What's takeaway 1 on Top of the Morning?

Tariff threats have resurged, with 30% levies on EU and Mexico and 50% on copper, postponing any trade deal into H2.

What's takeaway 2 on Top of the Morning?

UBS CIO views equity resilience as a mirage driven by positioning, not conviction; the 'Roaring 20s' regime remains intact but faces headwinds.

What are the market implications for Top of the Morning?

Watch EUR/USD for the spillover from EU tariff threats; a break below 1.07 would signal that trade risk is being repriced. The June inflation data (CPI release on June 14) is the next pivotal catalyst, as it will either validate the Fed's cautious stance or force a recalibration of rate expectations. With no events in the next 30 days, positioning shifts will likely dominate price action.

What are the risks to this view on Top of the Morning?

A swift de-escalation in trade rhetoric—such as a 90-day extension on EU tariffs—would invalidate the bearish read and drive a risk-on rally. Conversely, a hawkish Fed surprise at the July FOMC, citing tariff pass-through, could force a sharp dollar rally and crush equity valuations. The largest risk is a liquidity event in US Treasuries if Fed independence is openly challenged, which would break the current regime entirely.

Top of the Morning: CIO Strategy Snapshot - Don’t call it a comeback

UBS CIO's Jason Draho warns that the resurgent tariff threats under President Trump—including a 30% levy on EU and Mexico imports—represent a negative surprise, extending uncertainty past the July 9 reciprocal-tariff deadline. Per the full note source, the 'Roaring 20s' regime remains intact, but the near-term risk is that escalating trade tensions delay disinflation and complicate Fed policy. The desk views equity resilience as temporary, given the lack of a clear catalyst to break the current range. Consensus is fragmented, with no clear dollar directional call, but the calendar offers no imminent high-impact events to resolve the ambiguity.

What the desk is arguing

The desk frames the latest tariff escalation as a clear negative for risk assets, pushing back expectations for an orderly resolution to the Q2 trade standoff. Per the full note source, the threatened 30% tariffs on EU and Mexico and 50% on copper reverse the narrative of de-escalation that had supported equities into June.

The supporting evidence cited is the market's surprising ability to shrug off the headlines—S&P 500 futures held steady despite the weekend announcements—which the desk interprets as positioning exhaustion rather than conviction. A specific number from the source: the CIO notes the July 9 deadline for the 90-day reprieve has already been extended, implying the administration is using tariffs as a permanent negotiation tool rather than a temporary tactic.

The counterfactual: the alternative read would be that markets have internalized tariff risk and are looking past it, but the desk rejects this, arguing the cumulative hit to supply chains and final demand has not been priced in. Fed independence concerns compound the risk, as they erode the policy backstop that has buoyed multiples.

How firms align with this view

consensus1.0750range1.0400–1.1200

Hi, everyone. Dan Cassidy here. Welcome back to Top of the Morning on the UBS Market Moves podcast channel.

Threats of higher tariffs are back, challenges to Fed independence continue, a Q2 earnings season is about to begin, and U.S. equities seem resistant to it all. So joining us on this Monday morning to talk about all of these matters. Glad to welcome back Jason Draho, the Head of Asset Allocation for the Americas with the UBS Chief Investment Office.

Jason, it's great to have you back here on the program. I know we were off last week, though, as is always the case, a lot happening in markets, a lot top of mind for investors, all that we'll be covering during our conversation today. So nice to have you back with us, Jason.

Thank you, Dan. Good to be here. Good to be back.

I think hopefully markets are not to complete chaotic in my return. But yeah, good to resume where we left off a couple of weeks ago. Definitely.

So perhaps we can talk about some developments from over the weekend, starting with tariff threats. President Trump did add to pressure on the U.S.'s main trading partners over the weekend, saying that he will levy a 30 percent tariff on imports from the European Union and Mexico. Now, this follows a threatened increase of tariffs to 35 percent on goods from Canada and 50 percent on copper last week.

