Trading Insights: US policy and the impact of tariffs

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William Tuttle: There's just a degree of unpredictability in foreign policy in general these days that I don't think we've wrestled with, at least in my professional career. And I just think that we need to keep that in mind.

Eloise Goulder: Hi, welcome to ‘Market Matters,’ our market series on J.P. Morgan's Making Sense. I'm Eloise Goulder, and today I'm delighted to be sitting here in New York with William Tuttle, who is Executive Director for Global Engagement, to dive into U.S. policy and the evolving world order. So William, thank you so much for joining us here today.

William Tuttle: Thank you for having me.

Eloise Goulder: So William, could you start by introducing yourself and your background?

William Tuttle: I'm part of a team called Global Engagement. We're based in Washington, D.C. What we do is track, monitor, analyze the implications of U.S. foreign policy for the firm, and for our clients. Before joining J.P. Morgan, I was vice president for political risk and security at a small energy firm based in Texas. And prior to that, I spent 16 years in the U.S. intelligence community and State Department.

Eloise Goulder: And I'm really looking forward to hearing your perspectives on the political and the geopolitical, William, and coupling that with my perspectives on the markets. And I think one really important debate this year, which couples both those facets, is U.S. exceptionalism. A theme that worked so well in markets over the last decade or so, but a theme that really underperformed through the market drawdown of February to April this year, during which the S&P 500 lost about 20 percent peak to trough, it sharply underperformed other global indices, albeit the U.S. has been outperforming since then. But certainly questions around U.S. dominance have been absolutely at the forefront since then. And I guess this comes down to questions around both U.S. policy and foreign policy, but also to questions on technology and the global A.I. race. So, William, could we start with U.S. policy? And can you tell me your thoughts on the impact of the tariffs that have been announced?

William Tuttle: The interesting thing about tariffs is that we tend to look at the Trump administration as having made this giant move earlier this year but the impulse to place tariffs in the United States goes back a number of years, and I think it's worth keeping that in mind as we're looking at this. In Washington, when I was coming up as a young professional, free trade really drove U.S. foreign policy, or at least it was a key pillar. Now I would say in Washington there's really no policy constituency that has a free trade agenda, which is quite remarkable. We've entered this new phase where tariffs are becoming more and more acceptable. And that's led to some questions that we hear from clients, which is, what are we trying to do with tariff policy? So we see a number of reasons that explain what the government's trying to do. One that's talked about quite a bit, is to try to bring manufacturing jobs back to the U.S. Another one is in the national security realm. And we saw some of this under the Biden administration as well, which is, we need to protect certain critical supply chains, and tariffs can help do that. And there's one more thing tariffs are helping accomplish for this government that I think will make them sticky over the long term, and that is they're creating revenue. They created upwards of $30 to $40 billion in revenue last month. I mean, you stretch that over a year, and that's a significant piece of revenue for the government, a government that has in the past struggled to generate new sources of revenue. Now that these tariffs are in place, I tend to think that they're going to stick a bit. And even if we look at the Supreme Court decision that's going to come up, end of this year, maybe beginning of 2026, where they're going to rule whether the actions that the Trump administration have taken are consistent with the International Economic Emergency Powers Act, IEPA. And even if it throws out the administration's tariffs, the administration will find ways to put them back in place. So I tend to think that's where the policy direction is. The impulse is towards tariffs, they'll probably settle at a lower level than what we're seeing right now. But I think they're here to stay for a few more years, at least.

Eloise Goulder: It's really helpful to hear the context and the rationale for the tariffs, those three core reasons but I guess the question is, what are the costs against that? And I would argue from a markets and from an economic standpoint, the big questions this year have been when and if we would see a corresponding growth decline and or inflation increase associated with those tariffs. Because of course, there's a question as to how much the goods that were otherwise imported from abroad will be substituted by U.S. manufactured goods. But other things equal, one would expect some sort of a hit to growth, some sort of an increase in costs and inflation. And yet we haven't really seen that. Has that debate been coming up in your circles?

William Tuttle: Yes. The questions that we're getting from clients are when there will be a corrective course by the administration because the expectation is that there will be impact on growth at some point. We haven't seen a change in policy from the administration yet. What we have seen are a series of deals cut with individual trading partners, countries that have historically been close to the United States. Those trade agreements, take a long time. They're very complex. We've seen announcements around those, but not a lot of concrete progress. And historically the U.S. has worked very closely with allies, And right now there's a little bit of an expectation around, OK, well, where are these talks going to go? Where are they going to end up?

Eloise Goulder: So the U.S. authorities still need to conclude these tariff discussions with these bilateral countries. But the other debate that's been coming up in markets is the extent to which the One Big Beautiful Bill Act, which only came through in July, could have an offsetting impact on growth to the extent that there are multiple tax cuts in that bill. That could be a boost to growth, an incentive for growth, and that could offset some of the tariff dynamics. Is that something you have a view on?

William Tuttle: Well, maybe so, actually. And so that's one thing that could counter some of the tariff implications.

