Is the trade war getting worse?

Originally Posted, August 11 2025 – Is the trade war getting worse?

With Trump’s tariffs now in effect, are markets justified in shrugging off their potential impact?

Market recap

• Equity markets rebounded this week as the earnings season continues to churn out solid results, while near-term Federal Reserve easing odds are ramping up.
• The S&P 500 rose 2.4% and the TSX gained 2.7%, both powered by rallies in technology.
• AI is clearly making its mark on corporate earnings, market performance, economic growth and the job market.

Tariffs

U.S. President Donald Trump’s tariffs have gone into effect, and perhaps surprisingly, markets have largely shrugged off their potential impact thus far. One thing we’ve learned in recent weeks is that many countries bent the knee more than expected. In some cases, the deal wasn’t bad—perhaps a slightly higher tariff than initially expected, but not outrageous. In other cases, countries may have caved in too quickly. Either way, what countries likely didn’t anticipate was additional sector- and industry-based tariffs on top of the broad levies—for instance, Trump’s announced 100% tariff on semiconductors.¹ That does change the equation somewhat, and we’re a little surprised that markets are reacting with relative apathy. The other major economic news last week was the U.S. jobs report for July, which showed a slowdown in job creation, including downward revisions for May and June.² Markets rightfully paid attention to that report and declined as a result. A couple of days later, however, they’d seemingly forgotten about the employment news and were back on the upswing. It’s understandable that markets would appreciate the clarity we’ve received as a result of the slate of bilateral trade agreements that the U.S. has signed. However, our belief is that global trade tensions are slightly escalating rather than de-escalating, and that there is still heightened uncertainty about what could come next. A recent example is Trump’s threat to impose a 50% tariff on India, not based on exports per se, but on the fact that they’re buying oil from Russia.³ This shows that Trump is willing to wield tariffs as a deterrent whenever a country does something that he doesn’t like—even outside of traditional trade disputes. Despite some cracks, the U.S. economy is still fundamentally strong. However, with these types of trade issues continuing to pop up and deals with Canada and China yet to be finalized, it’s a bit puzzling to see markets up as much as they have been on a day-to-day basis.

Bottom line: We remain optimistic about U.S. markets, but we think investors may be getting a bit ahead of themselves, hoping that trade tensions will go away rather than acknowledging that they may be on the rise again.

Oil

Speaking of Trump’s new tariffs on countries that buy Russian oil—are they likely to affect crude prices? It’s a reasonable question. Overall, we think the outlook for oil is okay. Based on supply and demand factors, $60-$70 per barrel, which is where prices currently sit, is probably the right range. Currently, demand is likely a bit better than expected, but supply is in excess, which means there likely isn’t much upside for crude prices. We do think there is some room for oil stocks to go higher, but will they outpace the broader market? Probably not, which is why we don’t have a bullish outlook for Energy. A temporary spike in oil prices is possible if countries like India do have to buy (presumably more expensive) oil from sources other than Russia. But that is merely a lateral shift in demand rather than an increase; countries currently paying more for oil elsewhere could swoop in and scoop up Russia’s cheaper supply. In the long run, we wouldn’t expect such a shift to drastically affect oil prices. It is also unlikely that India will completely wean itself off Russian energy—today, Russia provides over 35% of India’s oil supply, compared to only 1.7% in 2020.⁴ That kind of reliance would be difficult to unwind quickly.

Bottom line: If countries like India are forced to buy oil from sources other than Russian, oil prices could move higher temporarily, but we don’t expect a significant increase in prices in the longer run.

Interest rates

The disappointing July jobs report has been deemed a “turning point” by some U.S. Federal Reserve (Fed) governors,⁵ and we concur—in fact, we think it changes the outlook for rate cuts. The report highlighted that job activity is turning somewhat negative. The significant revisions to May and June numbers were particularly important because, along with the July numbers, they show that tariffs are having an impact. Consumers have been the key reason why the U.S. economy has held up fairly well. But if they’re now worried about their job status, it raises concerns that they could begin to cut back on spending, further compounding the problem. From the Fed’s perspective, they’ve now seen a crack in the employment picture that wasn’t evident before. Unemployment has gone up and the participation rate has come down (though it is worth noting that between non-respondents and new immigrants entering the workforce, participation can be difficult to judge). In our view, this increases the chance that the Fed cuts rates in September and likely beyond, and a 50-basis-point (bps) decrease in September isn’t off the table if inflation stays under control. Market reaction will likely depend on the Fed’s messaging; if they say they’re cutting rates because inflation is no longer as much of a concern, that’s preferable to them saying they’re cutting rates because the economy is weakening. While a 25-bps cut will likely be welcomed, a 50-bps slash could raise some questions.

Bottom line: The weaker job picture has given the Fed the green light to cut rates sooner—and given the cover this provides as well as ongoing tariff uncertainty, the Bank of Canada is likely to follow suit.

Positioning

For a detailed breakdown of our portfolio positioning, check out the latest BMO GAM House View Report, titled Don’t fight the momentum.