Tariffs put investors on alert for 2025

Clark J. Geranen isn’t worried about inflation. Others might be, but he’s not adjusting strategies because of it.

“Last year, we actually saw more of an impact on investors’ approach because of the rate cuts and because of where inflation was heading,” said Geranen, who is chief market strategist and chief operating officer at CalBay Investments. This year, with no rate cuts expected and inflation holding near 3%, the market is moving forward.

“Because we’re not going to see any more rate cuts this year, we really don’t see inflation as being a huge phase effect on where people are investing.” 

The bigger shift is happening elsewhere—out of large-cap tech and into a broader market mix. Geranen saw 20-plus percent returns in those large-cap, mega-cap, Magnificent Seven companies. The behemoths, as Geranen described them.

“It came as no surprise to see some of those funds flowing from the large-cap growth names in the ‘Mag Seven’ and diversifying.” The equal-weighted S&P 500, which lagged behind in 2023 and 2024, is now keeping pace. And the Nasdaq, S&P 500, and Dow are moving in sync. 

So what could throw things off? One word: tariffs.

“I think that also has a lot to do with where we go with Trump 2.0 tariffs, and I think that’s really where there’s so much uncertainty right now,” he said. The volatility index has already dropped 20% since the start of the year, but if trade policy takes a hard turn, markets will react. “We’re hoping that that becomes more negotiations, as opposed to these hardline retaliatory tariffs.” 

Clients are split on the issue. “We do have some nervousness with clients,” he said. “Some are worried about tariffs; some are in support of tariffs.”

His take? Tariffs aren’t punishment; they’re leverage. “We see the tariffs as being a bargaining tool and not a retaliatory tariff, and so we are hoping that over the next six months, there are conversations with the individual countries to get to some sort of reciprocal agreement.” 

But from an allocation standpoint, tariffs aren’t a major concern.

“In general, we only allocate less than 10% to international, so from an impact to clients’ accounts, we typically just aren’t taking that risk in the international stocks.” The bigger issue is how tariffs affect inflation and U.S. consumers. That’s where pressure could build. 

Some sectors are more at risk than others. Consumer discretionary and manufacturing would take the hardest hit. Financials and tech? Not as much.

“Financials have the tailwinds of deregulation and tax cuts, which has already proven fruitful for them in their earnings. Earnings in quarter four were 50% year over year.” 

There are also signs that manufacturing is turning a corner. “We got the most recent purchasing managers index numbers out last month. It was the first time that it was above the 50 threshold,” he said. “So now we’re in that upward trend of bullish sentiment.” If that holds, it strengthens the outlook for 2025. 

Beyond tariffs, the strongest market plays look clear. “I think [financials and tech] could be two of the greatest benefactors,” Geranen said. Healthcare, on the other hand, is a wildcard. “We have some of the deregulation, which can help lead to further and faster progress for these healthcare companies,” he said. “But now we also have a new Secretary of Health with Robert F. Kennedy, and there could be some complications there.” Healthcare stocks reacted immediately. “He has commented that he is going to be coming down a little bit harder on some of the healthcare companies.” 

Then there’s bonds. The 10-year Treasury yield is sitting between 4.5% and 4.6%, after briefly spiking to 4.8% earlier this year. “We saw that tick all the way up to 4.8% earlier this year, and that’s when the VIX, the volatility, was at its peak,” he said. The goal is clear: avoid another 2022, when stocks and bonds both posted double-digit losses. 

That’s why they’re using floating rate funds for inflation protection. “That’s what we think on the fixed income side can help prevent in a defensive posture if there was a large rise in that 10-year yield,” Geranen said. “If we see that, it’s most likely going to be caused from tariff impacts. But again, the probability of that is low right now.” 

Even if bond yields climb, stocks can still perform. “Equity markets have proven to do well even with the 10-year yield rising,” he said. “The 10-year yield rose about 50 basis points throughout the year, and we still saw 20-plus percent growth.” 

Bottom line: inflation isn’t the story. The market is resilient, and unless tariffs spiral, momentum is holding strong. “If we end the year and the 10-year yield is higher from where it is now, I don’t think that means that equity markets will be down for them.”