Tariffs Take the Spotlight: Navigating the New Economic Landscape

The U.S. economy is now navigating a treacherous stretch of trade waters, with Danske Bank's revised growth forecasts—1.6% in 2025 and 1.3% in 2026—sounding a loud warning bell. Tariffs, once a political tool, have now become an economic anchor, dragging down growth while inflation (projected at 2.8% in 2025) refuses to budge. This isn't just a U.S. problem; it's a global ripple effect that's reshaping investment strategies. Let's break down the risks and opportunities sector by sector—and how to position your portfolio to survive this storm.

The Tariff Tsunami: Manufacturing's Pain, Energy's Mixed Blessings

The manufacturing sector is ground zero for tariff fallout. With U.S. tariffs now averaging 15%—the highest since WWII—companies are feeling the squeeze. Steel and aluminum levies alone have pushed up input costs, squeezing margins. Take U.S. Steel (X) or Caterpillar (CAT): these names are now fighting inflationary headwinds while grappling with slower demand as growth stalls.

But not all sectors are drowning. Energy, paradoxically, could see fleeting benefits. Lower oil prices (a key reason inflation is slightly moderated) are a double-edged sword: they reduce energy costs for consumers but hurt energy producers. Chevron (CVX) and Exxon (XOM) might underperform, but renewables like NextEra Energy (NEE) could thrive as the U.S. pivots toward energy independence.

Trade-Dependent Economies: Europe's Exports Are in the Crosshairs

European exporters, particularly in Germany and Denmark, are collateral damage in this tariff war. Companies like Siemens (SIE) or Danfoss (a Danish industrial giant) rely on seamless cross-border trade—now disrupted by protectionism. The Nordic region's open economies, which Danske Bank also analyzes, face headwinds as their largest trading partner (the U.S.) slows.

Investors should underweight European export-heavy equities and avoid overexposure to sectors like autos, machinery, or chemicals. Instead, look to domestically focused plays or companies insulated from trade cycles.

Central Banks: The Tightrope Between Inflation and Growth

The Federal Reserve's terminal rate forecast of 3.00%-3.25% hangs in the balance. While Danske expects rate cuts to begin in 2025, don't bet on it yet. Core inflation at 3.0%—stuck above the Fed's 2% target—could force policy patience. This creates a bond market dilemma:

• Fixed Income Winners: Overweight inflation-linked bonds (like TIPS) to hedge against stubborn price pressures.
• Fixed Income Losers: Avoid long-dated Treasuries; rising rates or persistent inflation could crater their value.

Equity Playbook: Go Defensive, Go Domestic

In equities, avoid sectors with tariff exposure. Instead:
1. Domestic Staples: Consumer goods (e.g., Procter & Gamble (PG)) or healthcare (e.g., Johnson & Johnson (JNJ)) face fewer trade disruptions.
2. Tech Titans: Firms like Microsoft (MSFT) or Nvidia (NVDA) with global reach but diversified supply chains.
3. Utilities & Infrastructure: Regulated industries like NextEra Energy (NEE) or Dominion Energy (D) offer stability.

The Bottom Line: Stay Nimble, Stay Protected

The U.S. economy isn't in recession yet, but these revised growth forecasts are a stark reminder of how policy missteps can unravel progress. Tariffs are here to stay, and their impact will linger into 2026. Investors must pivot toward resilience:
- Underweight: Tariff-sensitive equities (manufacturing, European exports).
- Overweight: Inflation-linked bonds and domestically oriented sectors.
- Avoid: Over-leveraged companies or those reliant on global supply chains.

This isn't the time to chase returns—it's the time to safeguard them. The tariff tide is rising; don't get caught standing still.

Action Alert: Trim exposure to tariff-hit sectors and load up on TIPS before inflation expectations harden further.