Tariffs top of mind

The Federated Hermes 2026 outlook series continues with two of our thought leaders in equities discussing what the new year might bring for the economy, financial markets and investors.

Martin Schulz, Head of International Equity Group 

What’s your 2026 global outlook?

We’re at a “show me” point. In spite of all the headwinds — tariff uncertainty, regional war, geopolitical tension and economic slowing — global equity markets have had a strong run. Now it is time for the world’s corporations to deliver on earnings. The good news is it appears we might get that. 

Forward earnings in Europe are more attractive than seen in some time, even if the third quarter has been disappointing. Emerging markets are the most interesting area, in our view, as the global central-bank easing cycle accelerates, the US dollar likely weakens midterm and the Chinese economy rebounds. 2026 will see numerous elections around the world, especially in South America. Although they might upend expectations and increase uncertainty in the short term, they may lead to greater long-term stability. In China, the trade war with the US is resolved for now, giving the country a chance to focus on economic stimulus as it executes on its next five-year plan. Other Asian economies should benefit from some manufacturing exiting China due to costs and trade restrictions. Finally, we believe that the global monetary easing cycle will support emerging markets broadly.

Is de-globalization ending or is re-globalization taking place? 

We are seeing regional spheres of influence getting stronger as geopolitical relations evolve. Instead of globalization, we’re now seeing regionalization and a grouping along the lines of centers of power, alliances, currency blocs and shared interests. Global trade and commerce will continue but likely on a smaller scale. Still, not everything is changing. We don’t face a repeat of the Cold War, when trade flows across the Iron Curtain were practically nonexistent. For now, China and the US have put their rivalry on pause: China needs to contend with a weak economy mired in deflation and the Trump administration must focus on domestic politics. We do not anticipate Apple or Tesla leaving China. Supply chains are becoming more localized. But we are seeing Chinese firms producing for the local market in Europe and, potentially, even in the US.  

Are tariffs here to stay—and what’s their impact?

Once politicians find a new source of revenue, they rarely relinquish it. To lower or remove tariffs in the US, the government would have to raise taxes (always unpopular) or face a revenue shortfall. Global investors and companies engaged in international commerce are still sorting out how to manage the new or increased tariffs, including where and on whom the burden of payments ultimately will land. Businesses likely will not continue to bear the cost of the tariffs forever. Margins are simply too tight, especially for many industrial and automotive firms. Tariffs will likely lead to more local production even as companies focus on productivity improvements. But none of these moves are without complications. For instance, one follow-on effect is that Chinese overcapacity will flood the world with its goods. That situation would affect many areas that had been sheltered from global competition and enjoyed profitable local production.

Phil Orlando, Chief Market Strategist, Global Head of Investment Directors

What is a contrarian view for the US economy that you hold for the coming year?

The US economy will be much more robust than anticipated next year. At 3.0%, our forecast for gross domestic product (GDP) growth in 2026 is twice that of the Blue-Chip consensus figure of 1.5%. Our confidence stems from a belief in the staying power of spending, both by people and companies. 

It’s well known that consumer spending is paramount to the health of the US economy, accounting for around 70% of GDP. Less understood is the outsized proportion coming from wealthier Americans: those in the top 10% of income account for half of total spending. Seeming to ignore inflation, this cohort is behind the strong retail sales this year, compensating for declining contribution from lower-end consumers, many of whom are struggling amid inflation and a weakening labor market. We expect that the holiday season will stay on trend, another out-of-consensus view. And, buoyed by the robust stock market and high home prices, high-end shoppers should continue to drive the bus next year. 

Have tariffs reshaped global investment flows or shifted them temporarily? 

In a sense, tariffs are always temporary, as they are tools of government policy, which is subject to change. The Trump administration’s aggressive negotiations are certainly reshaping the structure of global commerce. But until trade agreements are fully hammered out, investment trends will be fluid. More important to 2026 is the impact of tariffs on GDP growth and inflation. We anticipate levies will cause less drag on growth next year, agreeing with the Fed that they will have only a temporary inflationary hit. And if tariff-related revenues do reach the administration’s forecasts — potentially US $300 billion a year — then GDP will grow by simple math, as net exports are part of its calculations.