25% tariff is enough to hurt risk appetite UBS' "Defensive Three Shields" strategy layout stocks market

UBS, a global bank, recently released a research report stating that the organization is overall cautious about the outlook for American consumers and the economy. It is anticipated that the "risk appetite" in the financial markets may face significant pressure, mainly due to the recent announcement by the Trump administration of implementing widespread 25% tariffs in August, which is expected to further suppress consumer spending. The tariffs are expected to lead to a rebound in inflation and the Federal Reserve is likely to maintain high interest rates in response to potential tariff pressures, which will collectively constrain consumer spending. Additionally, UBS emphasized that global consumer finance microdata shows an increase in loan defaults and a weakening in consumer spending willingness, reflecting tightening credit conditions and increased credit risk. UBS's strategy team believes that risk assets such as stocks may face short-term and overall downward pressure in the second half of the year, particularly the MSCI global stock index and the S&P 500 index, which have repeatedly hit historical highs, may face greater downward pressure. UBS warned that risk assets may face a new round of downturns in the near future, as high tariffs and inflation inhibit expenditure, prompting the market to reassess household balance sheets. Against the backdrop of macro headwinds and micro risk signals, UBS's stock market strategy does not favor aggressive investment strategies such as leading AI companies and unprofitable popular tech stocks. Instead, the organization is shifting towards defensive strategies and prefers to avoid consumer sub-industries that are highly sensitive to credit risk and economic conditions, such as high-end discretionary consumer goods and industries dependent on financing. UBS favors consumer giants in food and beverage, large retail chains, as well as high-quality fundamental companies with stable cash flows and rigid demand. Furthermore, UBS's global stock strategy team stated that the fiscal stimulus at the US government level needs to be deferred until 2026 to materialize gradually, leading to disposable income growth lagging behind consumption growth. Therefore, UBS has lowered its 2025 US GDP growth forecast to around 1%. However, due to strong financial buffers in high-income households and remaining job resilience, the long-term structural prospects for US consumption are relatively positive, with true recovery potential possibly emerging after 2026. UBS's strategy team indicates that as consumers become more cautious, the market may see a downward adjustment targeting risk assets. The recommendation is to be prepared and shift towards defensive and high-quality fundamental strategies. Only when inflation pressures ease, trade uncertainties reduce, and new fiscal benefits materialize, the "curse" on US consumers will be lifted, and risk assets may see a more stable upward trend. In terms of macroeconomic and consumer background, caution is rising. Overall, UBS's stock strategy team believes that risk assets such as stocks and high-yield corporate bonds may face significant downward pressure in the short term and in the second half of the year, as the market needs to reevaluate US household balance sheets and consumption sustainability. UBS's research report shows that the macro environment is becoming less favorable for consumers. Firstly, the slowdown in US and global economic growth is anticipated, with reduced fiscal stimulus and delayed effects of monetary policy tightening. UBS predicts that US real GDP growth will decrease to around 1% by 2025, significantly lower than 2024 levels. The report also forecasts an increase in the unemployment rate to around 4.6% by 2025, suggesting a phase of income growth slowing down and consumption relying on credit support in the US household sector. Additionally, the momentum in the US labor market is weakening, with slow private sector job growth and signs of softening in service industry job listings data compared to traditional labor indicators. This indicates a cooling labor and income outlook, with disposable income growth lagging behind personal consumption expenditure growth for the first time in over a decade. Some consumer spending may rely on accumulated savings or borrowing to support. While high-income households in the US still have strong financial cushions, suggesting that overall consumption resilience relies heavily on continued spending by the affluent group. Looking ahead, if the economy further slows down, lower and middle-income households in the US may be forced to reduce consumption due to depleted savings and credit restrictions. UBS indicates that inflation and interest rate factors continue to put pressure on US consumer spending. The report predicts that the core personal consumption expenditure inflation rate will remain around 3.4% by the end of 2025 and expects the Federal Reserve to maintain high policy rates in the second half of the year due