MW Why investors may be in for a long summer with no easy resolution on tariffs

By Vivien Lou Chen

'Tariff rates are likely to continue rising and remain elevated,' says Monica Guerra, head of U.S. policy at Morgan Stanley Wealth Management

It could be a long, uncomfortable summer for investors who are wary of further tariff-driven turmoil in the financial market. That's because President Donald Trump has a number of alternative ways he might be able to impose levies on U.S. trading partners.

According to Monica Guerra, head of U.S. policy for Morgan Stanley Wealth Management in New York, Trump can invoke sections of U.S. trade law that could theoretically begin investigations into China for unfair trade practices and target any country or product based on national-security concerns. She described each of these choices as realistic options and said the average effective tariff rate has the potential to jump back to as high as 20% - the level on April 2, which Trump termed "liberation day" - from 16% currently.

In a nutshell, "tariff rates are likely to continue rising and remain elevated," regardless of what happens and despite questions about the legality of the president's actions, Guerra said.

At least one challenge to Trump's tariffs is working its way through the court system. It is aimed at thwarting the president's attempts to impose tariffs based on his claim that he's stopping the flow of fentanyl into the U.S. and leveling the playing field with other countries via reciprocal actions. That challenge is unlikely to stop the Trump administration, however, which has set what it calls a "hard" deadline of Aug. 1 for countries to reach trade deals or face reciprocal tariffs.

Stock-market investors, meanwhile, are looking past some of these issues, and the market wasted no time in bouncing back. On Friday, the S&P 500 SPX closed up 11% since Trump's April 2 tariff announcement, while the Nasdaq Composite COMP is up 18.7% since then. The two indexes also finished near or at record closing levels on Friday, even after the Financial Times reported that the White House was seeking 15% to 20% tariffs on the European Union.

Read: 3 reasons investors have largely ignored Trump's tariff threats as Aug. 1 deadline approaches

"The market is doing a really good job of trying to look through these issues," Guerra told MarketWatch via phone. "It has two options: stop and panic, or continue on. Where the market is correct is in thinking that you can't hold your breath and wait forever for something to happen. That's why markets are trying to rationally look through it. I would argue that even though markets are behaving rationally because there's no other option, maybe the full impacts of tariffs haven't been priced in."

In her view, tariffs may end up having an impact that's more idiosyncratic than many people realize - meaning that they are tailored to particular countries and products and could therefore produce bifurcated outcomes in the economy and financial markets.

For market participants, this would be most evident in places like the dollar: As of Monday morning, the ICE U.S. Dollar Index DXY, a measure of the greenback versus a basket of six major peers, has fallen 9.6% this year on the diminished appeal of U.S. assets. But a weaker dollar has a dual-edged effect on American businesses. On the one hand, it tends to lead to higher import prices, making it harder for businesses to grapple with increased costs if much of their revenue is derived from within the U.S. On the other hand, companies with greater exposure internationally can benefit from a weaker dollar, because this boosts their potential revenue from overseas.

"When we talk about the bifurcation of sectors or the economy, market winners are likely to be companies with higher foreign revenue exposure should there be a weaker dollar," Guerra said. "Companies with a greater domestic revenue base could face greater headwinds, but that doesn't necessarily mean they won't win. For instance, there could be fiscal stimulus that supports utilities in 2026."

Meanwhile, she said, there is "absolutely no question" that tariffs will create a drag on U.S. gross domestic product the higher they go. "The big question is what the path through this ends up looking like on consumers. That hasn't been fully thought out yet, and there may be a full mosaic of outcomes. I do think growth will be pressured, and that costs to consumers will be tacked on."

Guerra added that her firm is advising clients to be diversified, with inflation-hedging strategies like alternative or real assets.

As of Monday morning, all three major U.S. stock indexes DJIA SPX COMP were moving higher as investors prepared for another batch of earnings reports this week.

-Vivien Lou Chen

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July 21, 2025 10:27 ET (14:27 GMT)

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