UBS has issued a warning that tariffs remain a threat to global growth, despite recent trade agreements between the U.S., EU, and Japan. These deals have provided more clarity, yet the 15% tariff rate on most goods from the EU and Japan may still hinder economic progress.
Ulrike Hoffmann-Burchardi, from UBS Global Wealth Management, cautions that these tariffs could impact global economic momentum. The risk of increased inflation or a hit to corporate profit margins could affect market optimism and alter economic forecasts.
The Role Of The US Consumer
UBS believes the U.S. consumer’s strength might help avoid a recession. However, they emphasise the need to stay mindful of the risks tariffs pose, as unchecked trade frictions or rising inflation pressures could lead to renewed market volatility.
Despite greater clarity from recent trade deals, we believe the remaining tariffs will continue to slow global economic momentum. The latest World Trade Organization data shows global goods trade for the second quarter of 2025 remains below its trend baseline, signaling persistent weakness. This suggests the market may be too optimistic about a quick recovery.
A key risk is inflation proving stickier than anticipated, which could force central banks to maintain a hawkish stance. The latest Consumer Price Index report for June 2025 came in slightly hot at 3.8%, driven by stubborn services inflation. This challenges the narrative of a smooth path to lower interest rates and could pressure asset prices.
We are also closely watching corporate profit margins, which are showing signs of compression this earnings season. With over two-thirds of S&P 500 companies reporting, blended profit margins have contracted by 50 basis points from last year, with many firms citing higher import costs. This pressure on profits represents a significant headwind for equity valuations moving forward.
Strategies For Market Downturns
Given these headwinds, we think it is wise to consider hedging strategies. Buying protective puts on major indices like the S&P 500 or on tariff-sensitive sectors such as industrials and consumer discretionary can provide valuable downside protection. This approach allows for participation in any upside while limiting potential losses from a sudden market downturn.
With the CBOE Volatility Index (VIX) currently trading near historical lows around 14, options are relatively inexpensive. We see an opportunity in buying VIX call options or using VIX futures to hedge against a potential spike in market volatility. History shows that periods of trade friction or inflationary surprises can cause sharp and profitable moves in volatility gauges.