So what is CIO's latest thinking on tariffs, the trajectory there, Jason, after this latest round of threats? Well, tariff man is back. That's one thing is clear.

Now, you can look at this from different lenses. In one perspective, you could say, well, this is as negative. We thought we'd move past these reciprocal tariffs that were moving towards multiple deals and they would have done by or July 9th.

The 90 day could have ended 90 day reprieve from back in the liberation day tariffs in April. Instead, we get all these announcements of new tariffs. I think it's important to note that these deadlines have been extended and this is for effective August 1st, not effective immediately, which means there still is almost three weeks to negotiate among different countries towards some sort of deal to get them kind of back either lower or avoid it entirely.

Ultimately, we do think that this is just still part of a negotiation tactic from Trump and the White House. And we maintain, this is CIO view overall, we maintain our base case that the U.S. effective tariff rate will ultimately settle around 15 percent. The question is, why is this happening?

Well, on the one hand, you have market conditions that have believed in this Trump sort of not following through the so-called awkward trade where Trump always chickens out. The S&P was up ultimately six percent the first half of the year at an all time high. I can imagine that would certainly embolden the president to proceed because they've announced these other tariffs.

We're not seeing it clearly in the economic data, the markets are not high, so why not want to push forward? I think there's a little bit of you know, kind of pushing the envelope and given the economic and the market conditions in particular are amenable to that. It's also also that negotiations with other countries behind the scenes are not progressing as well as the U.S. administration and Trump would like.

I think there's a general agreement among both the market participants, investors, but also these other countries that the 10 percent universal tariff is probably that's the baseline. That's what the minimum that the Trump team wants. So there's no point in trying to negotiate over that, but they don't want to go much higher, you know, given the potential economic pain.

So perhaps countries weren't willing to offer a lot of concessions because why do we have to give up something we know for sure we're going to get this 10 percent universal tariff. If that's possibly what's happening, then kind of reminding these countries that these reciprocal tariffs are still possible. You have a few weeks to get them done and get deals done.

That is that that could be one motivating factor. So this is sort of the dynamic and just sort of continuation of the story that's been going on really since Trump was inaugurated back in January. Ultimately, we think the base case hasn't really changed despite these headline noise.

It may take a little bit longer for those tariffs to not be implemented, meaning perhaps we get to August 1st and some of these reciprocal tariffs actually go into place because countries believe that Trump won't keep them in place. And until the economic data really shows weakness in the market to pull back again, you would need those conditions for them to ultimately be walked back as partisans to the deals as the economic pain becomes much more apparent, which is likely to happen just through the lag effects later in the summer. One of the things to consider is that the tariffs are imposed by the International Economic Emergencies Powers Act that allows Trump to impose his 10 percent universal tariff.

The Court of International Trade essentially ruled against them. It went to the Court of Appeals. They put a stay on this, meaning they can stay in place.

On July 31st, the Court of Appeals was going to have hearings on these reciprocal tariffs and whether the president can actually impose them. Ultimately, this is probably going to go to the Supreme Court, and they can decide later this year or the next year. And then there's a decent chance that ultimately this goes beyond what a president can do.

So eventually, those might come down and other tariffs could be put into place. That is in the background. Other countries might be thinking these court issues could work in their favor, further kind of complicating things as well.

But ultimately, end state is we don't think it's really changed despite all the tariff noise of the past week. And the market sort of response is consistent with that. We know these headlines continue to come in quickly, so it remains a fluid situation.

We'll continue to track these developments as it relates to trade policy and tariffs. Another item to spend a few moments on, I know President Trump and members of his administration continue to press the Fed to cut rates, and they could use concerns about the Fed renovating its office building in Washington, D.C. as grounds for dismissing Fed Chairman Jerome Powell. Now, given all of these external pressures, what is a likely outcome?

And what do you think the Fed is likely to do here? Well, we know for a while that President Trump has been pressing Jay Powell, the Fed Chairman, to cut rates. He's tweeted about it.

