Market Stories By Fathom 04/04/2025

Yesterday’s Liberation Day didn’t just celebrate history — it wiped out a year’s worth of gains in risky assets and liberated investors from their wealth. The shock came from a bombshell tariff announcement, which seemed purposefully outrageous: a reciprocal 20% scheme clearly designed to shake up markets and pressure foreign governments. The goal? A mix of fantasy budgeting (the infamous 333 target) and Trump’s usual playbook — stir chaos, then negotiate weak deals to claim victory. Markets were braced for something temporary and less dramatic, maybe 10%. Instead, we got a full-blown 20% slap, while the White House flexed recent "deal-making wins" with Trudeau, Starmer, Putin, and Zelensky (which, let’s be honest, is a generous description).

The immediate market reaction was rational — first-order impacts are easy to model — but it’s the second-order effects that are far less predictable. For the U.S., we now estimate recession odds have climbed over 60%. Short-term inflation is expected to jump by 1–1.5%, and GDP growth for 2025 may take a 1–1.5% hit. In Europe, we’re penciling in a downgrade of GDP about 0.6 percentage points for 2025 (from 1.2% to 0.6%), but there’s a rebound to around 1.1% likely in 2026 once fiscal measures kick in.

Inflation in Europe should stay tame. Goods account for just 25% of the HICP basket, and U.S. imports make up 13% of that, so a 20% tariff only nudges headline inflation by about 0.2%. With energy prices sliding and the euro strengthening, I expect HICP to remain below 1.7% in 2025 — giving the ECB enough room to bring rates down to 2%.

The Fed, however, is in a bind. Inflation will tick higher, labor markets remain tight due to immigration policies, and growth is clearly softening. The current market pricing for a rate cut in June and deeper easing in 2026 seems logical, but mainly due to political pressure rather than sound macro fundamentals. Alternatively, a credit event could force the Fed’s hand, pushing it to cut more aggressively and inject liquidity — macro story or not. Frankly, the warning signs of these Trump policy misfires were there early on — remember the meme coin madness? Risky assets were pricing in fantasy outcomes on the back of levered quant flows. That’s now reversing hard. And while the U.S. might indeed fall into recession, the rest of the world could hold up better, making global cyclicals more attractive from here.

Now that the big investment banks are capitulating, it may actually be a good time to rotate into quality cyclicals trading at cycle lows. Avoid U.S. meme stocks. Avoid the MAG7 narrative. Yes, four of those are incredible companies, one’s a fraud, and two are just expensive giants. But they’ve undeniably improved our lives and employ millions — no reason to paint them all with the same brush.

At some point, this administration is going to unravel — whether from internal fractures or growing public frustration. When it does, the world will be forced to recalibrate, and that shift could create meaningful opportunity.

Alexandros Tavlaridis