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.
-
73% of savers plan to rely on partner’s pension in retirement
A new survey suggests the majority of people may lack financial independence in retirement, with almost three-quarters set to rely on their partner’s pension
-
How much you need to follow the 25x retirement rule – will you have enough to be financially independent?
We explain what the 25x retirement rule is and the amount you would need to be financially independent in retirement.
-
The financial crisis in UK universities – what can be done?
UK universities are running out of cash and have begun to shed staff; bankruptcies look likely. What’s gone wrong, and what should be done about it?
-
'Governments are launching an assault on the independence of central banks'
Opinion Say goodbye to the era of central bank orthodoxy and hello to the new era of central bank dependency, says Jeremy McKeown
-
Why investors can no longer trust traditional statistical indicators
Opinion The statistical indicators and data investors have relied on for decades are no longer fit for purpose. It's time to move on, says Helen Thomas
-
The most likely outcome of the AI boom is a big fall
Opinion Like the dotcom boom of the late 1990s, AI is not paying off – despite huge investments being made in the hope of creating AI-based wealth
-
The rise of Robin Zeng: China’s billionaire battery king
Robin Zeng, a pioneer in EV batteries, is vying with Li Ka-shing for the title of Hong Kong’s richest person. He is typical of a new kind of tycoon in China
-
How retail investors can gain exposure to Lloyd’s of London
It’s hard for retail investors to get in on the action at Lloyd’s of London. Here are some of the ways to gain exposure
-
The goal of business is not profit, but virtue
Opinion Serve your customers well, and the profits will follow, according to a new book. It rarely works the other way around, says Stuart Watkins
-
Earnings estimates are a rigged game – especially in the US
The number of US stocks beating earnings estimates tells us only that guidance has deliberately been set too low