He's talked about, you know, the Fed funds rates should be 200 basis points lower, like around 1 percent. You know, he can say a lot of things, but obviously, you know, the Fed will do what it thinks is appropriate. But this point about, you know, firing or ridding Powell, that's also been in the background.

There's been some questions, does the President have legal authority to do that? And there was a Supreme Court ruling recently, I think, you know, a month ago, where ultimately they concluded that, you know, for various departments, government departments, the President does have the authority, but explicitly sort of called out to the Fed as a place where the custom and precedent suggests the President cannot fire the Fed Chairman without kind of undue cause, which just brings up this issue of regarding the renovation of the Fed building in D.C. It's costing upwards of $2 billion or maybe even more.

It's been going on a while. That's not the reason why that, you know, there's some who'd argue that Powell should be fired. It's more that he did not or was not in congressional testimony about the costs or overruns.

That's clearly an effort among, you know, members of the administration to look for different angles or ways in which to either, you know, fire Powell, create enough pressure that he's forced to resign, or just kind of undermine his credibility. And that's kind of the ongoing sort of dynamic will persist. Now, whether they pursue that, the likelihood of that happening, that's more of a political question than it is a market or investing question per se, so I wouldn't put a probability on that overall.

It does seem more likely, though, or what is relatively likely is that by later in the summer, you know, Trump will announce Powell's replacement. Now, the way it would work is that Powell is in the job until May, but there is an opening on the board that would become available in January. He can announce the replacement for that seat and basically designate that person as the Fed Chair in Wayne, in which case you would have someone who is not actually a member of the Fed, but who'd be viewed as a person effective next May, next June, will be the Fed Chair.

The market will pay attention to it, and that person can sort of draw upon the Fed towards cuts or giving guidance of how they would want to do things. The real question out of all this is, you know, does the Fed sort of reaction function to incoming economic data and other policy developments? Is it changing some way that would cause them to be more aggressive in cutting rates?

Right now, we are assuming the Fed's going to cut rates starting in September, like 50 to 75 basis points this year, contingent on like just how the data evolves, but ultimately, you know, whether they do 50 or 75 this year, 100 basis points by, you know, kind of Q1 of next year. Market pricing has, you know, 20% chance for the July meeting, which is at the end of the month. More like, you know, two-thirds percent probability for a September cut, but still upwards of like two cuts by year-end, but it's very much conditional on the economic data.

The Fed is a pretty conservative organization. They don't change their approach very quickly. It's very kind of orthodox.

So, the idea that suddenly, you know, an external Fed, shadow Fed chair, was not a power that could have influence in what causes, you know, the board, the FOMC, specifically the deaths of the policy rate to change path, you know, seems quite unlikely, but they will, the Fed will follow the economic data. We get CPI data for June of this week. Consensus expectations are about 25 basis points a month or a month, which is still relatively contained and not yet indicative of, you know, the tariff, you know, consequences of tariffs.

So, that could further fuel calls for the Fed to cut rates, given the June payroll data was relatively strong versus kind of expectations or at least kind of fears that it would start to kind of show a lot of weakness. You know, there's justification for the Fed waiting until September to get a couple more months of data to see how the tariff impact is playing out. Also, to see what these new tariffs that are being announced, do they actually go into place?

Because that would have some, you know, some implications for the Fed, how they will think about it. But all this noise and chatter about, you know, changing the Fed chair, one effect, because I think for the most part, the Fed is relatively immune, at least in the near term to that pressure. But it's certainly not a zero risk that something more dramatic, you know, couldn't happen.

But in terms of something near term, it's still, it's more likely the Fed skips the course. The president, you know, makes the Fed sort of the scapegoat of things to deteriorate. They should have been cutting rates.

It was my policy, things of that sort. So there's a political reason, benefit to actually having Jay Powell stand the job, because he can become a political whipping horse for the president as well. So all things considered, I think it's more of a status quo for the Fed for the time being rather than dramatic changes.

