American trade policy has shifted significantly with the Trump administration’s ongoing move to slap higher tariffs on imported goods. The president may have walked back his tough stance on China tariffs a bit on April 23, but his policies have had a significant impact on the U.S. economy so far, with experts downgrading their outlooks and the S&P 500 sinking roughly 10% year to date.
According to the April 2025 Wolters Kluwer Blue Chip Economic Indicators survey of 46 leading economists, the consensus outlook has shifted from solid growth to a risk of stagflation, with a 63% probability of “stagflation lite” emerging over the next 12 months.
The Wolters Kluwer report notes that every economist surveyed says U.S. trade policy is posing a downside risk to the global economy in the near term, with 69% of respondents believing the risk is significant.
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“The widely held view is that the tariff increases will raise inflation and slow economic growth, not just in the U.S. but across the globe,” the report notes. “That is, generate what might be called stagflation-like conditions, a period during which inflation is elevated and rising while economic growth is slowing to a pace below trend.”
With the tariff issue still unresolved, the odds of a significant stock market disruption are rising. What will the next few months bring to the markets, and what are the key economic metrics to analyze right now? Here’s a snapshot:
— Inflation is once again a threat.
— Tariffs are a market drag — for now.
— Out-of-control congressional spending.
— Dour investor sentiment.
— Keep an eye on unemployment.
— What will the Fed do?
Inflation Is Once Again a Threat
The trade wars, and the conflict with China in particular, threaten to boost inflation again after it showed signs of moderating in recent months.
“Higher tariffs will likely increase inflation, which then lowers real income and thereby reduces consumer spending,” the Wolters Kluwer report says. “For business investment, the increase in tariffs has already increased uncertainty significantly and will likely reduce corporate profits. A more muddied future will likely force business investment to the sidelines until more clarity emerges.”
Tariffs Are a Market Drag — for Now
Team Trump’s tariff policy has sent stocks on a roller-coaster ride of volatility amid confusion over ongoing negotiations with trade partners. The main problem? Economists say the Trump administration’s tariff policies have been unpredictable and inconsistent thus far.
“While it’s a response to 50-plus years of bad trade policy, ripping the Band-Aid off has created instability in the markets,” says Rod Skyles, an analyst with The Unconventional Economist. “It’s more about the uncertainty that creates paralysis in the markets. A clearer and consistent policy may still cause issues, but would do less damage to the overall economy and the stock and bond markets alike.”
Out-of-Control Congressional Spending
Skyles believes the main issue the U.S. economy faces is the out-of-control spending by Congress for the past 25 years.
“Inflation results in higher prices but is simply the devaluation of the dollar (in the case of the U.S.) due to the creation of more currency to offset deficit spending by the U.S. government,” he notes. All things being equal, Skyles says the economic focus should be on the burgeoning U.S. debt picture, now estimated at $36 trillion. “If a (bandage) had to be ripped off, I would have preferred it to be in government spending and not in tariff policy,” he says. “That could have driven inflation down, interest rates down, and spurred new, productive spending by the private sector.”
Dour Investor Sentiment
Main Street investors are extremely jittery right now, and on Wall Street, that’s bad for business.
“Following extremes of emotion is a common mistake for people trying to time the market,” says David Russell, global head of market strategy at TradeStation. “Environments like this see extreme pessimism (like on April 7, when the stock market tanked) and extreme optimism (like April 9, when the market rebounded significantly).”
Extremes tend to moderate as time goes by and economic conditions revert to a more stable state. “Investors might benefit by remembering that such swings are common at times of heightened volatility,” Russell says.
[Read: 10 Best Investments for 2025]
Keep an Eye on Unemployment
Sustained tariff wars will likely mean higher costs for certain goods and services, which will likely be passed on to individuals. This cycle hurts the economy, too.
“It remains to be seen if the decreasing price of gas will somewhat counteract inflation for other goods and services and control the rise in overall inflation,” says Steven Rozencwaig, senior vice president of wealth management at Raymond James in New York. “While the U.S. just reported better-than-expected job growth numbers, unemployment increased slightly to 4.2%, which could reflect more people entering the job market. Consequently, the net result is that an uncertain economic policy makes for an uncertain economy and an uncertain stock market.”
What Will the Fed Do?
One of the biggest factors influencing stock prices is the Federal Reserve’s monetary policy and the direction of interest rates.
“President Trump’s unprecedentedly high and widespread announced tariffs have infused more uncertainty into future Federal Reserve actions,” says Robert R. Johnson, chairman and CEO at Economic Index Associates and a professor of finance at Creighton University. “While interest rate cuts were widely anticipated before the announcement of tariffs, as inflation seemed to be ebbing, there is more concern that tariffs will stoke inflation, causing the Fed to pause on rate cuts, or even raise rates in response to higher inflation.”
Political Risk
Politics is another market risk, and for multiple reasons.
“Most investors assumed Congress would extend tax cuts from 2017,” Russell says. “Taking anything for granted can be dangerous because the opposite reality might get priced in quickly if events don’t pan out,” he notes. “Additionally, the recent idea of trying to remove Fed Chairman Jerome Powell before May 2026 is another, and potentially more disruptive, political risk.”
What’s Next for Investors?
With talk of recession and more market shocks in the air, should investors stay the course or pivot to a more protective portfolio strategy?
“Investors should do what is best for their personal financial situation,” says Robert D. Kantor, co-founder at XML Financial Group in Rockville, Maryland. “Over the past 50 years, the market (S&P 500) has only been down four times more than 10% in any given calendar year.” The U.S. economy continues to be the premier global economy and the safest country in which to invest globally.
“Couple that with our ability to print money, and you have a country that is likely resilient in all market conditions for the foreseeable future,” Rozencwaig says. “For individuals who are long-term investors, stay the course. Timing the market is a futile effort as nobody can predict the low or high point of the market.”
Being out of the market when the market is up can be very costly to the long-term growth of your investment portfolio. “Those investors who don’t have a long-term time horizon shouldn’t be overweight in the stock market in the first place,” Rozencwaig says.
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Update 04/23/25: This story was published at an earlier date and has been updated with new information.
