Tariffs create significant challenges for U.S. economic growth this year. Although Neuberger Berman forecasts low growth, the firm believes two categories of equities may benefit due to economic signals at the beginning of April.
The administration rolled back the steepest tariffs on Wednesday for all countries except China. But 10% blanket tariffs remain in effect. Significantly more appealing than the 50%+ rates in effect for 12 hours for some countries, a 10% tariff still carries heavy implications for an already-struggling economy. Coupled with the 125% tariff on China and escalating trade wars with the second largest global economy, the U.S. is not out of the woods by any means.
Tariffs & Where We Are Now
“While surging tariffs and a hard sell-off have sown uncertainty, we expect negotiations to bring some relief on initial tariff proposals, and that sharply slower growth seems more likely than a U.S. recession,” explained Raheel Siddiqui, senior research analyst, global equity research at Neuberger Berman, in a recent Q2 Equity Outlook.
The firm currently forecasts for U.S. GDP between 0%-1% in the next 12 months, as long as no further major shocks occur. They base their forecast on strengthening in cyclical sectors, a broadening of demand for goods, and rising income at the beginning of April. These signal economic strength able to absorb shocks instead of being overcome by them and tipping into a recession.
That said, tariffs will play a major role in dampening growth. This in turn will likely lead to a flatline in earnings in the next 12 months for S&P 500 companies. And the U.S. is still deep in the woods when it comes to recession risks.
“While a recession is still not our base case, we acknowledge that a worsening trade war, further fiscal austerity, or yet another exogenous shock on an already weakened economy could ultimately trigger one,” Siddiqui noted. “We estimate a mild recession might drag the S&P 500 Index into the high 4000s, while a moderate recession could pull it into the low to mid-4000s.”
Navigate a Volatile Market Environment With Actively Managed NBSM
Despite tariffs, Neuberger Berman believes ongoing momentum in goods could lead to outperformance in specific equity categories. These include value as well as small-cap companies, which remain highly levered to the goods economy.
The actively managed Neuberger Berman Small-Mid Cap ETF (NBSM ) invests in small- and midcap companies with elevated, sustainable growth potential. The fund managers use bottom-up analysis when evaluating companies. The strategy focuses on quality companies that generate reliable free cash flow and elevated profitability. The companies also have conservative balance sheets and business models that set them apart from peers.
The overall approach to SMIDcap investing results in a diversified portfolio compared to benchmarks. The strategy also seeks to mitigate the elevated volatility inherent to small- and midcap investing while reducing downside risk.
NBSM carries an expense ratio of 0.74%.
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