UBS clients' most pressing questions: How much are tariffs priced in? Is DOGE useful? Has Europe been visited?

At the crossroads of the global economy, investors are facing unprecedented challenges and opportunities.

On March 13, UBS Group AG released a report on the global economy and strategy, addressing several key concerns of investors—threats of trade wars, how much tariffs will be priced, is DOGE useful, the future of Europe, the subsequent impact of DeepSeek, and whether U.S. stocks will decline further?

UBS believes that investors have underestimated the risks of Trump's 2.0 tariff policy. If major U.S. trading partners retaliate comprehensively, the U.S. GDP will suffer a fivefold negative impact. At the same time, the difficulty of DOGE driving fiscal reform is high; even with significant spending cuts, it would only save $75 billion, which has limited impact on the nearly $2 trillion annual fiscal deficit. Additionally, UBS analyzes that U.S. stocks still face downside risks in the short term, potentially falling back to around 5,300 points, while the Eurozone economy is at a critical crossroads. UBS expects it to show a "J-shaped recovery path" of "decline followed by rise," with potential upward opportunities for European stocks, while emerging markets need to be viewed with caution.

How serious is the threat of Trade War 2.0?

First and foremost, it is naturally the tariff stick that Trump is wielding again. UBS points out that the U.S. government has proposed imposing at least $770 billion in tariffs, which is seven times the scale of the "Trade War 1.0" period in 2018/2019!

(The U.S. government has proposed imposing at least $770 billion in tariffs)

What does this mean for investors? First, tariffs may exacerbate inflation levels in the U.S. Second, as the increase in tariffs typically raises the prices of imported goods, thereby suppressing import demand, tariffs may lead to the depreciation of the currencies of importing countries (such as Mexico and Canada). Third, the GDP growth of different countries/regions will be affected to varying degrees, with Canada and Mexico facing the most significant impacts.

UBS's model shows that if Trump imposes a 25% tariff on all trading partners, the EU economy would slow by 0.53 percentage points, and Japan would slow by 0.6 percentage points. For Mexico and Canada, the impact would be catastrophic, at 3.2-3.4 percentage points. Furthermore, if major U.S. trading partners retaliate comprehensively, the U.S. GDP will suffer a fivefold negative impact.

How much are tariffs priced in?

The market seems to underestimate the risks of Trump's 2.0 tariff policy.

UBS points out that through the analysis of price performance across multiple asset classes, it can be seen that the market's level of concern about tariff risks is far lower than during the previous "Trump 1.0" period, and this optimistic attitude may conceal significant risks.

UBS's developed "Tariff Fear Index" shows that the tariff concern index for European and U.S. stock markets is 30% and 23%, respectively, indicating that panic has not yet set in. Compared to the Trump 1.0 period, European stock indices affected by tariffs have recently risen by 5%, while related U.S. stocks have only declined by 7% during the same period

The commodity market also shows a calm performance. Copper and aluminum fell by 19% during the Trump 1.0 tariff period, but have risen by 7.8% and 12.8% respectively over the past six months, suggesting that the market has not fully digested the potential negative impact of tariffs on economic growth.

The only market that clearly reflects tariff expectations is the U.S. inflation expectations. Since September last year, U.S. short-term inflation expectations have risen by 63 basis points, while European inflation expectations have remained stable.

Is DOGE's reform useful?

UBS stated that DOGE finds it difficult to truly drive fiscal reform.

At the beginning of Trump's presidency, the "Department of Government Efficiency" (abbreviated as DOGE) was established to "improve government efficiency and productivity." However, the reality is quite stark.

The report points out that mandatory spending (including Social Security, Medicare, and Medicaid) accounts for 14.3% of U.S. nominal GDP, while net interest payments account for 3.1%. Together, they exceed the total revenue of the U.S. government! In other words, even if the defense budget and all other government expenditures are cut, the U.S. still cannot achieve budget balance.