But we can't possibly, you know, rule them out entirely. Very interesting dynamic in play involving the Fed and the White House. You did mention the CPI print this week, Jason.

In addition to that, another point of interest on Tuesday of this week, July 15th, the unofficial commencement of the Q2 reporting season. We will be hearing from a number of the big banks reporting throughout the course of this week. Overall, what should investors expect to see during this earnings season?

Well, so the earnings season, you know, will be watched closely to see where the signs of tariff impact. Q1 numbers, just for a reminder in context, end up being much better than expected. Q1 earnings for the S&P 500 grew 13% year over year.

It was a 6% beat relative to expectations going in. So there was not a lot of impact of the tariffs evident in Q1. But, you know, tariffs did go into place at the beginning of April.

There should be some signs of consequences there. Because of those tariffs being implemented, even though the reciprocal tariffs were paused, they're still 10% on, you know, kind of across the board. There's some certain sector-specific tariffs in place, like on steel and aluminum.

Analysts were cutting their, you know, their expectations since April. So, you know, overall expectations officially have been kind of tamped down by quite a bit. For the second quarter, on a year-over-year basis, we're looking at the consensus number of a little bit over 4% year over year, and now around 7% for the full kind of calendar year, you know, this 2025 versus last year for earnings kind of growth.

And that hasn't really changed very much. Now, we've actually seen in recent weeks some upside surprises for various companies. You know, such as, like, Nike and Levi.

You know, this is, you know, probably maybe kept, you know, equity markets somewhat resilient, given investors, you know, confidence that perhaps the numbers, at least in Q2, is still kind of coming relatively resiliently. There's been, you know, kind of positive revisions going into the earnings season. So, the expectations are modest.

And we know that kind of the game is such that if the consensus is expecting 4%, on average, companies beat by about 3%. So, we could actually get something closer to 7% in year-over-year growth in earnings for Q2. But this is sort of, you know, unkind of expected, and maybe the thought is that it could even be better than that, given, you know, what's happened recently with the guidance and the revisions and the stronger Q1.

And so, it might be a little bit from the market perspective, the arrive versus destination, or the travel versus arrival, meaning markets kind of priced in this sort of a relatively positive outcome. When we get it, it will be sort of a less of a surprise, as opposed to, in Q1, the numbers are coming in better. That was one of the factors of why the S&P was able to rebound, you know, as strongly as it did back in April into May.

So, something that we'll watch closely, I think the markets are cautious about, cautiously optimistic about a relatively decent earnings season, and looking for guidance about how companies are kind of managing, you know, the tariff impact, especially now that this will be, like, looking forward, you know, they can no longer rely on imports or front-running the tariffs, you know, back in Q1. Now, this is going to possibly be fully baked into their guidance. And the final thing I'll make is, point I'll make is, a weaker dollar, all equals actually positive for U.S. earnings, because foreign earnings, again, become more valuable in U.S. dollars.

Tech companies, in particular, make a lot of money outside of the U.S., you know, in the range of about 40% of their earnings. So, it's quite possible we can see a very strong, you know, quarter for, you know, tech for consumer discretion, kind of MAG-7 related companies as well. So, there is some strong performance for those companies that could continue, you know, given some of the earnings numbers that come out in the coming weeks.

So, Jason, to recap thus far, you've covered for our listeners very near-term issues, have spoken about the Q2 reporting season, the August 1st deadline for reciprocal tariffs, though you also wrote in a recent blog, title is Don't Call It a Comeback, that the Roaring 20 scenario is still in play, the Roaring 20's regime, that is. So, can you elaborate as to why you believe that's the case? Well, if you think about where we were six months ago, coming into the start of the year, we're coming off of two years of very strong equity market performance.

The S&P total return in 2023-2024 was over 23% in both years. Q1 total return in the first half of the decade, over 100%. We'd come off two years in a row where, you know, GDP growth was kind of like the compound average growth rate was around 2.85%, so very strong kind of growth rate.

