iCapital Market Pulse: The American Corporate Restructuring 2025: Patience Required

Barring a quick resolution, tariff negatives will weigh on the economy in the months ahead

In response to President Trump’s announcement on April 2, 2025, dubbed “Liberation Day,” the U.S. is set to impose a sweeping 10% tariff on all imports, along with additional reciprocal tariffs on goods from 60 nations.¹ This move is seen as the culmination of Trump’s “America First Trade Policy,” aimed at revitalizing U.S. manufacturing and addressing trade deficit grievances.

These “discounted” tariff levels, in our view, were designed to deter the impacted countries from retaliating by leaving room for further increases up to the full reciprocal tariff. It remains to be seen how effective this will be, but either way, projected economic impacts of a roughly 20% increase in effective tariff rates are significant.² Based on this, PCE inflation could rise by 1-1.5% by the end of 2025 and GDP could fall by -0.9% by the end of 2025.³

There are several potential ways to alleviate these tariffs, but all will likely take time. Countries may offer concessions, buy more U.S. goods to close the trade deficit gap, or agree to invest in or build plants in the U.S. However, all of this will likely require extensive negotiations which could take months and not days.

In the meantime, the impact on corporate America and the U.S. consumer is negative. For U.S. corporations, higher imported costs of goods sold (COGS) will need to be passed through to consumers. Indeed, about 40% of COGS for the S&P 500 are generated abroad, with Communications Services, Information Technology and Material sectors having the highest percentage of COGS generated outside the U.S., at 90%, 80% and 78%, respectively.⁴ Revenues may also decrease if companies are selling abroad (foreign revenues represent 41% of SPX revenues according to Factset and once again, Info Tech stands out with 56% of foreign revenue exposure)⁵, and demand could drop if consumers’ real earnings growth returns to negative territory, as seen in 2022. Indeed, the impact on the U.S. consumer is also projected to be negative. Consumers will likely begin to see price increases across various products in the coming months, although some pre-April 2nd stocking up may soften this impact. Finally, we will be closely watching for any cracks in the labor market from companies whose margins are squeezed or who suffer from lower global growth, which could result in slower hiring or layoffs further dampening the outlook for the U.S. consumer.

The bottom line is – unless there is a quick resolution to these tariffs, the next few months will be marked by the realization of these negative impacts.

For investors patience and a focus on income will be required for now

Today’s market reaction is focused on pricing in the full downside potential of announced tariffs. A 3-4% drop across various indices is justified since the approximately 23% U.S. effective tariff rate⁶ shaves off close to -10% from EPS, assuming a 1-2% EPS hit from each 5 percentage point increase in the effective tariff rate, according to Goldman Sachs.⁷ We started the year with 13% EPS growth for the SPX, are at 10% today, and the full impact of announced tariffs effectively wipes out the remaining 10%, so the market “deserves” to be down close to -13% from all-time highs.⁸

As a result of these tariff announcements, recession odds have risen to 35-39% or higher⁹, and the market typically draws down by 24% during a recession, so a 10%-15% drop is also “fair” based on that.¹⁰ The concern is that in the coming months, barring a quick cancellation of the announced tariffs, we will need to price in still higher recession odds.

This is why although conditions appear to be in place for a tactical rebound given the oversold positions and reduced investor risk positions, a catalyst for a rebound is needed, but it’s unclear what or when that might be – an eventual trade deal or a Fed rate cut, but when will it come? Until then, the bigger picture technical trend is not favorable for investors right now, with the 50-day moving average dipping below the 100-day moving average, and trading below the 200-day moving average.¹¹

For investors, patience and perseverance, along with income, are required for now. While those stock investors who have cash to deploy and are otherwise underweight equities may nibble, our view is that against the current backdrop, patience will be required to see the payoff.

Some silver linings to consider

Lower rates across the curve should support borrowers’ financials as well as bank balance sheets (due to positive mark to market on assets). Additionally, if cracks appear in the labor market, and chances are they will, the Fed may move to support the economy with lower rates (despite consensus calls for few cuts this year), especially if this one-time price level reset due to tariffs lowers aggregate demand. Mortgage rates should also continue to trend lower as the 10-year UST yield fell to below 4% at one point today.¹² Finally, the budget deficit outlook is better due to $400 billion in expected tariff revenue, which allows more room for tax cuts.¹³

Putting it all together – how to position now

In terms of portfolio positioning and investment ideas, here are our top convictions:

• Lean into high-quality defensives and interest rate-sensitive beneficiaries, such as domestic utilities, real estate, and banks with limited capital market exposure.
• Prioritize income, including in Alternatives like private credit, real estate, and infrastructure.
• Consider hedges, such as structured investments with downside protection/coupons and macro hedge funds.
• If dipping your toe, consider AI domestic software (though it is at risk of rising recessionary odds too) and/or broad SPX, especially in the structured investment format.
• Avoid the Mag 7/Semis/Tech for now, due to their high percentage of foreign COGS and high percentage share of foreign revenue.