Eloise Goulder: Moving on to AI, when we look back to the underperformance in U.S. equities through February, March this year, one of the narratives, of course, was the impending tariffs and their impact on growth and inflation. But another argument for U.S. equity underperformance was competition from China. And indeed, the DeepSeek R1 model was released in January and showed enormous success in terms of downloads over the next few weeks. The U.S. has certainly been the leader in terms of cumulative AI-related CapEx to date. William, do you believe the U.S. will continue to dominate in this field?

William Tuttle: Well, I think this is probably one of the most important questions that we'll be talking about for the next several years. Clearly, the United States has put a premium on innovation and pushing the frontiers of AI in a way that contrasts slightly with the Chinese approach, which is more focused on ensuring that AI is integrated into its economy as quickly as possible, But the Chinese are catching up. Their homegrown chips are getting better, so I think this is really the race of the next 25 years.

Eloise Goulder: So when we put this all together, both the policy developments with tariffs, their impact on growth, their impact on inflation, their impact on U.S. foreign policy, and then we couple that with the AI race, and technological developments in all economies globally, what do you think this means, William, for the changing world order? And what do you think this means for the U.S. in the longer term?

William Tuttle: I see a U.S. that is pulling its horns in. It's focused more and more on its immediate neighborhood, and there are good reasons to do that. The administration has made fentanyl a priority. It's made immigration a priority. These are huge challenges for the United States, and they're deserving of policy attention. But they're less about pushing a broader free trade agenda, or some value-based policy across the globe. It's a very transactional foreign policy right now we're sort of entering this age of transactionalism and I think that will lead to questions about long-term durability of U.S. partnerships to the extent that it maintains them and sustains them abroad. All that being said, the U.S. is still a hugely dominant economic player on the global stage, spends more than any other country on its military, is able to project power still in very real ways.

Eloise Goulder: And of course, these much longer term themes in markets should play out in the longer term growth premia, and/or the longer term risk premia. But in the near term, there have been many supportive factors for U.S. equities this year, which help justify and explain the strength year to date. On the macro front, in spite of tariff news and tariff uncertainty, the U.S. economy has continued to deliver around 2 percent growth so far this year. On the micro corporate earnings front, I think that's been a really remarkable story because not only have we seen the S&P 500 deliver around 10 percent earnings growth in both Q1 and Q2 this year, but we've actually seen evidence of a broadening of the earnings base within the U.S. So it's no longer the Mag 7 and the tech names which are really dominating earnings growth but we've actually seen nearly 10 percent earnings growth from the S&P 493 and the non-tech segments of the market. That is a marked change versus the prior two years. And then from a policy perspective, you've seen the Fed cutting rates. The market is anticipating further cuts through the course of this year and other things equal, that is positive for equity markets. So I do believe that all three of those drivers help explain equity markets year to date. But, William, from your perspective, as you look ahead, which economies outside of the U.S. really stand out to have tailwinds at this stage?

William Tuttle: That's a great question. I look at the Gulf countries in the Middle East in particular, I think that there is the opportunity for real growth there, real dynamism. There is in the world of international affairs literature, a lot of talk about this being a middle power moment where countries like, Turkey, Indonesia, South Africa or Brazil, find themselves in a position where they're being competed over, competed for by the great powers, China, the U.S., and is this an opportunity for them to leverage what advantages they have potentially? So I think this could be a middle power moment for some of those countries. The final thing on China, the Chinese are watching what the U.S. is doing and not changing much of what they're doing at all. And I think their stature is almost rising globally by default. And we saw recently with the Shanghai Cooperation Organization meeting, SCO, bringing together world leaders in a way that we hadn't seen China do previously.

Eloise Goulder: And of course, from a market's perspective, emerging economies as a whole have performed very well, have outperformed U.S. equities year to date. And the weaker dollar particularly those that have dollar denominated debt, alongside access to commodities, has been highlighted as another supportive pillar for many of those economies. So William, we've discussed so many topics which are widely debated already amongst both the political, geopolitical community and amongst the markets community. Tricky question to close, but are there any less discussed topics, or perhaps I should say, known unknowns, that you believe are important?

William Tuttle: Sure, so I would just say, don't sleep on the conflicts that we know about already, in terms of the geopolitics. So Ukraine, there's still an opportunity for escalation there. So as much as I see opportunity in the Gulf, there is still geopolitical risk around Israel and Iran. And there are some other things, again, from a geopolitical perspective that I watch. One of them is in the South China Sea, where the U.S. has a mutual defense treaty with the Philippines. And then there's just a degree of unpredictability in foreign policy in general these days that I don't think we've wrestled with, at least in my professional career. And I just think that we need to keep that in mind.

Eloise Goulder: There's clearly so much to watch, whether it stems from U.S. policy changes and the implication of tariffs to AI dominance, technological change, and as it pertains to geopolitics across the globe. So thank you very much, William, for taking the time to go through all of this with us today.

William Tuttle: Well, thank you, Eloise. We probably just barely scratched the surface, but it was a pleasure being with you and I'm happy to come back anytime.

Eloise Goulder: Fantastic. Thank you also to our listeners for tuning in to this regular podcast series. If you have questions or if you'd like to get in touch with our team, then please do go to our website at jpmorgan.com/market-data-intelligence. And with that, we'll close. Thank you.

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