UBS has issued a warning that tariffs could impact global growth, even with new trade agreements between the U.S., EU, and Japan. These agreements provide more clarity, but the ongoing 15% tariff on many goods from the EU and Japan might still slow economic progress. Ulrike Hoffmann-Burchardi from UBS Global Wealth Management highlights that these tariffs could affect global economic momentum. Higher inflation or reduced corporate profits might dampen market confidence and change economic forecasts.

The Role Of The US Consumer

UBS believes that the strength of the U.S. consumer could help prevent a recession. However, there is a need to be aware of the risks posed by tariffs. If trade tensions or inflation pressures rise, they could lead to new market volatility. Although recent trade deals offer a clearer picture, the remaining tariffs may continue to slow global economic growth. The latest World Trade Organization data shows that global goods trade for the second quarter of 2025 is still below its expected level, indicating ongoing weakness. This suggests that the market may be too hopeful about a quick recovery. A significant concern is that inflation could remain higher for longer than expected, which might lead central banks to keep a strict approach. The latest Consumer Price Index for June 2025 shows an inflation rate of 3.8%, driven by stubborn costs in services. This challenges the expectation of lower interest rates and could impact asset prices. Corporate profit margins are also under pressure this earnings season. With over two-thirds of S&P 500 companies reporting, profit margins have decreased by 50 basis points compared to last year, with many companies citing increased import costs. This profit squeeze poses a major challenge for stock valuations moving forward.

Strategies For Market Downturns

Considering these challenges, we recommend looking into hedging strategies. Buying protective puts on major indices like the S&P 500 or on sectors sensitive to tariffs, such as industrials and consumer discretionary, can provide important downside protection. This strategy allows for potential gains while limiting losses in case of a sudden market drop. Currently, the CBOE Volatility Index (VIX) is trading near historical lows around 14, making options relatively cheap. We see an opportunity to buy VIX call options or use VIX futures to guard against a potential rise in market volatility. History shows that times of trade tensions or unexpected inflation can lead to sharp increases in volatility, which can be profitable. Create your live VT Markets account and start trading now.

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