Before tariffs were suddenly shoved into the centre of investors’ minds, a soft landing for the US and global economy looked to be well established.

But US growth has turned negative in the first quarter of the year and consumer inflation expectations have risen sharply since tariffs were announced.

As such, a US tariff-induced inflation spike was cited as a top risk to markets by Allspring as it warns that US inflation expectations could rise sharply over the next year.

“The likely scenario to us is that the costs of higher tariffs will be passed on to consumers,” the report said.

“Tariffs will increase costs for US companies that rely on imported goods and components, pressuring earnings. A weaker US dollar may take a toll as well.”

“In the current environment, the US outlook appears more stagflationary to us, with tepid growth and short-term higher inflation.”

While the market is broadly expecting three interest rate cuts from the US Federal Reserve this year, the report warned that the central bank may be more cautious and cut only twice, or less.

“This would disappoint investors in US bonds and likely make US bond and equity valuations more challenging,” the report said.

A global recession

The report flagged a second major risk to markets: an escalating global trade war coupled with US government spending cuts could push the global economy into contraction.

While potential tax cuts could be a bright spot for the US consumer, the report warned that tariffs at their current or higher rate may “wipe out the positive effects of US tax cuts and cause a recession”.

Since US consumer spending was critical in helping buoy the global economy and avoid a recession, the report said a trade war coupled with big US government spending cuts could derail US consumer spending – causing an economic contraction for multiple quarters.

New trading blocs

Although tariffs were undoubtedly a shock to global markets, many investors had been pointing to a trend of de-globalisation already underway after the pandemic in the form of supply chain re-shoring.

But the recent tariff conflict highlights a trend toward trade nationalism, the report said. “Rather than deglobalisation, we’re likely to see new trade blocs and alliances shaped.”

However, one positive outcome could be emerging markets seeing increased domestic consumption which would have them transition away from a purely export-driven growth model, according to the report.

On the other hand, the authors warned that “decoupling-along with the weaker growth that generally occurs with trading-partner transitions could amplify geopolitical risks given that global trade and increased interdependencies are often associated with more peaceful times”.