Market perspective: Answers to five top client questions

Summary

• From coast to coast, TIAA clients are seeking clarity on multiple challenges—from new trade tariffs that could impact corporate profits to AI’s market influence to Europe’s shifting relationship with the United States—which are contributing to elevated market volatility.
• While policy changes create uncertainty, particularly around Federal Reserve decisions on interest rates and the impact of trade restrictions, well-diversified portfolios remain the best defense against market turbulence.
• History supports maintaining long-term investment strategies through market corrections, as the S&P 500’s best-performing days typically occur during periods of market stress—meaning investors who exit during downturns risk missing the eventual recovery.

Coast-to-coast client questions on market volatility

Florida. Nevada. California. Colorado. New York. North Carolina. Niladri “Neel” Mukherjee, TIAA Wealth Management chief investment officer, has been everywhere this year. And his road trip isn’t over. Mukherjee’s goal is to meet with as many TIAA Wealth Management clients as possible and answer whatever questions they have about how we’re managing their money at a time of elevated market volatility and unusual geopolitical upheaval.

In this month’s CIO Perspectives, Mukherjee digs into the questions he’s been asked the most. Here’s a summary:

Q: Tariffs are dominating the headlines. What does a trade war mean for investors?

On February 1, 2025, the White House announced a 25% tariff on imports from Mexico and Canada—measures that have been delayed twice as the two countries agreed to deploy additional troops to the U.S. border to patrol the flow of illegal drugs and immigration. Fast-forward to April 2, President Trump announced a series of reciprocal trade tariffs on nearly all imports entering the United States. A baseline tariff of 10% will be applied to all imports, effective April 5. Additionally, higher tariffs were imposed on specific countries, including Japan (24%), the European Union (20%), and China (initially 34% but later upped to 125%). With the exception of China’s, implementation of all country-specific tariffs was delayed until July, potentially allowing for negotiation.

“This announcement immediately shook markets as investors had hoped for careful implementation but instead were confronted with a worse-than-expected trade scenario,” writes Mukherjee. “While the situation remains fluid, these measures serve as a reminder that tariffs are a cornerstone of President Trump’s economic agenda and something investors will have to navigate throughout 2025 and beyond.”

Tariffs and trade wars pose “major risks” to the baseline case outlined in TIAA Wealth Management’s 2025 Outlook, according to Mukherjee. The 2025 Outlook predicted stocks would post moderate gains this year and the U.S. economy would outperform the world economy. However, the costs of tariffs are likely to be absorbed by companies and consumers alike, which could mean lower profit margins for companies and more sticker shock for consumers. A permanent shift to a more protectionist stance might eventually result in foreign investors shunning U.S. stocks and bonds. Protectionism could also accelerate the fragmentation of the global economy into blocs—a trend noted in the 2025 Outlook—with China and eurozone economies reducing their economic and strategic dependence on the United States.

“In this environment,” Mukherjee writes, “it is crucial for investors to stay anchored to up-to-date financial plans and ensure diversification within and across asset classes.” He anticipates that rising risks to economic growth may lead to declining bond yields (and rising bond prices), which could partially offset losses in equities.

Q: What does the future hold for inflation and interest rates?

The recently announced tariffs pose both upside risks to inflation AND downside risks to employment. And that, according to Mukherjee, puts the Federal Reserve in a tough spot when it comes to managing their dual mandate of maintaining stable prices and full employment. Right now, investors expect the Fed to be more focused on jobs and the economy: Market expectations for Fed rate cuts in 2025 have increased from three to more than four since the announcement of reciprocal tariffs. However, Mukherjee’s view is that it will be difficult for the Fed to overlook tariff-related price inflation, lessening the chances for significant rate cuts.

“Given the lingering risk that trade tariffs may boost consumer prices over the next few months, the Fed remains in wait-and-see mode,” Mukherjee writes. “Pricing more rate cuts into market models could be difficult without more significant labor market weakness.”

Q: There’s so much information in the media about artificial intelligence (AI), and it’s hard keeping track of the latest developments. How should investors navigate this new technology space?

Wall Street’s fascination with AI has cooled in recent months. In the United States, the AI success story had been spearheaded by the so-called Magnificent 7—Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla. But that rally faded in Q1, as these stocks fell an average of 16% in Q1 2025, far more than the 4.6% decline of the S&P 500.

One reason for the decline: There’s evidence that the gap between the United States and China in developing AI technology might not be as wide as once thought and that the large language models (LLMs) powering AI can be produced, replicated and commercialized at much lower costs (something Mukherjee’s team wrote about in their January FocusPoint).

That said, Mukherjee remains bullish on AI and sees the recent sell-off as a bump in the road, not a dead end. “AI will continue to be a focal point for big business over the next decade as companies invest in the essential infrastructure, such as data centers and computing resources, required to implement AI,” he writes. “We’re watching to see which companies capitalize fastest.”

Q: The European Union (EU) is taking steps toward becoming less reliant on the United States. How will this impact major industries on both sides of the Atlantic? And what does this mean for investors?

The shifting political landscape—particularly the United States potentially decoupling further from the EU—presents both opportunities and challenges for investors, according to Mukherjee. The opportunities stem from the possibility of greater EU investment in defense, infrastructure, and energy production. The challenges are tied to interest rates: New government spending requires new government borrowing, and bond markets might react poorly.

The Trump administration has criticized NATO allies for not meeting their defense spending commitments, threatening to reduce support. The administration delivered on those threats in recent weeks as the United States paused military aid in Ukraine’s war with Russia. In response, European leaders have rallied around Ukraine’s President Zelensky. However, without U.S. support, Europe faces the need for substantial military upgrades. The EU proposed €150B in loans and €650B in national defense spending over the next four years to counter Trump’s security withdrawal.¹ Historically debt-averse, Germany has also voted to allow a massive increase in defense and infrastructure spending to address this defense spending shortfall.²

Defense sector growth in Europe. Should the United States follow through on reducing defense spending support commitments for the EU and allies, European governments are likely to accelerate spending to bolster and modernize its military capabilities.

Possible implications for investors:

• Defense sector growth in Europe. Should the United States follow through on reducing defense spending support commitments for the EU and allies, European governments are likely to accelerate spending to bolster and modernize its military capabilities.
• Energy and resource independence. Lack of U.S. support could incentivize the EU to diversify its energy sources.
• Increased spending on infrastructure and technology. To reduce dependence on the United States, the EU may explore building out new supply chains, increasing domestic manufacturing and investing in technology. Potentially, this could lead to greater innovation across the EU.
• Currency and bond market volatility. Increased EU spending could lead to higher interest rates and borrowing costs, negatively impacting euro-denominated bonds.

Q: With all the uncertainty in the world, should I change my investment strategy or alter my portfolio?

In March 2025, the S&P 500 entered correction territory, experiencing a 10% decline from its all-time highs. However unnerving, market fluctuations are common, and history demonstrates that those who remain invested during corrections are generally rewarded. “Our view,” Mukherjee writes, “is investors are best served by remaining committed to their long-term strategies and by staying the course.”

Trying to time the market can be risky. Mukherjee points out that the 10 best days in the S&P 500 over the past 25 years all occurred during periods of severe market turmoil (i.e., the Great Financial Crisis and the COVID pandemic). The lesson: Investors who sell after prices decline may miss out on big gains when prices bounce back.

Contact your advisor.

For more insights on how policy changes might impact the markets and the economy—and to discuss the implications for your investment portfolio and financial plan—talk to your TIAA Wealth Management advisor. Don’t yet have an advisor? Schedule an appointment .