(U.S. spending as a percentage of GDP)

What DOGE can do is merely "cut" the remaining $750 billion in non-defense discretionary spending. Even if a drastic 10% cut is made, it would only save $75 billion, accounting for just 0.25% of GDP. Compared to the nearly $2 trillion fiscal deficit each year, this is simply a drop in the bucket.

Legal barriers also limit DOGE's influence. Section 10 of the Congressional Budget and Impoundment Control Act of 1974 prohibits the president from refusing to pay congressional appropriations. Attempts by the Trump administration to freeze federal appropriations were quickly halted by the courts, and similar lawsuits regarding cuts to USAID funding are ongoing.

The reality shows that while DOGE may have some impact, any substantial fiscal improvement requires congressional support and needs to address the fundamental contradiction between revenue and welfare spending. Simply relying on cuts to domestic discretionary spending cannot balance the budget.

Is the Eurozone economy doing well?

The Eurozone economy is at a critical crossroads, with the economy expected to follow a "J-shaped curve," initially declining before recovering.

After five consecutive quarters of stagnation from the fourth quarter of 2022 to the fourth quarter of 2023, there was a growth rebound in the first three quarters of 2024, but momentum was lost again in the fourth quarter, nearly falling into a state of stagnation UBS believes that the current Eurozone economy seems to be in a wait-and-see mode, with its future direction depending on the actual impact of three key risks.

U.S. tariffs pose the biggest downside risk. According to simulations, a 10% comprehensive tariff could reduce the Eurozone's GDP growth rate by 0.2 to 0.75 percentage points, while the 25% tariff mentioned by Trump would have a more severe impact, potentially pushing Europe into recession.

(Impact of U.S. tariffs, potential Ukraine ceasefire, and EU defense spending on Eurozone GDP)

In contrast, a potential ceasefire agreement in Ukraine could boost GDP by 0.5-1 percentage points from 2025 to 2027, while European fiscal expansion could raise the Eurozone's GDP by 50 and 60 basis points in 2026 and 2027, respectively. However, this expansionary fiscal policy also comes with risks. It is expected that by 2027, the overall budget deficit in the Eurozone will rise to 3.6% of GDP.

Overall, the Eurozone's economic growth may exhibit a "J-shaped curve" pattern: initially declining due to the impact of U.S. tariffs, followed by a gradual recovery and momentum driven by fiscal stimulus and a potential ceasefire agreement in Ukraine. It is worth noting that accelerated economic growth may push up inflation, presenting new challenges for the European Central Bank, which may have to raise interest rates above neutral levels in the next 2-3 years in the face of higher public spending.

What is the impact of a Ukraine ceasefire on the European economy?

A ceasefire agreement in Ukraine could boost the European economy.

The potential ceasefire agreement between Ukraine and Russia brings a glimmer of hope to the war-torn European economy. Although a lasting ceasefire still faces challenges, the potential positive impacts cannot be ignored.

According to UBS analysis, the ceasefire agreement could boost the European economy through five key channels:

• Lower natural gas prices;

• Enhanced business and consumer confidence;

• Promotion of Ukraine's reconstruction;

• Increased European defense spending;

• Impact on the labor market.

Among these, the decline in natural gas prices and the increase in confidence will contribute significantly to growth. As the risk premium dissipates, natural gas prices are expected to normalize, helping to reduce inflation. More importantly, the increase in European defense spending will become a major driver of economic growth. The "European rearmament" plan proposed by the European Commission is expected to significantly boost defense spending and may involve exemptions from fiscal rules.

Although the impact of Ukraine's reconstruction on the European economy is still unclear, it is expected that the total reconstruction amount over the next decade will approach $500 billion, which will undoubtedly create opportunities for European businesses (Ukraine is expected to have a total reconstruction cost of $486 billion)

For the stock market, although the overall growth impact is relatively mild, a ceasefire agreement may have a positive effect on specific industries, such as capital goods and materials companies. In the fixed income market, lower natural gas prices, easing inflation pressures, and reduced risk premiums are favorable for bonds, but better growth prospects and bond issuance related to reconstruction may have a counteracting effect.

