By Reshma Kapadia

The stock market has largely tuned out the past week's tariff drama, with the Trump administration threatening a new spate of levies and announcing other agreements. But TS Lombard Chief Economist Freya Beamish is cautioning investors against complacency because multiple "low-grade shocks" can take their toll like that of a frog in boiling water.

Tariffs are one of these "low-grade" negative supply shocks Beamish is worried about, she wrote in a note to clients Wednesday. Ultimately, she expects a sizable chunk of tariffs against foreign countries to stick, with an effective rate of 10%. To avoid triggering a recession or causing imports to shrink so much that the tariffs wouldn't generate much revenue, Beamish estimates an average 10% tariff is about as high as the Trump administration goes.

That said, she expects some sectors and regions to face higher tariffs -- and some products, like energy, to be exempted from levies to ease the pain.

In the past week, President Donald Trump has imposed 50% tariffs on copper, set a 30% tariff on the European Union even as officials have been in negotiations with the U.S., and threatened 50% tariffs on Brazil, citing the government's treatment of ally and former President Jair Bolsonaro -- who is accused of trying to overturn the 2022 election in the country -- and Brazil's treatment of U.S. tech firms.

Beamish says the latest spate of threats don't make sense and are counterproductive. For example, she says, U.S. demands to interfere in another country's legal proceedings are unlikely to do much beyond rallying support for incumbent President Luiz Inácio Lula da Silva. Beamish also says that copper tariffs are making it harder to achieve the Trump administration's stated aims of revitalizing manufacturing by raising costs for U.S. businesses.

Those may end up being noise -- but she says tariff shocks are here to stay. And tariffs are part of the series of low-grade shocks the market is struggling to digest. None are likely big enough to register on the yield for the 10-year Treasury note, but investors may be underestimating their impact on inflation, she cautions.

While the June reading of the consumer price index climbed 2.7% higher -- less than many anticipated -- Beamish notes that tariffs' sting was partly hidden in the dat: Falling autos prices offset the tariff effects working their way through highly imported goods such as appliances, apparel, and toys.

In a note to clients Wednesday, Deutsche Bank macrostrategist Henry Allen also stressed inflation risks are being underestimated. Allen describes a "remarkable complacency across key assets," even as a multitude of factors globally come together to push inflation higher.

Rising tariffs are one. But in Europe, he also noted the huge fiscal stimulus the region is prepping while unemployment is at multidecade lows. With deficits high, the temptation for policymakers to use inflation to whittle it down exists, he adds.

Beamish also points to immigration in the U.S. While she doesn't think ICE will be able to hit its goal of 3,000 arrests a day to reach one million arrests in a year due to a lack of resources -- even after the big boost from the recently-passed tax bill -- Beamish cautions that the labor market is already structurally tightening. The deterrent effect of the immigration raids shouldn't be underestimated.

These are issues that will take a while to play through the economy, a reason for the market's complacency. But analysts are increasingly raising flags for investors to not underestimate the growing risk.

"The economy is being repeatedly pushed into the stagflation quadrant but each shock isn't enough to shift the needle -- hence our boiling-the-frog metaphor," Beamish says. But Beamish forecasts that investors will look back to this period and realize inflation was consistently higher than bond investors were getting paid for and the economy was tilted more toward stagflation. Eventually, bond investors are going to demand higher yields -- and that will translate to lower valuations for stocks.

For now, it may not convince big long-term investors to sell U.S. assets but Beamish sees little reason why foreign investors would want to increase their allocations to U.S. stocks.

Investors may not want to start taking some of their bets off the table and locking in recent highs before inflationary pressures are much more obvious.

Write to Reshma Kapadia at reshma.kapadia@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

July 16, 2025 15:01 ET (19:01 GMT)

Copyright (c) 2025 Dow Jones & Company, Inc.