Tariff Turbulence: VanEck’s 2025 Q2 Summary 

Please Note: This report was created and provided by VanEck.

American economist Harry Markowitz is credited with saying that “diversification is the only free lunch in investing.” The problem for the past quarter is that not everyone was eating. Unloved and under owned assets came to the fore during the first quarter of 2025.

Gold was the best-performing asset class over the quarter, bested only by its miners. Gold miners are associated with being a leveraged play to gold. The theory is that when the gold price rises, its miners rally by more and vice versa. In the recent past, however, this leverage has seemingly only been on the downside. Miners may have more room to run.

It’s not just gold miners. As investors reconsider their US equity exposure, Europe has become an investable alternative again. The US represents over 70% of the MSCI World Index. International value managers may have been the only investors diversified to Europe during the quarter.

The story of the past quarter has been Trump’s tariffs.

They have moved markets as they have been announced, as they have been paused and as they have been confirmed. Now that they have been announced, they vary and the immediate impact was a fall in S&P 500 and NASDAQ futures. The biggest sector of the US’s S&P 500, information technology, has dragged its market down, but under owned sectors such as energy and financials have had positive quarters. The question investors are wondering is if this is the start of a new economic regime. Tariffs will be the norm, and with them, the potential for associated inflation. The Fed has already described this inflation as transitory.

The ultimate long-term impact is uncertain, and markets don’t like uncertainty. Tweets and data prints will continue to move markets. The US economy is wavering, but its consumer remains strong, so it could avoid a Trump-cession.

Europe, after a period in the doldrums, appears to be heading in the right direction. Chinese authorities are also doing the right things to reinvigorate consumers there.

Locally, however, Australia is precariously placed.

Our central bank issued a hawkish statement as it dovishly decided to ease rates during the past quarter. This coming quarter, we are headed to the polls, with the outcome far from certain. But uncertainty is a feature of markets.

We are headed for a paradigm shift. As investors assess their portfolios, we think opportunities will present themselves for diversification into once under owned, unloved corners of the capital markets. Diversifying into assets many may have never owned (gold and EM, should the US dollar come off further) or diversifying into styles that have been out of favour (value). Turbulent markets can present opportunities.

“The only investors who shouldn’t diversify are those who are right 100% of the time”

– Sir John Templeton

Goodbye TINA, hello FRED!

A few months ago, US investors exhibited record levels of confidence buoyed by artificial intelligence (AI) euphoria, expectations of tax cuts and deregulation.

The level of market confidence had many investors questioning their previously held assumptions. The US was priced to perfection, and it was hard to see what would derail the train. Last quarter, we mused that nothing short of a bond market riot would take the wind out of investor sails, at least until Inauguration Day.

In the end, something resembling a minor bond market riot got underway before President Trump’s inauguration. A few weeks after that, equities got the message.

The message had two parts: Trump means what he says, and, given that, it isn’t wise to own things priced to perfection in the face of such uncertainty. Now, markets have got caught up in the noise of announcements. They are wavering back and forth between hope and fear.

It makes more sense to step back a little. Trump is implementing tariffs. Potentially, this will be in fits and starts. There will be retaliation, and the impact may be higher inflation and lower global growth. There have been some additional surprises over the past quarter, and not all the surprises have been negative, though they do feed into broader market realignments.

We have seen a much sharper attack on the US Government by Elon Musk and his Department of Government Efficiency (DOGE) team than was earlier expected. It’s worth noting that this won’t be the herald of some new fiscal golden age because the numbers don’t seem to reconcile. In the short term, it could result in more chaos and potentially income and confidence losses, which could undermine spending and growth.

At this stage, we do not see this slower growth turning into outright recession because household incomes are solid.

