Home Insights Macro views Trade tensions: Navigating market risks

Escalating trade tensions are injecting fresh volatility into markets. The U.S. trade deficit, which remains sizable with key partners like China, Mexico, and Europe, underscores the stakes in ongoing trade disputes. However, while tariffs could increase costs and disrupt supply chains, history suggests that markets adapt over time. A well-diversified portfolio remains the best defense against short-term uncertainty. Investors should avoid overreacting to short-term swings and instead focus on economic resilience, corporate earnings strength, and broader market trends.

U.S. trade balance by country
Rolling 12 months, visible trade, free alongside basis

U.S. trade balance by country Rolling 12 months, visible trade, free alongside basis in graph form
Source: Clearnomics, Census Bureau, Principal Asset Management. Data as of December 31, 2024.

Financial markets are once again caught in the escalating trade tension crosshairs as new tariffs take effect, are postponed and are adjusted, seemingly on the fly. This week, President Trump imposed duties on imports from Canada, Mexico, and China—signaling a hardening stance to his trade policy. Investors are left weighing the implications for global supply chains, corporate profitability, and economic stability.

A prolonged U.S. trade war will create headwinds for growth and likely further unnerve markets. Since tariffs function as taxes on imports, they often push prices higher for both companies and consumers and will be an added strain on an already precarious inflationary environment. Amplifying investor concerns is the U.S.'s sizable trade deficit, which leaves the country particularly vulnerable to trade-related disruptions. If trading partners decide to retaliate, expect uncertainty to deepen, increasing pressure on businesses navigating global supply chains.

Despite short-term risks and the recent equity market selloff, it's important to put these events into perspective. While markets tend to respond swiftly, the economic effects of tariffs typically emerge gradually. History shows that diversified portfolios benefit from staying invested through cycles, particularly when strong corporate earnings, resilient labor markets, and stable credit conditions support a constructive long-term outlook. While trade headlines persist, disciplined investing remains the best strategy for navigating the uncertainty ahead.

Macro views
Equities
Disclosure

Past performance is no guarantee of future results. Investing involves risk, including possible loss of principal. Equity investments involve greater risk, including heightened volatility, than fixed income investments. Asset allocation and diversification do not ensure a profit or protect against a loss.

The information presented has been derived from sources believed to be accurate; however, we do not independently verify or guarantee its accuracy or validity. Any reference to a specific investment or security does not constitute a recommendation to buy, sell, or hold such investment or security, and does not take account of any investor’s investment objectives or financial situation and should not be construed as specific investment advice, a recommendation, or be relied on in any way as a guarantee, promise, forecast or prediction of future events regarding an investment or the markets in general. The opinions and predictions expressed are subject to change without prior notice.

Principal Funds, Inc. is distributed by Principal Funds Distributor, Inc.

Securities are offered through Principal Securities, Inc., 800-547-7754, Member SIPC and/or independent broker/dealers.

Principal Asset Management leads global asset management at Principal.®

For Public Distribution in the U.S. For Institutional, Professional, Qualified and/or Wholesale Investor Use only in other permitted jurisdictions as defined by local laws and regulations.

© 2025, Principal Financial Services, Inc. Principal Asset ManagementSM is a trade name of Principal Global Investors, LLC. Principal®, Principal Financial Group®, Principal Asset Management, and Principal and the logomark design are registered trademarks and service marks of Principal Financial Services, Inc., a Principal Financial Group company, in various countries around the world and may be used only with the permission of Principal Financial Services, Inc.

4299080