After years of new highs in the equity markets and new lows (yield-wise) in the bond markets, investors should look at their investment strategies and see what, if any, changes to make. Growth, as we know it, may not be assured. For years, globalization has been the backdrop for industrial activity. With Trump’s tariffs, the U.S. decreed that globalization as we know it has ended. Investors are wondering what Trump’s tariffs will do to global trade and how this will affect world economies and markets.
The Geneva, Switzerland-based World Economic Forum (WEF) and the global management consulting firm Kearney produced a report that addresses the issues facing the reshaped global manufacturing and newly formed supply chain world in a more fragmented industrial environment.
What Will Happen to Global Gross Domestic Product (GDP)?
In the report, Aengus Collins, a WEF head economist, stated that uncertainty arising from Trump’s tariff changes caused dismay and shock worldwide. The dramatic extent of the tariffs and the changes they produced significantly affected the key pillars of the global order established at the end of World War II. The announced revisions emphasized that the U.S. role has changed, with the U.S. having been the cornerstone of that order for many decades. Each country has to rethink its position going forward.
This political and economic rupture has been building. When Trump announced the new U.S. position, “I think people were surprised by the pace and scale of those moves, and it pushed pretty much every major uncertainty that we have off the charts,” Collins stated.
Although U.S.-induced changes could contribute to a negative global economic outlook, the development of Artificial Intelligence (AI) could improve the economic outlook, the WEF writes. “Nearly half (46%) of chief economists expect AI to deliver a modest global real GDP boost of 0-5 percentage points over the next decade, with a further 35% projecting gains of 5-10 points.
Collins argues that there may be an upside to the startling changes brought about by Trump’s tariffs. He sees the prospect of an AI lift as a “significant uplift for GDP, if it develops.” If so, these changes could turn out to be a “healthy thing,” he thinks. And that countries “stepping back and asking questions about their role in global trade,” could be helpful, he thinks.
The U.S. GDP Outlook
WEF, in its September 2025 Chief Economists’ Outlook, reported that the U.S. growth outlook appears “subdued” but has shown signs of “stabilization.” In April, only 22%of chief economists expected moderate U.S. growth; that share rose to 49% in August, a marked improvement. However, most economists still expect weak growth out of the U.S.
For the second half of 2025, economic growth is expected to be shaped by the impact of tariffs, which now affect many trading partners. The Purchasing Managers’ Index (PMI) data for August indicated that business activity rose at the fastest pace in 2025, with job creation the highest in three years.
According to the report, 59% of surveyed chief economists predicted high inflation in 2026. Producer prices went up 2.6% in August, a welcome decline from July’s 3.3% increase. The report states that “tariff-driven cost pressures are working their way through supply chains.”
Recent GDP Reports and Analysis
The U.S. economy could be improving. According to the U.S. Bureau of Economic Analysis, the third estimate of the 2025 GDP second quarter, ending in June, shows an annual rate of increase of 3.8%; that is up from the revised first quarter of real GDP estimate of (minus) – 0.6%.
Consumer sentiment improved slightly after the federal shutdown ended. The latest report from the University of Michigan shows little estimated change in consumer sentiment in November relative to the 2.6 index-point decrease in October.
The U.S. could be less affected by the U.S. tariff reset. At a recent WEF conference, the U.S. was described as a country “less dependent on trade.” In contrast, China, the country most competitive with the U.S. and the second-largest nominal global GDP country, was portrayed as an “increasingly dependent on trade” country.
Since the China/U.S. trade friction in 2018, China’s trade relationships have outpaced the number of the U.S., according to the Lowy Institute. And the trading activity has grown more with China than the U.S. Lowy points out that “more than half of all economies now trade twice as much with China compared to the United States.
The U.S. Stock Markets
Small-cap stocks should be a beneficiary of any success the U.S. has in relocating manufacturing. Over the last 5 years, the big-cap Standard & Poor’s 500 ETF (SPY) has advanced 87.91%, outperforming the small-cap Standard & Poor’s 600 ETF (IJR), which has climbed 38.79%. Investors could consider the iShares Russell 2000 Growth ETF (IWO) on valuation and growth potential. The Price/Earnings to Growth (PEG) ratio, according to Morningstar’s numbers, is 1.45. That valuation is reasonable when compared to the S&P 500 PEG, which is 2.38. Technology and health care account for about 45% of IWO, sectors that are expected to continue growing even in a slower-growing economy.
Another small-cap ETF to consider for pure tech exposure is the Invesco S&P SmallCap Information Technology ETF (PSCT). The index replicates the Small-Cap 600 Index. The Index includes the companies that provide information technology products and services in the U.S. The PEG ratio, according to Morningstar’s numbers, is 1.44.
But where will the equity markets go? Much depends on future earnings, which is usually the case. Dr. Ed Yardeni, of Yardeni Research, in its “Quick Takes”, makes the point that “investors’ short-term valuation concerns should be offset by the ongoing strength of S&P 500 earnings. Over the past three quarters, earnings growth was about twice as strong as analysts’ consensus estimates.” So, earnings could turn out better than expected, which would be bullish. And with global ingenuity and determination, de-globalization may also turn out better than many people expect.