Has the impact of DeepSeek faded?

UBS pointed out that as the tremors caused by DeepSeek gradually subside, its long-term impact is becoming increasingly clear: It will accelerate the adoption of AI technology while reshaping the competitive landscape and investment logic of AI technology.

DeepSeek has significantly accelerated the diffusion of AI technology by lowering the costs of large language models and open-sourcing its technology. The UBS report indicated that the inference costs in China and overseas have decreased by approximately 10 times and 5 times, respectively. This is beneficial for non-tech industries, including healthcare, banking, insurance, and retail, which will all benefit from the productivity gains brought by AI.

However, for tech companies themselves, challenges and uncertainties are increasing.

UBS believes that although DeepSeek has reduced the usage costs of LLMs, hyperscalers have announced larger-than-expected increases in capital expenditures, with a projected growth of 32% in 2025, and capital expenditures accounting for 18.6% of sales. More concerning is that the profitability and valuation premiums in the tech industry are rapidly slowing down, and UBS has expressed concerns about the valuations in the semiconductor industry.

How is the "animal spirit" weakening in 2025, and what about U.S. economic growth?

In 2025, the once-hopeful "animal spirits" (referring to irrational optimism) seem to have failed to boost the U.S. economy as expected. Although the market rebounded briefly after the election and small business optimism soared, this wave of optimism did not last.

UBS pointed out that various data indicate that optimism is rapidly fading, and economic indicators are beginning to deteriorate. Declining consumer confidence, low corporate investment willingness, uncertainties brought by trade frictions, and expectations of tightening fiscal policy have all cast a shadow over economic growth.

Previously, at the end of 2024, UBS's hard data model showed an upward trend, but after entering January and February 2025, the model turned negative. Although the risk of recession in the model has not significantly increased, there has also been no noticeable improvement.

More importantly, the fiscal deficit in 2024 is already high, providing limited room for large-scale tax cuts. Coupled with a high-interest-rate environment and uncertainties in trade, immigration, and fiscal policy, these factors are putting pressure on economic growth UBS believes that the originally expected positive growth momentum may ultimately be offset by tariffs, the Federal Reserve's wait-and-see attitude, and uncertain fiscal policies, posing more severe challenges to the U.S. economy than ever before.

Will U.S. stocks continue to fall? How about European stocks?

UBS analysts believe that the European stock market is more attractive compared to the U.S. stock market.

There are still downside risks for U.S. stocks in the short term, and the S&P 500 may retreat to around 5,300 points. As of March 14, the S&P 500 closed at 5,521.52.

Strong U.S. economic survey data has not translated into actual economic data, and corporate earnings expectations have been overestimated, especially for the 493 companies outside the "seven giants." Earnings growth and revenue growth may not reach the typical relationship with nominal GDP growth, profit margins are under pressure, and valuations will also be pressured by an expanded risk premium.

In contrast:

Increased political cohesion in Europe, Germany's fiscal stimulus and defense spending commitments have boosted manufacturing, GDP, and earnings expectations, capital is flowing back from the U.S. to Europe, and falling natural gas/electricity prices are supporting our positive view on the European stock market.

We are strategically increasing our holdings in the European stock market, expecting this trend to continue over the next 1-3 months.

Additionally, UBS holds a cautious attitude towards emerging market stocks.

Although emerging market valuations are relatively attractive compared to developed markets, this mainly reflects the higher ROE of developed markets.

In an environment of high volatility, tariffs, slowing trade growth, and dovish policies from emerging market central banks, exchange rates may become a resistance for emerging market stocks.

Overall, while there may be performance opportunities in the European stock market in the short term, the U.S. still has advantages in earnings and productivity growth in the long term