What tariffs may mean for the economy and portfolios

Tariffs have dominated headlines — and market movements — for much of the year. While we believe peak policy uncertainty is almost certainly behind us, October brought potential new tariff announcements after China took actions relating to rare earths. Clearly, trade policy remains complex and will continue to evolve. Against this uncertain backdrop, we examine what impact tariffs had in the first six months since the Trump administration rolled out sweeping changes to trade policy, what remains to be seen, and what it may mean for portfolios.

The average effective tariff rate in the U.S. stands at 17%, up from just 2.4% at the start of the year.¹ But the increase in tariff rates has not been uniform across goods, countries, or time. After announcing sharply higher tariff rates for much of the world in April, the U.S. administration put a 90-day pause on implementation.² Since then, many deals have been struck that have established new rates, select exemptions, and in some instances delays in implementation. What's more, a spate of lawsuits challenging the legality of a subset of the tariffs continues to wind its way through the courts. While we have seen stabilization in trade policy since April, it’s clear the situation remains fluid.

Revenue — While it may still be early days for the tariffs, we have some evidence of their impact in terms of revenue generated for the government. The Daily Treasury Statement shows that since tariffs were announced in April, cumulative customs and excise tax revenue has run about $88 billion higher vs the same period in 2024.³ Additional revenue can be used to offset government spending elsewhere, a potential boon to federal finances. However, with the federal deficit running at nearly $2 trillion in 2025⁴, we feel the impact is likely to be modest, absent further changes.

Payment — Who ultimately pays for tariffs? This remains the most important question for many investors. At the end of June, Goldman Sachs and BNP Paribas separately estimated that U.S. firms had absorbed around 60% of the total cost of tariffs, with foreign firms and U.S. consumers absorbing a further 20% each. But as the situation evolves, we believe those early estimates are likely to change (more below).

Inflation — While perhaps not as large or as fast as some market participants anticipated, we see some evidence of higher tariffs in inflation reports. Parts of the CPI basket that are highly exposed to supply chains in some of the highest-tariffed regions, such as apparel, furniture, and sporting goods, have seen prices rise in recent months. And there may be evidence of indirect effects as well. As we learned during the pandemic, consumers who are unable to spend on services may pivot to goods; we feel the same effect is likely happening to some extent in reverse, as consumers put off by higher tariffs have pivoted to services, with evidence of such substitution found in higher concert, dining, and lodging prices.⁵ Still, we have not seen future inflation expectations become unanchored, and the acceleration in inflation from the summer was not enough to prevent the Federal Reserve from resuming rate cuts in September and October.

Growth — All told, U.S. companies — and indeed the U.S. economy — have proven remarkably more resilient than many investors expected. Second quarter earnings handily beat low expectations, delivering 12% year-over-year growth compared to the 4% forecasted by analysts.⁶ And while GDP growth was negative in Q1 as companies and individuals pulled forward import purchases ahead of expected tariffs, Q2 GDP figures surprised to the upside, only to be further revised higher.⁷ Though the full economic impact of the tariffs cannot yet be determined cannot be determined thus far (more below), we have avoided the worst-case scenarios some observers initially projected.

Tariff pass-through is likely to take time. U.S. firms tend to keep a few weeks to several months’ worth of inventory on hand, though this varies by industry.⁸ That means that tariffs that went into effect in August may only show up in September or October accounting, which itself is often reported on a quarterly lag. Beyond delays due to inventory, we believe many companies may have held off passing higher input costs to consumers as uncertainty around trade policy and the economy remained high. But signs of a stronger consumer and economy evident in September’s economic data, and more certainty that tariffs are here to stay, may spur companies to shift more of the burden to their customers.

Earlier in the tariff cycle, U.S. businesses absorbed most of the costs. More recent estimates indicate that the balance is shifting, with consumers now expected to bear a majority of total tariff costs, around 55% as the effects of recent trade measures continue to filter through. Meanwhile, the share absorbed by businesses has declined to roughly 22% as firms pass on higher input costs.¹⁰ What’s more, tariff rates on China, India, computer chips, and semiconductors are still being negotiated. Tariffs on specific goods, such as those that recently went into effect on lumber and wood products in October, have yet to appear in the data. And new tariffs were still being announced. We expect the impact of tariffs to continue to evolve in the quarters, and perhaps years ahead.

The stronger-than-expected economy, coupled with forward expectations for greater corporate pricing power, leave us comfortable with U.S. equity risk. But the impacts of tariffs have not been uniform, even within sectors. Third quarter earnings calls will be closely watched for mentions of tariffs and the impact on margins. We favor a systematic approach to seeking winners and losers in affected sectors.

Consider dynamic strategies in tax efficient ETF wrappers, which can be accessed via the iShares U.S. Equity Factor Rotation Active ETF (DYNF) and the iShares U.S. Thematic Rotation Active ETF (THRO).

Because strong pricing power and higher inflation are often two sides of the same coin, we also believe targeted inflation protection such as Treasury Inflation Protected Securities (TIPS) or gold deserves consideration.

Such inflation hedges may be accessed via the iShares 0-5 Year TIPS Bond ETF (STIP) and the iShares Gold Trust (IAU). For investors with higher risk tolerance, we believe the fixed supply of digital currencies such as Bitcoin may also help provide an effective inflation hedge. Exposure to other digital assets, such as the iShares Ethereum Trust ETF (ETHA), may offer additional diversification benefits.

The iShares Trusts are not investment companies registered under the Investment Company Act of 1940, and therefore are not subject to the same regulatory requirements as mutual funds or ETFs registered under the Investment Company Act of 1940. Investments in these products are speculative and involve a high degree of risk.

Finally, while we prefer the strong earnings growth and AI tailwind in U.S. large caps, it’s also important to note that broad geographic diversification has benefited many investors, even in a year fraught with geopolitical tensions. One global response to more uncertain U.S. trade policy has been lower demand for dollars, as evidenced by record annual purchases of gold by global central banks, and a 10% decline in the value of the USD.¹¹ A cheaper dollar has propelled many international indexes to outperform domestic ones.¹² Going forward, we anticipate the tailwind to continue and see international equities as a key source of diversification in an ever-evolving world.

Investors interested in adding international equity exposure to portfolios may consider the iShares Core MSCI Total International Stock ETF (IXUS).