Ripple Effects: Investing After Liberation Day

While the markets have finally regained their footing, the geopolitical and economic foundation remains shaken. How has our perspective on the markets changed in the aftermath of Liberation Day?

Uncertainty Reigns

Policy uncertainty has been the dominant theme so far in 2025. While tariffs themselves are just starting to show their effects, the real challenge lies in how they’ve been implemented. The broad tariffs announced in April as part of Liberation Day were sizable, but it’s the unpredictable adjustments, carve-outs, and reversals—especially on Canada, Mexico, and China—that have caused the most disruption. Subsequent zigzagging has thrown global supply chains into chaos, cast doubt on companies’ earnings targets, and impacted their plans for expansion and hiring.

The picture is further clouded by legal wrangling. The US Court of International Trade (CIT) recently ruled that the administration exceeded its legal authority in implementing the Liberation Day tariffs. But the CIT’s injunction—which left only the automotive and steel/aluminum tariffs in place—is stayed while the case is appealed (Display). That means the broader tariffs remain, for now, until the US Supreme Court weighs in, or the Trump administration explores other legal avenues to enforce them. Either way, uncertainty prevails.

Our primary concern? The potential negative impact on growth and hiring efforts. The US has experienced a strong post-pandemic economic recovery, and a meaningful shock to the labor market could upend this progress. That growing threat has prompted investors worldwide to raise their expectations of a potential recession. If the policies announced in early April were to remain in place for months, the likelihood of a recession would significantly increase. Even if these policies are eventually reversed, each day they persist and the uncertainty they generate will continue to heighten the recessionary threat.

While the initial tariffs have currently been dialed back to an extent, they still amount to the highest level in decades. Plus, the chance they’re sharply revised up or down still looms large. Ongoing uncertainty has set corporate planners up for an unenviable task. And while the odds of a recession have receded as trade tensions have deescalated, they remain higher today than they were coming into the year.

Still, we remain somewhat optimistic. While survey data reflects the prevailing uncertainty, recent commentary from corporate earnings calls adds nuance. It suggests that management teams are watchful and ready to react to changes in their businesses but aren’t yet making more serious moves that would have a cascade effect on the economy. As long as that remains the case, the economy can continue to expand.

US Moves Spark Global Economic Realignment

Beyond the tariff turmoil, the global economy is experiencing a sharp secular shift due to recent US geopolitical decisions. A key outcome, in our view, is that major European countries are now motivated to run bigger budget deficits in order to revitalize their defense capabilities and industrial bases. This move should spur more economic activity in those regions and potentially narrow the gap in global growth.

Another byproduct of recent US moves? Discovering the point at which global bond investors begin to balk at US Treasury bonds and the dollar. Markets encountered this threshold twice this year, with US Treasuries selling off and the dollar weakening against global currencies even as stocks fell—a rare occurrence suggesting a buyers’ strike for dollar-denominated assets. President Trump’s two sharpest policy reversals followed these events, and thankfully, we did not cross the line (Display). Now aware of this tipping point, policymakers must tread carefully to avoid a mini-crisis that could rattle markets in the near term, though it might also prompt long-term financial reforms in Washington. The lingering risk is that the budget bill working its way through Congress or negative news on the trade front could still trigger a more vehement bond market reaction.

 

Smart Strategies for the Aftermath

Remarkably, we believe stocks have actually behaved rationally over the past two months. Yes, they dropped precipitously and bounced back just as sharply. But given the downside scenarios introduced by new policy proposals and probabilities, stocks were guided more by changing news flow than sheer sentiment. Our view on equities has largely come full circle. The fundamentals appear slightly weaker than they were coming into the year, multiples are a little less stretched, and if the economy doesn’t lose its footing, the freshly minted bull market could have legs.

In credit markets, municipal bonds stand out as relatively compelling. With yields over 4%, their implicit pretax returns are competitive with riskier assets. In taxable markets, high-yield bonds offer reasonably attractive risk-adjusted returns while investment-grade bonds come close. The one near-term risk to bear in mind? The potential for rates to rise if the market rejects the budget or other forthcoming policies from DC.

Coming into the year, private markets offered the most reward potential, in our view. With the public markets having completed their round trip, this remains the case now. Technical pressures in the private equity markets suggest investors with fresh capital may have better access and prospects. Meanwhile, we continue to find opportunities across private credit markets, whether in direct lending, opportunistic credit, or real estate.

Finally, given the latest geopolitical and economic fluctuations, we’ve fielded an unusually high number of questions about both gold and crypto.

Gold has recently broken away from its historical relationship with other assets, particularly US real yields (Display). But predicting its new anchor point is challenging. The key question is how much more valuable gold becomes as a disaster hedge in today’s shifting geopolitical landscape compared to the conventional order from the 1970s to December 2024.

 

In the crypto space, bitcoin is the relevant asset. We’ve previously noted that investing in bitcoin is akin to making a VC-like bet that investors will treat it like gold in the future. In that light, two aspects stand out. First, bitcoin potentially faces that same shift in perceived value as a disaster hedge that gold does. Second, though bitcoin did fall in the recent downturn while gold rose, it didn’t drop as much as expected if it was still seen purely as a risk-on asset. The fact that bitcoin attracted some demand as a risk-off assets in this environment marks a notable milestone for those who believe in the “digital gold” thesis.

Thriving Amid Uncertainty

We can’t predict the next steps in policy, as it’s likely the administration is considering a wide range of options. This uncertainty holds important implications for both the economy and markets. While resolving it would go a long way, investors should expect to live with it through the medium term, including the mid-term elections.

As we’ve noted before, volatility is inherent to investing. Embracing real-world uncertainty and market fluctuations allows long-term investors to capitalize on economic growth and compound their capital over time.