The fallout of Liberation Day

Markets have come under renewed pressure following President Trump’s announcement of a sweeping “reciprocal tariffs” plan. The proposed measures were broader and steeper than anticipated, with a base 10% tariff and additional levies on select countries and goods. This announcement reinforces the recent stock market weakness. The question now is how markets will digest the real-world impact of these tariffs.

A concentrated sell-off triggered by uncertainty

Over the past two months, the sell-off has been led by growth and momentum stocks, particularly in tech, mirroring the concentrated nature of the rally following last year’s US elections. Investor positioning appears to be the primary driver, rather than deteriorating fundamentals. In fact, earnings expectations have remained largely intact so far, meaning the correction has been driven by a de-rating rather than a fundamental reset.

Rotation into value and defensive sectors

As often happens in market drawdowns, investors rotated into defensive sectors. Consumer staples, telecom and pharmaceuticals, in particular, have held up well. However, this shift has driven up valuations in some defensives to levels that appear stretched relative to their modest long-term growth prospects. Meanwhile, less popular value stocks – with lower growth expectations and high dividend payouts – also remained resilient, as the direct impact of tariffs on sectors like banks and energy is relatively muted. Defence stocks re-rated after the European announcements around defence investments.

Tariff impact varies across sectors

Looking ahead, the focus is shifting from sentiment-driven price action to the real economic impact of tariffs. Some sectors are likely to see more immediate and direct effects. Companies with global supply chains – particularly those manufacturing goods in Asia, such as Apple , Adidas , and Nike – face increased cost pressures. Discount retailers and non-US automakers may also be disproportionately affected due to their price sensitivity and reliance on imports.

Business services and software companies, on the other hand, have limited direct exposure to tariffs and are likely to be more insulated from the direct impact. The same is true for medtech and household products which should remain relatively unaffected.

Recession risk and the limits of monetary policy

The tariff announcement comes at a time when US economic data is already softening, largely due to tight monetary conditions. Higher tariffs could fuel temporary inflation while simultaneously weaken growth – limiting the Federal Reserve’s ability to cut rates. Should these pressures lead to a recession, we expect cyclical sectors such as banks, consumer discretionary, materials and industrials to come under greater stress. In contrast, companies with recurring revenues, high margins, low leverage, and essential services tend to perform better during economic slowdowns. Importantly, valuations in quality growth have already reset significantly, and the valuation premium is historically low. The next phase will likely involve earnings revisions across the market.

Remaining ambiguities

Certain sectors remain question marks. Semiconductors, for example, continue to benefit from the long-term Artificial Intelligence investment cycle, but are still highly cyclical. While semiconductors are exempt from tariffs, the key question is whether capex in AI will remain robust through a downturn, and more structural questions around AI capex (see our previous communication on Deepseek). Conversely, valuations have come down materially in the recent correction.

Private market firms such as Blackstone and KKR are another area of interest. Despite their high-beta equity behaviour, their business models are relatively resilient. They may even benefit if investors seek greater exposure to private, lower-volatility asset classes amid public market instability. While the longer-term structural growth opportunity remains intact, shorter term, the share price will remain dependent on the broader market direction.

Global spillovers beyond the US

The economic consequences of these policy shifts will not be confined to the US. Export-heavy economies are likely to face material slowdowns and potential currency depreciation. Countries with significant trade surpluses and manufacturing reliance – particularly in Europe and parts of Asia – may see a deterioration in both economic activity and investor sentiment.

With much of the initial correction driven by positioning and valuation resets in the most crowded segments of the market, any additional downside from here is likely to be driven by the direct and second-order economic impacts of the newly announced tariffs. These effects will be bigger for certain sectors like goods exporters, consumer-sensitive businesses, and cyclical businesses. Portfolios that remain focused on high-quality companies with strong balance sheets, recurring revenues, structural growth and strong business models should prove increasingly valuable in a more challenging macroeconomic environment.