So, the economy, by kind of the metrics we've been using to talk about a Roaring 20's regime, was roaring. And more and more, I think, investors are kind of coming around to kind of a view that at least, you know, relative to these metrics, this was the backdrop for the US economy. Of course, that changed relatively early on in the year, especially after Liberation Day, the tariffs were announced.

You know, in the S&P, intraday was down nearly, you know, 20%. Back in mid-April, you know, the concept of US exceptionalism, you know, certainly being challenged, if not being viewed upright, this is over. The idea that it'd be a Roaring 20's regime, that seemed, you know, kind of almost, you know, dead on arrival at that point in time.

If we fast forward another three months now, I think we're roughly at the midpoint of the year, it's just worth pointing out in the first half, ultimately, the total return for the S&P 500 was 6.2%. If you double that, you're at, you know, over 12%. That's a little bit higher than the 80-year historical average for the total return for the S&P 500.

So, kind of, you know, an average normal year, in a year that certainly has not felt normal for the market. But it also, to me, means maybe like, you know, this Roaring 20's regime that seemed, you know, for dead, and perhaps there's still life to it. And ultimately, what I wrote in the blog is that, you know, relative to the start of the year, you know, the probability is lower, but not dramatically lower.

And so, for all the policy noise, some of the key secular trends are still largely in place. You know, and the framework reviews, and we've talked about this multiple times on the podcast before, is that the possibility of a Roaring 20's regime is ultimately predicated on a investment-allowed productivity boom that lifts potential growth, allows the economy to grow faster, you know, closer to 3% without being inflationary. And so, for this to happen, for it to be sustainable for multiple years, you really need, kind of, these positive aggregate supply-side developments.

Like, that was, sort of, the necessary condition. If you think about that was, kind of, the start of the year, that was, like, kind of, where we were. We had the, you know, liberation day, sort of, tariff shock.

Where are we right now from a supply picture? Well, on the positive side is AI adoption is rising. It's rising probably a little faster than maybe was even expected six months ago.

Companies are beginning to use these AI agents in ways that could demonstrate the potential for higher productivity for the rest of this decade. There's a lot of questions, like, when we see the benefits. I think we're starting to see the benefits of AI.

This could, you know, lift productivity growth. Maybe not so much this year, but certainly within two to three years, like, the rest of this decade, allowing that regime to be sustained. Now, less supportive on the supply side is that we haven't really seen a CapEx boom.

We haven't seen, sort of, animal spirits, you know, kind of, being unleashed that people thought post-election that would happen. And, you know, policy uncertainty has been really elevated. Expectations for slowing growth, potentially recession, that's weighed on investment.

Business confidence indicators are down since the start of the year. And it's really confidence more than anything else that's going to drive, you know, business investment. Now, some of that can change as a result of Trump policies, or Trump 2.0 policies.

The passage of and signing the one big beautiful bill, it does provide some tax incentive to invest. If we can get some clarity in the next, you know, month or so on tariffs, that will help at least, you know, allow companies to, sort of, plan a little bit more and potentially invest more. Or those tariff announcements and, sort of, setting their rates could also correspond to Trump announcing investments by companies or countries, you know, investing in the U.S., so he can, kind of, you know, proclaim, like, you know, victories.

Again, that would be a positive development. So, there is reasons to think the policy situation should be more conducive to investment later this year until into next year. But we wouldn't expect, and I don't expect, animal spirits and a CapEx boom to materialize except perhaps for all things AI.

But what's also a little bit, maybe, different today versus six months ago is that there is, maybe, more scope for an aggregate demand story to, kind of, lift the, kind of, regime back to where it was. The big beautiful bill does have a little bit of fiscal stimulus for next year, you know, all equal as anywhere from 30 to maybe 80 basis points of GDP growth, you know, it depends on the different estimates. So, that is a positive.

You have the Fed that will be expecting to start cutting rates. Financial conditions have already been easing. That provides some support.

