Tariffs, Inflation and Opportunity: What Investors Should Know Now
It has been a turbulent stretch for investors over the past few weeks, driven by ongoing trade negotiations, shifting inflation data and evolving policy from the Federal Reserve (Fed). While headlines continue to stir market movement, there are meaningful developments beneath the surface that point to resilience, opportunity and the importance of staying disciplined through the noise.
One of the biggest drivers of recent market momentum was the de-escalation in U.S.-China trade tensions, with a 90-day pause and a rollback to 30% tariffs announced on May 12th. This helped spark a sharp rally in equities, particularly in the Nasdaq 100, which recovered 25% from the April lows that week. Although recent negotiations have provided temporary relief, tariffs remain higher than they were before. These elevated costs can have an inflationary effect, as companies will be forced to choose between raising prices for consumers or accepting lower profit margins—both of which can weigh on future growth.
Despite ongoing volatility, recent economic data suggests the U.S. economy remains resilient. Inflation appears to be cooling, with the Consumer Price Index (CPI) for April showing a 2.3% year-over-year increase, marking the lowest annual inflation rate since February 2021. The Producer Price Index (PPI) for the same period showed a 0.5% decline, indicating easing pricing pressures at the wholesale level. A strong jobs report also showed wage growth remains strong at 3.8%, with 177,000 jobs added in April. Still, earnings expectations have been revised down, from 13% to 7%, as companies factor in the impact of tariffs, slower growth and margin pressures.
This disconnect between strong economic data and more cautious corporate guidance helps explain why investor sentiment remains cautious. The University of Michigan Consumer Sentiment Index for April posted its second-lowest reading ever. In addition, the AAII Investor Sentiment Survey showed more than 50% of respondents were bearish for 11 consecutive weeks—a record. Such negativity often signals a market bottom, as extreme sentiment tends to precede turning points. During April, individual investors sold stocks at a pace not seen since March 2020, which ultimately marked the market’s pandemic-era low.
Even as uncertainty lingers, several areas across the markets are showing signs of opportunity for long-term investors. After more than a decade of underperformance, international stocks are starting to regain traction—reinforcing the long-term value of diversification and rebalancing. The MSCI EAFE Index is up approximately 14% year to date, supported by a weaker dollar, increased fiscal spending in Europe and improving international earnings expectations.
Small-cap stocks, on the other hand, continue to lag due to their greater sensitivity to higher interest rates and heavier debt loads. However, their underperformance may offer a chance to buy quality companies at more attractive valuations. At the same time, tax-free municipal bonds (munis) have emerged as a compelling option in today’s rate environment. Yields on munis are approaching 90% of comparable Treasury yields, and the after-tax income can be especially appealing for those in higher tax brackets.
While no one can predict market bottoms with certainty, extreme investor sentiment and broad-based selling activity suggest we may be approaching an inflection point. History shows that periods of fear often precede recovery, and recent market behavior—such as the S&P 500’s 9.5% single-day gain on April 9—serves as a powerful reminder of why staying invested and focused on long-term goals matters.
If you have questions about your portfolio or how current conditions may affect your investment strategy, we are here to help.