But with less government spending and income support, plus wavering consumer and business confidence, it pays to maintain a careful watch. Watch non-farm payrolls like a hawk. On the plus side, we’ve seen surprising responsiveness to Trump’s belligerence from Europe and China. After years of macro and market underperformance, both have started to look like competitive destinations for capital.
At the same time, policy uncertainty argues for more diversification. The US generates roughly 20 per cent of global GDP, 40 per cent of global profits and it represents 70 per cent of global market capitalisation. Without any judgment on future relative outcomes, diversification, a tenet of modern portfolio theory, would suggest it is wise to seek alternatives.

Say goodbye to TINA (There Is No Alternative). Say hello to FRED (Finally Relativities Encourage Diversification).

Tariffs, growth and inflation prospects

Markets are swinging back and forth on every tariff announcement, thought bubble and tweet. There will be a significant bump in tariffs, and there will be retaliation.

The latest Organisation for Economic Co-operation and Development (OECD) projections show a modest loss of growth across the world and OECD economies, with weakness concentrated in North America.

China’s growth prospects are relatively undiminished. The outcome of the Government’s domestic economic policy aimed at revitalising its property market has more impact on the nation’s long-term economic recovery than the impact of tariffs.

The US inflation impacts are, expectedly, worse. US core inflation is expected to run at 3 per cent through 2025, retreating only to 2.6 per cent through 2026. This stands in sharp contrast to the Federal Open Market Committee’s (FOMC’s) latest, optimistic projections. While the committee has projected core PCE jumping to 2.8 per cent this year, it’s close to target again next year (2.2 per cent) and on target the following year.

It’s hard to believe a rolling series of tariff moves, involving heavily interlinked supply chains, alongside the proposed deportations and trend GDP growth, could see instant, immaculate disinflation.

The word ‘transitory’ was used, and it triggers the memory of the COVID inflation episode.

We hope the US Federal Reserve (Fed) forecasters learnt from that recent lesson. With inflation expectations also surging, to continue with a median forecast of two rate cuts, amid barely changed growth projections, this year could be seen as hopeful. Of course, for capital markets, rate cuts and growth unabated is the sugar hit US equities need.

Not everyone agrees that the slowdown will be moderate.

Markets recently have had a couple of episodes of recession jitters, triggered by softer data. The Atlanta Fed GDP Nowcast has slumped to roughly negative 2 per cent this quarter.

This is an overstatement due to gold imports (not counted in GDP), rising other imports (likely a timing effect aimed at beating tariffs) and, potentially, one weather-affected month of consumer spending.
Nonetheless, it currently points to a solid step down in the pace of growth (to 0–1 per cent range from over 2 per cent) and bears watching.

Payrolls and DOGE

There is no doubt that consumer confidence has taken a sharp hit, with Conference Board consumer sentiment back to lows not seen since COVID. But, at the same time, all the hit is in expectations with current conditions fine. Over time, confidence usually converges on income, not the other way around. And income has a much better forecasting record for spending than confidence.

For the moment, we view a moderate slowdown.

But it will be worthwhile to watch payroll numbers carefully because if business confidence, which is currently high but declining sharply, or government layoffs start to hit employment, then the slowdown may not be moderate.

On the question of government layoffs, the implementation of Elon Musk’s DOGE has been quicker and sharper than expected. Musk’s approach, however, is seemingly closer to how he might approach a technology business, and it has the potential to have a different effect when running an entire government.

As we have noted, it is difficult to see that DOGE’s efforts will generate the savings necessary to meaningfully close the budget gap or even pay for extending tax cuts. Sacking all civil servants would yield savings of US$300 billion a year.

Remember, the promised extension of tax cuts runs to US$600 billion a year.

Last year, the US Government spent US$6.75 trillion, and this year’s deficit is currently running ahead of last year’s. Chart 7 shows the breakdown of that spending. The vast bulk of the spending is mandatory or politically untouchable:

• defence and veterans at 20 per cent;
• already-underfunded social security at 20 per cent;
• net interest at 13 per cent (and rising sharply);
• health and medicare at 29 per cent.

All in all, something like 94 per cent of spending maybe in too-hard for DOGE categories.

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