Why stagflation now seems like America's "optimistic scenario"
Investors have gone into tariff shock, and stagflation could now be the optimistic scenario for the US economy.

“The post-World War II… world economic order” is finished, says Reshma Kapadia in Barron’s.
On Wednesday, 9 April, sweeping US import charges on most countries in the world came into effect, including tariffs of 20% on the EU and 104% in the case of China. As during the pandemic, ultra-efficient global supply chains are being disrupted, raising inflationary pressure. The latest tariffs, which Donald Trump unveiled on Wednesday 2 April in an event dubbed “Liberation Day”, take the average US tariff rate from 2.5% last year to 22% now, according to calculations by Fitch Ratings. That is the highest level since 1910.
Is the US headed for stagflation?
Investors have gone into tariff shock. The US S&P 500 dropped 12% in the four trading days following Trump's "Liberation Day" tariff announcement. Down 18% since Trump’s inauguration, American stocks sit on the cusp of a bear market. Germany’s Dax was off 9% since “Liberation Day”, with the FTSE 100 falling 8%, correct at the time of writing. Asia has been hit especially hard. Trading has been exceptionally volatile, with the Vix index – known as the stock market’s fear gauge – spiking to its highest level since the 2020 Covid crash.
“Wall Street blew it,” says James Surowiecki in The Atlantic. For months, US stock investors have been in denial that Trump was actually going to do what he said he was going to do. Trump’s beliefs about trade – “deficits are horrible, and tariffs are great” – have been “strikingly consistent” for almost 40 years. Markets have been guilty of “wilful blindness”.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
The stock plunge heralds “a severe economic slowdown”, says The Economist. JPMorgan Chase’s analysts put the chances of a global recession this year at 60%. While the US has been hardest hit, the selloff across other major bourses has been almost as bad, suggesting that tariff pain will be widely felt.
The tariffs amount to a $600 billion tax hike on the cost of living that will hurt consumers, says Bill Dudley on Bloomberg. In the past, the Federal Reserve has ridden to the rescue of a weaker economy. Don’t expect a repeat this time. Annualised US inflation is likely to reach nearly 5% over the coming months, reducing the space for interest-rate cuts. “All told, stagflation is the optimistic scenario. More likely, the US will end up in a full-blown recession.”
The S&P is on the verge of its 13th bear market – defined as a 20% fall from the peak – since 1950, says Russ Mould of AJ Bell. The average post-war bear market lasted 381 days and knocked a third off stock valuations. “The bigger the prior bull-market gain, the bigger the post-party hangover” tends to be – not reassuring, given how overheated US markets became in 2024. Eventually, stocks sell off so much that they become a good deal, but the US market has a long way to fall before that becomes the case. On 19 times forward 2025 earnings, valuations are “still not cheap” by historic standards. And remember that those valuations bake in forecasts of strong corporate profit growth this year – forecasts that are likely to be cut as the trade war bites into the bottom line.
This article was first published in MoneyWeek's magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.
Get the latest financial news, insights and expert analysis from our award-winning MoneyWeek team, to help you understand what really matters when it comes to your finances.
Alex is an investment writer who has been contributing to MoneyWeek since 2015. He has been the magazine’s markets editor since 2019.
Alex has a passion for demystifying the often arcane world of finance for a general readership. While financial media tends to focus compulsively on the latest trend, the best opportunities can lie forgotten elsewhere.
He is especially interested in European equities – where his fluent French helps him to cover the continent’s largest bourse – and emerging markets, where his experience living in Beijing, and conversational Chinese, prove useful.
Hailing from Leeds, he studied Philosophy, Politics and Economics at the University of Oxford. He also holds a Master of Public Health from the University of Manchester.
-
Inheritance tax investigations catch out 1200 more families in HMRC crackdown
Where there is a suspicion inheritance tax has been underpaid, HMRC has extensive powers to check the deceased individual’s financial affairs and chase what is owed. Will you pay more?
-
Bank of England expected to cut interest rates despite sticky inflation
Economists and industry experts think that a weakening economy will force the MPC to stick to its cutting schedule in spite of inflation running above its target.
-
Alex Karp: can Batman save America?
The US governing elite needs to take on the bad guys, says Alex Karp, who sees himself as the caped crusader to lead the battle
-
Trump’s tariffs are here to stay
Opinion Trump's tariffs mean American businesses and consumers will have to pick up the tab
-
Philip Coggan: 'Donald Trump means business on tariffs'
Interview What could Trump's tariffs mean for the US and global economies? Philip Coggan, former columnist at the Financial Times and The Economist, explains
-
In defence of Donald Trump
Opinion Doom-mongers thought the world would end with the election of Donald Trump. Think again, says Max King
-
US stocks are more expensive than ever after Trump's tariffs
We don’t need to second-guess the effect of Trump's tariffs to think that the rest of the world offers better value
-
America’s looming debt crisis could blow up the entire financial system
Opinion Everyone’s trying hard to pretend that America's debt trap doesn’t really matter. It does, says Bill Bonner
-
China takes the lead in the global AI tech race – can the US charge ahead?
The idea that China could get ahead of the US in terms of technological prowess once seemed fanciful. That’s no longer the case.
-
Zohran Mamdani wows New York – what did the mayoral candidate get right?
Zohran Mamdani, 33, has won the Democratic candidacy to be mayor of New York. That has energised his supporters and enemies alike – and terrified the rich