On April 2, the Trump administration announced a more aggressive tariff policy than consensus expected. It was twice the size of the largest tax increase ever enacted in U.S. history. The size of the announced tariffs represented more than 2% of U.S. GDP. Then, a week later, on April 9, the president announced a 90-day pause on all “reciprocal” tariffs to allow time for negotiations with individual countries, with one significant exception: China. Meanwhile, 10% universal tariffs were set to remain in place, with exemptions for Canada and Mexico.

The size, speed, and sudden reversal of the tariffs has created news headlines and rattled markets, but we believe at their core, they introduced increased uncertainty about the path of the economy. This uncertainty around foreign trade policy has led to a rapid decline in consumer sentiment and some instability in manufacturing and business activity. The tariffs disrupted global trade and investor confidence has been shaken. Some investors may be reconsidering their international investment allocations given the current environment.

Revisiting the case for international allocations

International allocation is intended to provide diversification, which may lead to better risk-adjusted returns than would be possible with a more concentrated portfolio. Could the current tariff/trade policy uncertainty be the proverbial straw that breaks the camel’s back, moving investors away from this long-held belief?

The short answer, in our opinion, is “no.” While past performance is no guarantee of future results, it’s important to remember that the market has endured many similarly disruptive events over the course of history with limited long-term impact.

Tariffs do not have a universal impact on all markets, instead affecting countries, industries and even sectors differently.

Removing an international allocation disregards these important differences and could negatively impact investor portfolios.

The current environment

Despite widespread concern about tariffs, owning non-U.S. equity exposure has been beneficial thus far in 2025. As of May 9, the MSCI World ex USA Index posted a year-to-date (YTD) return of 12.5%, and the MSCI Emerging Markets IMI Index posted a YTD return of 5.6%, the only two major equity indices to record positive returns YTD. By contrast, the S&P 500® has posted a YTD return through the same period of -3.3% (see table). Historically, international markets often outperform domestic markets during different economic cycles, providing a risk-dampening effect for globally diversified portfolios.

Figure 1. Market Performance
  Price 1 Wk. QTD YTD 1 Yr.
Russell 3000® 3,223 (0.3)% 1.2% (3.6)% 9.5%
S&P 500 5,660 (0.4)% 1.0% (3.3)% 10.0%
Growth 3,914 (0.6)% 4.7% (4.2)% 15.4%
Value 1,828 (0.3)% (2.7)% (2.4)% 3.1%
S&P 400® 2,946 0.5% 1.0% (5.1)% (0.2)%
Russell 2000® 5,028 0.1% 0.7)% (8.9)% (1.1)%
MSCI World Ex USA 2,560 0.7% 5.9% 12.5% 7.3%
MSCI Emerging Markets IMI 1,160 0.3% 3.9% 5.6% 8.7%

As of 5/9/2025. Source: Bloomberg L.P., FactSet®. FactSet® is a registered trademark of FactSet Research Systems Inc. and its affiliates.

Acknowledging the angst that may arise from the uncertainty and volatility of the current environment, we continue to believe that, for long-term investors, maintaining a globally diversified portfolio is a prudent investment strategy.

Bottom line

Given there is no historical playbook for widespread tariff policies, we caution investors against making portfolio or allocation changes based solely on the current market environment. Instead, we recommend investors:

  1. Stay invested and rebalance positions that moved off-target: Stay focused on long-term strategic goals and asset allocation targets. Use moments of high volatility in U.S. markets as an opportunity to right-size the targets between U.S. and international equities to stay well-diversified.
  2. Overweight to U.S. large cap equities, underweight to developed international equities and smaller capitalizations: Although we believe it is important to maintain an allocation to international equities, the uptick in tariff-related volatility further reinforces our U.S. home-country bias in equity asset classes. Larger market capitalizations and quality-oriented exposures tend to do better when economic growth slows. They also have the size and scale to withstand global economic uncertainty relative to their smaller-cap peers.
  3. Quality is our favorite factor in this environment: Be valuation-conscious — growth stocks are not playing their traditional defensive role in this pullback, and stocks with low valuations are probably cheap for a reason in this environment; stay focused on quality characteristics. When macro uncertainty is high, we like stocks that have strong balance sheets, maintain low leverage and can consistently grow earnings throughout a cycle to persevere.
  4. Core fixed income and credit: Core fixed income has provided ballast during the recent market pullback, and we continue to emphasize its role in diversified multi-asset portfolios. From a duration positioning standpoint, we believe the “belly” of the Treasury yield curve (that is, securities that mature in about 5-10 years) currently looks attractive. With credit spreads rapidly rising from extremely low levels, we prefer actively managed fixed income strategies as opposed to passive exposures. The ability to be nimble and tilt toward or away from select issuers and industries is particularly valuable for credit strategies.

At the end of the day, we expect policy uncertainty and market volatility to continue for the near future. While there are select areas of relative attractiveness for investors to consider, the key is to stay invested, stay diversified and focus on your long-term goals.