The economy seems to be firing on all cylinders — but a veteran JPMorgan strategy chief says one underappreciated risk could cause a serious global slowdown

Although the US economy is on solid ground, tariffs could disrupt growth.

It looks like the most obvious threats to the economy have been neutralized for now, but a veteran strategy chief fears that an under-the-radar risk poses a threat to the global expansion.

This economic backdrop bears little resemblance to the so-called stagflationary environment of 2022, a year where US GDP shrank in the first two quarters as inflation hit multi-decade highs.

Fast forward to late 2024, and GDP has grown by at least 3% for three of the last four quarters and is expected to do so again in the third quarter, according to JPMorgan Asset Management. The firm estimates that consumer spending, which accounts for about two thirds of US GDP, also likely accelerated to 3.5% on an inflation-adjusted basis last quarter, up from 2.8% in Q2.

Meanwhile, price growth is remarkably close to the Federal Reserve’s 2% target, which allowed the US central bank to start the interest rate easing cycle with a bang in mid-September.

Perhaps most encouraging is that the labor market appears to be healthy. Job additions easily exceeded estimates in September, and the unemployment rate is in check at 4.1%.

Corporate earnings growth, productivity growth, and business fixed investment all seem to be headed in the right direction as well. The same is true of wage growth, which JPMAM found has topped inflation for the last 17 months, underpinning solid consumer spending in the process.

These signals have given David Kelly, JPMAM’s chief global market strategist, great confidence.

The economic outlook “seems remarkably benign with solid economic growth, low unemployment, resilient profits, a slow drift down in inflation, and gradual easing from the Federal Reserve,” Kelly said in written commentary on October 28. The market veteran added that there aren’t “signs of an imminent change in the economy’s path.”

A ‘tariff’ying risk

That seemingly picturesque backdrop helps explain why the S&P 500 has risen 22% this year and is near record highs. But Kelly believes investors can’t let their guards down.

“Investing has always been as much about risk as about return, and the key to long-term success is being prepared for both,” Kelly said in his commentary.

Kelly said to be wary of elevated stock valuations — which he and his colleagues at JPMAM said last week could put a lid on future returns — and the market’s heavy tilt toward mega-cap growth companies, even though that has been changing in recent months.

However, neither of those overhangs is more serious than the potential fallout from a domestic or international political shock. When asked last week about the biggest risk to his long-term outlook, Kelly quickly arrived at an answer: a fierce global trade war marked by escalating tariffs.

“No matter which set of economists you have sitting here, every one of ’em will tell you that tariffs are not a good idea,” Kelly said at JPMAM’s annual long-term capital market assumptions conference on October 21. “You can use it as a threat, though it’s kind of like a nuclear threat — the whole point is, if you actually end up using it, you kind of screwed up somewhere.”

Economists usually disapprove of tariffs, which are taxes on foreign imports, in most cases. Tariffs promise to generate revenue for the home country while aiding domestic industries, but they can drive up consumer prices and prompt counter-tariffs that lead to trade wars.

In a worst-case scenario, tariffs would result in higher prices and lower growth due to the waste and inefficiency that they create while hurting importers and exporters in both countries.

“A trade war could cause us to push up our inflation forecast and push out our growth forecast at the same time,” Kelly said at the conference.

While Democrats and Republican presidents have leaned on tariffs in the past, it’s former President Donald Trump who’s promising to implement substantial tariffs in this election cycle.

While some say the threat of aggressive tariffs would help the US secure better trade terms, others are skeptical — if not outright scared.

Such tariffs would cause “seismic shocks to the US economy,” Tom Orlik, the chief economist at Bloomberg Economics, said earlier this month. Charles Schwab global investment strategy chief Jeffrey Kleintop cited tariffs as a top risk back in June. The nonpartisan Peterson Institute spoke out against Trump’s tariff proposals, as did the right-leaning Wall Street Journal editorial board.

Although investors may want to take the possibility of tariffs more seriously, Kelly noted that even if they’re a major headache, stocks and the economy should still be fine in the long term.

“I could have said ‘pandemic’ five years ago, if I’d been incredibly prescient,” Kelly said at the conference. “But oddly enough, the global economy bounced back anyway. And so it wouldn’t actually have been a very good thing to worry about.”