Can US Fiscal Stimulus Shield Markets from Rising Tariff Risk in 2025?

As trade tensions continue to mount, analysts at Bank of America (BofA) believe that short-term US fiscal stimulus could help cushion financial markets against the negative impact of escalating tariffs.

While BofA economists characterise the recently approved US budget bill as offering a neutral fiscal impulse for FY2025, they point to one provision that could provide a much-needed economic boost: bonus depreciation. This tax incentive may inject an estimated $100 billion in temporary cash flow to American businesses, offering relief amid rising tariff-related costs.

“This could help offset growing pressure on corporate profits triggered by higher tariff payments,” BofA noted in a recent report.

The extra liquidity may encourage businesses to maintain capital spending rather than cut costs to protect margins, potentially reducing the risk of an economic slowdown in the near term.

Key Risks to Economic Growth Remain

Despite this fiscal support, BofA warns that overall risks to US and global economic growth remain tilted to the downside. The bank highlights several headwinds, including:

• The potential for a further increase in effective tariff rates

• Heightened trade policy uncertainty affecting business investment

• Weakening immigration trends

• A recent downturn in the US fiscal impulse

If the US economy slows in line with current projections, global growth could weaken further—especially given the sluggish economic recovery in both China and the Eurozone.

Cautious Stock Market Outlook

In terms of stock market performance, BofA maintains a defensive stance. The bank forecasts a possible 10% downside in the STOXX Europe 600 index over the coming months. European cyclical stocks—those tied to economic growth—are expected to underperform compared to defensive sectors.

BofA continues to favour stable, recession-resistant sectors such as pharmaceuticals and food & beverages. In contrast, it sees downside risks for financials and capital goods, while identifying luxury, mining, and semiconductor stocks as attractive cyclical hedges for investors.

Conclusion

With growing uncertainty over tariff policy, potential US fiscal stimulus could play a key role in stabilising markets and supporting corporate profitability in 2025. However, investors should remain cautious, as underlying risks to both domestic and international growth persist.

(Sources: investing.com, reuters.com, ChatGPT)