U.S. tariffs and equity issuance shifts raise risks for yields and stock returns

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U.S. tariffs and equity risks

Highlights

New U.S. tariffs include a 50 per cent duty on Canadian goods and 10–12.5 per cent forced labour tariffs on key trading partners, aiming to strengthen legal resilience.
Emergency tariffs previously generated about $150 billion in revenue, but replacements fall short, leaving a fiscal gap and heightening bond yield and inflation risks as negotiations continue.
JPMorgan projects net U.S. equity issuance will turn positive in 2024 due to AI-related IPOs, with new share supply potentially cutting index returns by up to 4.5 per cent annually over the next decade.

Tariff revenues, bond yields and inflation risks

As reported by Financial Times, the administration has launched a second major wave of tariffs that includes a 50 per cent duty on various Canadian goods and "forced labour" tariffs of 10 per cent to 12.5 per cent on most major trading partners. The stated aim is to make the new measures more resilient to legal challenges than the previous round.

Market reaction remains muted compared with the sharp moves seen on "liberation day" last year, but some analysts warn that investors may be underestimating the implications for U.S. Treasury yields. Steve Englander of Standard Chartered says the administration needs tariff income to help close a fiscal gap and reduce pressure on borrowing costs, suggesting further trade actions may still follow.

The earlier emergency tariffs generated about $150 billion in revenue before refunds that the U.S. government now has to pay. Before those levies were struck down, the Congressional Budget Office estimated they would raise $3 trillion by 2035, helping offset the $4.7 trillion deficit increase linked to the One Big Beautiful Bill Act.

The new tariff package does not fully replace that lost fiscal support, leaving trade negotiations and future changes in effective tariff rates as potential drivers of bond yields in coming months. Inflation is also a concern, with goods inflation already showing some effect from last year's tariffs, while oil prices are back near $100 and inflation remains above the Federal Reserve's target.

Re-equitisation tests U.S. stock market support

Another market support is also starting to reverse as shrinking equity supply, long boosted by buybacks, delayed listings and mergers, gives way to rising net issuance. For years, falling public share counts helped lift earnings per share and supported U.S. equity returns even when underlying income growth was less impressive.

In a forthcoming paper, Sahil Mahtani and Dan Morgan of Ninety One argue that the shrinking supply of shares added about 0.7 per cent a year to U.S. returns between 2015 and 2025. They contrast that with 2000, when heavy IPO activity dragged returns down by as much as 10 per cent, and say the inelastic markets hypothesis may work in reverse, meaning new supply can weigh disproportionately on prices.

According to JPMorgan, net U.S. issuance this year is expected to turn positive for the first time since 2021 and only the fifth time since the global financial crisis. A key driver is a wave of recent and expected AI-related IPOs and fresh equity issuance by hyperscalers funding AI infrastructure.

Mahtani and Morgan argue the larger risk comes not from the IPO itself but from the slower expansion in tradable shares after insider lock-ups expire. They cite research showing that companies listing 7 per cent of their equity at IPO typically have 54 per cent of shares in circulation two years later; in SpaceX's case, 4 per cent floated initially and another 27 per cent is expected to enter circulation in August.

If the overhang from new supply persists, the drag on returns could become material. Their worst-case scenario suggests new share supply cuts index performance by 4.5 per cent a year over the next decade, and when combined with a reversion from today's elevated valuations, they describe the outlook for U.S. returns as severe.

Long-dated U.S. Treasury inflation-protected securities (TIPS) have seen yields surge to multiyear highs as oil prices jumped and investors reassessed inflation risks. Our earlier coverage explained how higher energy costs can lift inflation expectations and draw interest to 10-year and 30-year TIPS, while still leaving holders exposed to meaningful interest-rate volatility.

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