On Our "Virtual Route 66" This Week: On The State of Our World

Our team pulled together some thoughts as the Tariff Wars continue and America's Status in the World continues to be of concern:

America the Unstable

The US will pay a market penalty for Trump’s turmoil

APRIL 13, 2025 by Rana Foroohar

Trump chaos prompts top Canadian and Danish pension funds to cool on US

Rethink comes as tariffs and talk of territorial expansion stoke market instability and geopolitical tension

APRIL 13, 2025 by Sun Yu and Antoine Gara in New York and Mary McDougall and Arash Massoudi in London

The impact of tariffs on US GDP growth and inflation

The “reciprocal” tariff policy President Trump announced this week would impose a weighted average tariff rate of 18.3% on US trade partners, around 3 percentage points higher than Goldman Sachs Research had expected. Roughly one-third of total imports would be exempt, which reduces the impact to a 12.6 percentage point increase in the effective tariff rate.

Our researchers estimate that this and other tariffs announced year-to-date would raise the US effective tariff rate by 18.8 percentage points, according to a report dated April 2 by Alec Phillips, chief US political economist at Goldman Sachs Research, and economist Elsie Peng. They assume that negotiations with trading partners will lead to somewhat lower “reciprocal” rates than announced this week. However, the prospect for escalation following retaliatory tariffs and a high probability of further sectoral tariffs suggest the US effective tariff rate could rise more than the 15 percentage points our economists had previously expected.

Tariffs affect economic growth through their tax-like impact on real disposable income and consumer spending; their tendency to unnerve markets and tighten financial conditions; the impact of uncertainty about trade policy on business investment; and the modest offsetting effect of a narrower trade deficit, according to Goldman Sachs Research. While the personal and corporate tax changes that Congress is likely to pass will modestly boost growth, fiscal policy is unlikely to offset the hit from tariffs and immigration this year.

When it comes to inflation, the team's rule of thumb is that every 1 percentage point increase in the effective tariff rate raises core PCE prices by about 0.1 percentage point.

In case you missed it: How to balance investment portfolios as tariffs rise.

Quoted: Navigating tariff-related volatility

“I think the best way for investors to try to navigate this market is to be nimble. I would say: Use pops in the broader market as a chance to reduce exposure. And then on dips, look to scale into companies that you can believe in the fundamental story and hold long-term.”

— Shawn Tuteja, head of custom baskets and ETF volatility trading in Goldman Sachs Global Banking & Markets

Listen to the latest episode of The Markets for more on how investors can respond to volatility following Wednesday's tariff announcements.

The Key Number: $200,000,000,000

With power demand from artificial intelligence expected to surge, US power companies are investing huge sums of capital to grow their capacity. US utilities companies are expected to invest approximately $200 billion in power infrastructure this year, according to Rebecca Kruger, partner in Goldman Sachs Investment Banking's Natural Resources Group, citing the Edison Electric Institute. That's the same amount as the four largest cloud providers are set to spend on digital infrastructure, according to Goldman Sachs Research.

This could provide a significant boost to the US power sector, which has suffered for decades from a plateau in electricity demand, Kruger says in the latest episode of Goldman Sachs' The Insight. “We can say definitively that the era of flat power demand in the US is completely over,” Kruger adds.

Read more about how technology and utilities companies could meet the surge in power demand driven by artificial intelligence.

Bain Capital's David Gross on investing in Japan

Bain Capital's David Gross (L) with Alison Mass on Goldman Sachs Exchanges: Great Investors.

When David Gross, co-managing partner at investment firm Bain Capital, graduated from college in the late 1980s, he decided “on a bit of a whim” to work in Japan. Years later, he returned to the country to build up Bain Capital's presence there.

“We're very bullish on Japan,” Gross tells Alison Mass, chairman of investment banking at Goldman Sachs, on the latest episode of Goldman Sachs Exchanges: Great Investors. He adds that the Japanese market has taken a long time to develop, but a recent convergence of forces promises to turn it into “a really big buyout market [and] a market for really all of the asset classes in which we participate,” including private credit and real estate.

Japan is an appealing market for investors like Bain Capital. “There are a lot of great Japanese businesses with good technologies that come from the R&D focus,” Gross says, and the country's high standard of education is a “tremendous asset.” But for historical reasons, the process of increasing productivity was slower across corporate Japan than it was in the US, leading to fragmentation and companies with big portfolios of core and non-core businesses, he says. “It's a hard market to build relationships, and it takes time and patience,” Gross adds. “Because of that, you've got a really great opportunity, but not as many competitors pursuing that opportunity — and that's changing a bit right now.”

Chinese policies to raise birth rates and the outlook for dairy stocks

Recent policy announcements in China highlight new government efforts to raise the birth rate in the world's second-largest economy, according to Goldman Sachs Research. For investors, this suggests an improving outlook for dairy and infant formula companies as well as makers of infant nutrition ingredients.

The policy developments include a March 13 announcement by leaders in Hohhot, Inner Mongolia's capital, of child-raising subsidies that could provide as much as RMB 100,000 ($13,830) over ten years for a third child. “Hohhot's initiatives resonate with the government's recent policy direction,” Goldman Sachs Research analyst Leaf Liu and her colleagues write in a report.

Even companies far from China may benefit if the country boosts its birth rate and provides greater support for families with small children. Makers of ingredients for infant formula in Europe stand to gain, according to a separate report from Goldman Sachs Research's Georgina Fraser, head of the European Chemicals team. In particular, biotechnology companies that have engineered human milk oligosaccharides, a type of carbohydrate that occurs naturally in human milk, may see a boost.