The potential portfolio impact of Trump policies & tariffs

• The Trump Administrations 's second term brings new trade policies that could affect investors. While we remain pro-risk in the U.S. at the headline level, we believe understanding these potential changes is key to managing risk and identifying opportunities in the administration’s first 100 days and beyond.
• The impact of tariff policies will vary by industry and depend on the scope, implementation, and duration of the policies. Firms with complex global supply chains, manufacturing abroad, and major exposure to revenue generation in the U.S. are most vulnerable.
• For investors who want to position their portfolios around tariff risks, there are three ways investors can try to insulate their portfolios from changes in tariff policy and subsequent headline volatility: increase diversification, mitigate geopolitical risk, and manage volatility.

Donald Trump’s second term as President brings with it new priorities and shifts in policy that may have significant implications for investors. The new administration looks to use tariffs as a key policy tool, going beyond addressing a range of issues like reducing trade deficits and encouraging inbound investments in U.S. manufacturing. The administration will use tariffs to raise revenue and for leverage in negotiations that go beyond trade/investment.

The scope, implementation, and duration of U.S. tariffs – and any retaliatory actions by other countries – remains highly uncertain. But firms with complex global supply chains, manufacturing abroad, and major exposure to revenue generation in the U.S. are the most vulnerable. We maintain our pro-risk stance in the U.S., as outlined in our 2025 Investment Directions. But in this dynamic policy environment, we believe investors should remain nimble and consider hedges that could help insulate portfolios.

Uncertainty around the scope and implementation of tariffs is high. What’s key for markets is how long they last: the longer they hold, the more permanent the supply chain shifts. Legal challenges could delay implementation and add to market volatility. How countries retaliate is also important – and could draw further U.S. escalation. We believe that these actions, and their ripple effects, could dent corporate and investor confidence.

The broader implications could be larger than the direct effect, in our view. Prolonged tariffs as proposed, and how countries retaliate, could hurt growth and add to inflation, leaving the Federal Reserve limited flexibility in their policy rate decisions. In markets, we think U.S. equities could come under pressure in the next few months as investors seek additional compensation for these risks. More broadly, resilient economic growth, solid corporate earnings, potential deregulation, and the AI mega force keep us positive on a six- to 12-month tactical view. We feel that markets could eventually adjust to a new regime of tariffs if growth stays solid and inflation contained.

Read more about how tariffs are signaling a shift in global trade here.

Figure 2: 2024 top U.S. imports by country & category

For investors who want to position their portfolios around these tariff risks, there are three ways we believe that investors can seek to insulate their portfolios from changes in tariff policy and subsequent headline volatility:

• Increase diversification: We believe the immediate, first-order impacts of tariffs tends to be higher prices and lower demand. The second- and third-order impacts of tariffs are harder to gauge. Adding gold into a portfolio can help hedge against higher prices and geopolitical volatility, while potentially reducing the overall risk of a portfolio. Traditional diversifiers, such as long-dated bonds, may struggle to provide ballast in a portfolio as the Federal Reserve is faced with the downstream impacts of tariffs on inflation and growth.
• Given the potential challenges traditional diversifiers may face, we believe that seeking to prioritize income generation within the bond allocation becomes crucial. Consider the iShares Gold Trust Micro (IAUM) and the iShares Flexible Income Active ETF (BINC).

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.

• Mitigate geopolitical risk: Equity investors may not realize the extent of their global exposure; companies in the S&P 500 generate half of their revenues overseas.¹  As protectionist policies intensify, some companies may face more risks than others. The iShares U.S. Tech Independence Focused ETF (IETC) leverages real-time data and machine learning to help investors target tech firms with a larger domestic footprint who may be better positioned to weather geopolitical headwinds. Systematic active management ensures you’ll be focused on long-term structural drivers of performance with the flexibility to invest alongside policy shifts.
• Manage volatility: The duration and scope of tariffs is a key factor in determining its impact. But most importantly, they historically decrease business confidence.² Costs can become variable and business investment decisions face uncertain regulatory environments. A firm’s ability to navigate these factors are key in their long-term planning and success. We remain broadly pro-risk on U.S. equities, but recognize that headline volatility will persist regardless of the final form of policy. Adding iShares MSCI USA Min Vol Factor ETF (USMV) to a portfolio can help investors get exposure to companies that exhibit lower volatility than the broader equity market.

Stay tuned for our next edition, where we’ll explore long-term themes shaped by increased public and private investment, including physical and digital infrastructure, as well as the resurgence of American manufacturing.

The evolving policy landscape presents both challenges and opportunities for investors. Navigating these changes will require an understanding of new priorities, from trade to domestic industry support. To learn more about our market view for the year ahead, read the 2025 Investment Directions.