Global Trade Uncertainty and Equity Valuations: Navigating Sectoral Resilience in a Tariff-Driven World

The U.S. tariff policies of 2025 have reshaped the global economic landscape, creating a stagflationary shock that elevates consumer prices while stifling growth. With effective tariff rates surging to nearly 25%-the highest in over a century-Citi analysts project global economic growth to slow to 2.1% in 2025, down from 2.8% in 2024, according to a Citi analysis. These measures, described as a "full-blown trade war" with China, have triggered retaliatory tariffs and disrupted supply chains, forcing businesses to front-load shipments and reconfigure sourcing strategies, the Citi analysis notes. Amid this uncertainty, equity valuations face mounting pressure, with global markets reacting to both immediate costs and long-term structural shifts.

Sectoral Resilience: Winners and Losers in a Tariff-Driven World

Citi Wealth's Chief Investment Officer, Kate Moore, has highlighted stark divergences in sectoral resilience in a CNBC interview. While large-cap technology firms and AI-driven industries demonstrate relative stability, smaller-cap and export-dependent sectors-such as automotive and pharmaceuticals-face acute margin pressures. For instance, S&P 500 companies revised earnings forecasts downward from 13% to 7.1% growth in 2025, reflecting the drag from tariffs, Moore noted. Moore attributes this to prolonged policy uncertainty, which has led firms to delay capital expenditures and hiring.

The construction and procurement sectors, meanwhile, are adopting granular risk mitigation strategies. Companies are cataloging supply chain vulnerabilities using risk registers and adjusting project timelines to account for tariff-driven delays, the Citi analysis observes. In contrast, the technology sector's resilience stems from its ability to absorb cost shocks through innovation and pricing power, a trend Moore describes as "transformative" in navigating trade headwinds.

Risk Mitigation: Strategic Shifts in Portfolio Allocation

Moore's investment approach underscores caution, advocating for reduced exposure to risk assets until trade policy clarity emerges, according to a Citibank note. Citi Wealth has reallocated portfolios toward large-cap equities and gold, which serve as hedges against volatility, Moore said. This shift reflects the reality that U.S. firms are absorbing 60–70% of tariff costs, but rising core goods inflation suggests consumers will eventually bear the burden, as shown in Citi research.

For corporations, Moore emphasizes tactical strategies such as diversifying export markets, leveraging duty drawback programs, and re-evaluating country-of-origin planning, she said. These measures aim to reduce dutiable values and recover up to 99% of tariffs on re-exported goods, Moore noted. In the near term, however, the front-loading of shipments-a short-term fix to avoid tariff hikes-risks exacerbating supply chain bottlenecks and inflationary pressures, according to a UNCTAD report.

Market Responses and Policy Uncertainty

The market's reaction to tariffs has been volatile. Following the April 2025 tariff announcements, the S&P 500 plummeted 4.6% in a single day, the Citibank note reported, though temporary de-escalation efforts (e.g., 90-day tariff pauses) spurred a partial recovery, the UNCTAD report observed. Investors remain wary, with bond yields falling as capital flows into safer assets, the Citibank note noted. Moore warns that prolonged uncertainty could amplify economic instability, particularly if foreign investors reduce U.S. asset holdings, the Citi analysis cautions.

The Federal Reserve's accommodative stance-pausing rate hikes despite elevated core inflation-has further complicated the outlook, the Citibank note observed. Citi now anticipates only two rate cuts in 2025, down from four earlier in the year, as tariff-induced price pressures persist. This divergence in monetary policy responses across central banks is likely to amplify market volatility, particularly in emerging markets like Vietnam and Eastern Europe, which face significant growth shocks, the UNCTAD report warns.

Conclusion: Strategic Agility in a Fragmented World

As global trade uncertainty lingers, investors and corporations must prioritize strategic agility. Moore's emphasis on diversification, hedging, and sectoral focus on transformative technologies underscores the need to adapt to a multipolar economic landscape, she said. While Citi remains cautiously optimistic about potential trade negotiations, the risks to growth remain substantial, the Citi analysis concludes. For equity valuations, the path forward hinges on balancing short-term resilience with long-term structural adjustments-a challenge that demands both foresight and flexibility.