The Market Update with EP Wealth Advisors Managing Director, Investments -
Adam Phillips, CFA^®, CAIA, CFP^®

Often quoted in major national media, Adam is a Chartered Financial Analyst (CFA^®), a CERTIFIED FINANCIAL PLANNER™ (CFP^®), and has been included on the Forbes NextGen Best-in-State Wealth Advisors 2019 list. He is a member of the CFA Society of Los Angeles and the CFA Institute. Adam helps establish asset allocation strategy as a member of the EP Wealth Investment Committee, which supports all EP Wealth Advisors and their clients. The Committee’s top-down approach to portfolio construction begins with an outlook on the economy’s likely direction, followed by the implications for different economic sectors and asset classes. This culminates in strategic selection of the individual stocks, bonds, mutual funds or other investments deemed most appropriate for each individual client’s portfolio.

Market Update: Tariffs Return to the Spotlight

A lot has happened in the markets over the past couple of weeks. We’ve seen continued rotation away from some of the high-flying artificial intelligence stocks and into more value-oriented areas, along with a strong earnings season that has supported overall market performance.

This week, however, investor attention has shifted back to Washington.

New Tariffs Add Uncertainty

Late last week, the Supreme Court ruled against the administration’s use of the International Emergency Economic Powers Act (IEEPA) to justify certain tariffs. In response, the administration quickly implemented a broad tariff of 10% on imports from all trading partners, which was increased to 15% the following day.

These tariffs were enacted under Section 122 authority, which allows temporary tariffs of up to 15% for as long as five months. That timeline takes us into July, and further investigations could lead to more targeted or longer-term trade measures. Depending on the outcome, tariffs could eventually be applied to specific industries, products, or countries at different rates.

The impact will vary by trading partner. Some countries may see lower tariff rates than before, while others could face increases. For now, the larger issue for investors is the return of policy uncertainty and the potential for trade headlines to influence market sentiment in the near term.

What It Means for Markets

Tariffs can affect markets through several channels. Higher import costs can put pressure on corporate margins, disrupt supply chains, and influence pricing decisions. They can also contribute to inflation expectations and affect global trade relationships, which in turn may impact economic growth.

While these dynamics can lead to short-term volatility, it’s important to keep the broader economic picture in perspective.

Corporate earnings have been strong, and the overall economic outlook remains resilient. At this stage, many key policy details are still evolving, and the ultimate scope and duration of trade measures remain uncertain.

A Larger Fiscal Question

Another issue still unresolved is what happens to the tariff revenue already collected under prior authorities. Estimates suggest that more than $130 billion has been collected, and any effort to refund those funds would be complex and time-consuming.

Looking ahead, tariffs have become a meaningful source of federal revenue. Without replacement measures, estimates suggest the government could lose as much as $2 trillion in revenue over the next decade. For that reason, most policymakers expect some form of tariff structure to remain in place over the longer term, even if the current approach changes.

Staying Focused on the Long Term

Policy developments and political headlines can move markets day to day, but long-term investment success depends on staying focused on fundamentals rather than reacting to short-term noise.

Our approach remains unchanged. Rather than making portfolio adjustments based on headlines, we continue to monitor the data, evaluate the economic outlook, and make changes only when the long-term investment landscape warrants it.

Periods of uncertainty often test investor discipline, but history has shown that avoiding knee-jerk reactions is one of the most effective ways to stay aligned with long-term goals.

If you have questions about how current events may affect your portfolio or financial plan, your advisor is always available to help.

Have More Questions About the Market and Investments? Talk to an EP Wealth Advisor!

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Video Summary: 

Adam Phillips:

Well, a lot's happened since the last time we caught up here. We've seen this market rotation continue, where investors are exiting a lot of these high-flying, artificial intelligence names and moving into more value-oriented areas of the market. We've also been through the earnings season. It was a really strong earning season and a number of other events that really helped to shape the market in returns over the last couple of weeks.

But what I want to talk about. This week is the latest news out of Washington. So last Friday we heard from the Supreme Court they ruled against President Trump and his use of A EPA, which is the International Emergency Economic Powers Act. And his use of an EPA in justifying the use of many of his tariffs that were put in place last year.