to high inflation, leading to elevated mortgage and consumer credit rates, increasing household debt burdens and suppressing durable goods consumption demand. Furthermore, the impact of Trump's trade policy may become more pronounced, as the US government is expected to significantly raise and expand import tariffs in the second half of 2025, leading to an average tariff rate of about 20% (compared to around 2% in 2024). UBS highlights that tariffs of 25% or more on goods from most countries will directly erode residents' real purchasing power by raising prices. A UBS survey shows that as high as 68% of respondents believe that inflation is negatively affecting their economic outlook, with 42% seeing tariffs as the main drag - the impact of Trump's tariff policy surpasses concerns about geopolitical situations or employment prospects. The report points out that the tariff policy adjustments will have a particularly strong impact on certain holiday season products in the US, such as Halloween costumes in the second half of the year, which will face higher tariff costs, potentially squeezing related consumption. Moreover, trade uncertainty itself has become a new pressure point on consumer psychology. UBS's survey shows that tariffs are now the second biggest concern for American consumers after inflation, which was unexpected by the market. This phenomenon indicates that trade policy uncertainty is dampening consumer willingness to spend through psychological expectations. If tariffs were to ease in the future, they may become one of the factors driving consumer prospects upwards. The postponement of fiscal support is another disadvantageous factor for the US macro environment. Despite a series of fiscal transfers and tax cuts aimed at residents in the recent years by the US government (such as tax deductions and new exemptions in the BBB Act), most of the benefits will only be realized around 2026. Therefore, in the next year or so, US households cannot rely on new fiscal stimuli to cushion the impact of inflation and interest rate pressures, but will have to rely more on their own assets and credit to balance income and expenditure. UBS points out that the new tariff impact in the second half of 2025 will coincide with the fiscal stimulus in the first half of 2026, adding pressure to the overall consumption slowdown throughout the year. Looking at financial indicators, the credit cycle for US consumers and businesses has entered a late stage, with increasing debt pressures and default risks emerging. For US companies, UBS's credit models show signs of fatigue in the credit cycle, despite no sharp deterioration in earnings, there has been a significant increase in defaults and downgraded bonds (fallen angels) since June. Fortunately, default rates for small and medium-sized enterprises (SMEs) have not shown a significant increase, and bankruptcy applications in the society remain near historical averages after adjusting for employment. UBS emphasizes monitoring changes in corporate profit margins - under economic slowdown and automation trends, companies may no longer prioritize retaining employees, and increased profit pressures may lead to cost-cutting measures such as layoffs, thereby exacerbating downward consumption and credit default risks. Household credit pressures are also on the rise. With the end of the federal student loan forbearance period, student loan delinquency rates in the US have significantly increased, and mortgage-related default rates have started to rise from very low levels. In comparison, credit card and auto loan default rates in the US are relatively stable for now, indicating that asset quality for these two types of consumer credit has not significantly deteriorated. Overall, consumer delinquency rates are trending upwards, albeit remaining at historical medium levels, caution is advised against the potential spread of financial pressures into other credit areas. UBS will closely monitor credit card and auto loan delinquency as leading indicators of consumer financial stress spreading. UBS proposes a stock market strategy of "Three Shields of Defense": prioritizing defensive styles and seizing opportunities for counterattacks amidst macro headwinds and micro risk signals. Specifically, UBS's defense strategy includes shielding credit markets, preferring essential consumption over discretionary consumption, and favoring companies with stable cash flows and inelastic demand while avoiding highly leveraged industries. These recommendations are geared towards providing relative returns during the consumption slowdown period, with a shift towards more aggressive strategies when economic prospects improve. In conclusion, amidst a challenging economic and consumer environment, UBS's caution towards risk assets such as stocks and high-yield bonds reflects the need for a defensive stance and quality investments. The organization emphasizes the importance of prioritizing essential consumption, stable cash flow companies, and defensive strategies to weather the uncertainties in the market and maximize returns in the long run.