UBS Group AG cautions that the Trump administration's impending 25% tariffs could significantly suppress consumer spending, reignite inflationary pressures, and prolong elevated interest rates. This triple threat compounds existing concerns about weakening consumer resilience, with the bank revising its 2025 U.S. GDP growth forecast down to approximately 1%.

Micro-level data reveals troubling trends: rising loan delinquency rates and diminishing consumer spending appetite point to tightening credit conditions and deteriorating household balance sheets. UBS warns that risk assets—particularly record-high global equities like the MSCI World Index and S&P 500—face substantial correction risks through year-end.

Rather than chasing high-growth tech or AI leaders, UBS advocates a defensive pivot through its "Three Shields" strategy:

**Shield 1: Credit Market Fortification** Adopting a "neutral-to-cautious" stance on U.S. corporate debt, UBS favors upgrading portfolio credit quality. Tightening credit spreads limit excess returns, making defensive relative-value trades preferable—such as pairing long positions in financially robust corporate bonds with shorts in vulnerable issuers.

**Shield 2: Essential Consumption Focus** Consumer spending slowdowns and credit tightening hit discretionary sectors hardest. UBS shifts toward defensive retailers benefiting from "trading down" behavior, where giants like Walmart, Costco, and Target now command ~50% of U.S. retail expenditure. This contrasts with vulnerable mid-tier discretionary players facing inventory gluts and financial strain.

**Shield 3: Cash-Rich Quality Compounders** Targeting companies with resilient cash flows and inelastic demand—including supermarket chains, discount retailers, essential goods producers, and cyclical stalwarts like Amazon and Coca-Cola. These firms demonstrate pricing power to offset inflationary costs while maintaining reliable cash generation.

Macroeconomic headwinds underpin this cautious stance: - U.S. core PCE inflation is projected to remain elevated at ~3.4% through 2025 - Federal Reserve policy rates will likely stay higher for longer - New tariffs could catapult weighted average import duties to ~20% from 2024's 2% - Fiscal stimulus benefits won't materialize until 2026

Consumer surveys reveal tariffs have unexpectedly become the second-largest concern (cited by 42% of respondents) after inflation (68%). This policy uncertainty now psychologically suppresses spending more than geopolitical risks or employment worries.

Credit cycle indicators flash warning signs. Corporate "fallen angels" and leveraged loan defaults are rising, though SME distress remains contained. Household delinquencies—particularly student loans and mortgages—are climbing from historic lows, with credit card and auto loans currently stable but closely monitored.

UBS concludes that only fading inflation, reduced trade uncertainty, and realized fiscal benefits can sustainably reignite risk appetite. Until then, its Three Shields strategy aims to weather volatility while positioning for eventual recovery.