So he responded very quickly after that ruling on Friday with a 10% broad tariff against all, all trading partners, which was increased to 15% on Saturday. So here we are, 15% tariff rates are in place. This is going to help to keep a, a fair amount of the revenues in place, at least for now. He did this under section 1 22, which really gives him the ability.

To put tariffs in place without any investigation. This is really the, the broad powers and discretion that the president has. These tariffs can be between 10 and 15%, so we took it up to the max of 15%, and they can last up to a hundred, 150 days, or five months. So that's what he's done. Now, the impact on trading partners is kind of mixed.

If you look at China or India, they're actually going to get a slightly lower tariff rate than they otherwise had in place. In the case of the U.K, they had actually negotiated a 10% tariff rate, and so their tariff rate is actually going to go up for now. So there are winners and losers. Now, this actually isn't the first time that we've seen a major Supreme Court ruling, although this is a big one.

You may recall back in 20 23, so a few years ago. The Supreme Court ruled against President Biden when he tried to forgive about 400 billion in student loans. Now he ultimately used other means and authorities granted to him by Congress to forgive close to 200 billion. So this is not the first time it shows that the separation of powers is working.

Right now we're, we're just in this state of uncertainty. So really back in it where we're going to wait and see what happens in the, the months to come with Section 1 22 now in place, what the president is going to do. Is beginning these investigations that are afforded to him by Congress and see if he can put.

Different tariff freights in place on select um items or goods or on select countries through other means. It's really this, this alphabet soup that we excuse me, this number soup that we hear about so much that gives the, the president these powers to do this and do so in ways that are outside of IEPA.

So he can put tariffs in place for the longer term and actually put tariffs in place that go higher than 15%. So we're going to wait and see what the, what happens here. Section 1.22. Because it lasts five months, it will take us into July. And before we know, we're going to be preparing for the midterm election, we know that affordability remains a concern among us households.

And so tariffs are really right back into the center of things. And so we're going to wait and see how this all shakes out. But for now, how we are, how are we responding from an investment standpoint, really, there's no response right now. We are all waiting for more data. We didn't respond last year when the news broke on Liberation Day in early April, but it turned out to, to be a very good call, not to have a knee-jerk response.

And just because there are. Headlines and they can move markets on a day-to-day basis. Doesn't mean that you need to react in terms of portfolio trades. And so we're going to wait. We're going to trade on data as we always have. Right now, the earnings picture is still good. The economic e economic outlook is still good.

, and so it's important not to trade just on headlines, even if we see this lead to volatility. You know, we, there are still some answers that we're waiting for here, although most expected the Supreme Court to rule against President Trump. Last week. The big question mark is still refunds. What happens with, with all of these tariff revenues that have been collected through IEPA?

So we've actually, the estimate is about a north of 130 billion that's been collected through IEPA, and so. Does that have to be refunded somehow? That would be a pretty painful and long process. There have been, there's over 300,000 importers that have actually paid these I EPA tariffs. And so how do you track that?

How do you pay it all back? This is something that the Supreme Court did not rule on. They're going to defer to the lower courts and all likelihood. But the other reason this is important is that the, the outlook for tariffs and where things ultimately settle is very important for the fiscal outlook and our budget.

We know that with tariff revenue just skyrocketing last year, it actually helped to offset a lot of our rising costs in terms of our budget, and it actually brought our deficit down by about 2.7%. And so if you did get rid of tariffs. And we did not replace the EPA; it would have a very meaningful impact on the long term.

Most estimates are that if we did not replace the EPA tariff revenue, this would cost the government about $2 trillion in foregone revenues over the next 10 years. And so you would see our. , our, our debt as a percentage of GDP continued to increase and, certainly, beyond the baseline projection.

And so this is pretty meaningful, something that we do want to keep an eye on. At the end of the day, if you listen to Treasury Secretary Scott Bestin, he thinks that we will ultimately replace all of these tariffs over the long term, beyond just this, these 150 days that are currently being seen through section 1 22.

So more to come there. As I said, this does not mean that we need to make a change at the portfolio level, but we need to just wait for more information, and we’ll certainly be watching it. But if you have any questions, please don't hesitate to reach out to your financial advisor, and we'll see you next week.