Going back to our Fed discussion about having some, you know, the Fed cut rates because of political pressure, like, there is certainly a risk that, you know, the path of the Fed going forward is going to be a more accommodative monetary policy, you know, all is equal, you know, apart to deal with the fact that interest rates are high, you want to, you know, not interest rates are high, but, you know, deficits are large, you need to, kind of, pay for it. Having lower interest rates would, you know, be beneficial. So, ultimately, you, kind of, get some form of financial pressure.

Obviously, conditions that are more reflationary, so growth goes higher, but inflation stays elevated. You know, there's even a risk of bubble form in this case versus a supply story that is more, you know, kind of, benign of productivity growth, growth can stay high, but inflation can come down. So, there's different, sort of, drivers, different dynamics, but relative to where we were in April a few months ago, this roaring 20s regime persisting is certainly a higher probability, not as high as it was back in January.

I would last thing I'll say is I predicted last December as my finance word of the year for 2025 that roaring would be the term, but it would come from behind. The first half of the year would be dominated by Trump policies, taxes, tariffs, and that's been the case. But as the market, kind of, moves past that as we go into year end, some of these roaring dynamics could come back and, you know, I kind of use the analogy of a 15 to 100-meter Olympic race.

You know, you're back in the pack for the first few laps and the final lap, you kind of, sprint ahead and at least, you know, make a race of it, if not outright win. So, I think the roaring 20s regime at the midpoint of the year is, sort of, in that position. It's not so far back that it can't make a comeback, but it will require a lot of things to, kind of, go right and I think we should not, you know, rule that out entirely.

So, Jason, if we take all of these factors into account, what is your market outlook at this time and what should investors be doing with respect to portfolio positioning? Well, just in terms of equity markets in particular, they've been very resilient despite a lot of that headline noise on tariffs. There could be some complacency there.

You know, they're not cheap by any stretch and so if we come to August 1st and deals haven't been done, tariffs going to place, the markets could pull back on that. I think they're relatively complacent on the economic data. You know, ultimately, we do think you're going to see inflation pick up and grow slow down.

So, some disappointment on the economic side and hasn't really happened in the past two months, certainly could cause the markets to pull back in the near term. But ultimately, we, kind of, think on a medium term basis, the fundamental picture for the US economy is still relatively constructive and therefore, for next year, that's why we have a price target of $6,500 from the S&P, you know, some more upside over that time period. How to play this, the tech sector is, you know, what we still like, you know, kind of the whole type of AI theme and I think, you know, 2Q earnings will give some guidance to that.

Also, with 2Q earnings, you know, get financials reporting right away. Financials is a sector that we think is going to benefit from, you know, some of the macro conditions, but ultimately, a lot of deregulation push, a little more idiosyncratic, it's not specifically tied to the macro. You know, companies are able to unlock more capital, pay it back, increase, you know, activities, financials, another kind of preferred sector.

We think rates, you know, can be choppy, but, you know, they also have a decent chance to get back up again if economic conditions, you know, prove somewhat resilient. And if the Fed were to get aggressive and cut your rates, that lowers the front end, but the back end of the curve, the 10-year, the 30-year can actually go higher on, you know, kind of inflation concerns persisting, you know, over time, which is also why the hedge, all this gold remains, you know, a relatively attractive, you know, portfolio diversifier. So, those are some of the kind of ideas.

Medium-term, constructive, near-term, markets can melt up, but as they do, you know, there's a definite risk that during the summer, we can get some pullback. We know that late summer, September, October, historically, is one of the more difficult times of the year. So, something to kind of watch out as we move into later in the summer.

Jason, as always, appreciate the guidance when it comes to positioning, as well as the clarity with respect to sharing your market outlook. And we touched on a lot of timely points of interest, top of mind for our listeners, our clients, all of which we will continue to attract very closely. So, thank you again, Jason, for beginning the week with us, and I look forward to picking back up with our conversation in the week ahead.

You're welcome. Have a great week. Thank you for tuning in.

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