Although global economic growth in the opening months of 2025 has held steady, the outlook for the rest of the year has become cloudier, due to the uncertainty surrounding the implementation of headline-grabbing U.S. tariffs—particularly their timing, scale and scope, which add further complexity. Uncertainty, however, is twofold. Investors have experienced similar tariff pressures before, some of which were quickly retracted, making policy now unpredictable and adding to market volatility in 2025. The extent to which businesses and investors pause M&A activity and capital spending plans will depend on how seriously these threats are taken and what quick actions ensue.
The uncertainty caused by the threat of new U.S. tariffs is likely to delay global M&A momentum, slowing down a market that had been gaining traction later last year. Companies with U.S. exposure may appear riskier to potential buyers, meaning international acquirers could prioritize deals in their own regions. Other macroeconomic factors—such as tax hikes (or tax cuts, depending on the segment affected), margin pressures and cash flow concerns—will influence M&A activity. The impacts of tariffs will vary by location and different countries will assess risk differently, with Canada, Mexico, China and Continental Europe potentially facing a more aggressive approach to tariffs than the UK, for example. Retaliation from U.S. trading partners, with their own set of announced tariffs, will further complicate the cost of doing business and the prices that consumers will ultimately face.
Economists generally agree that if tariffs are broad-based, there will be inflationary pressures, at least in the year in which they are first applied. This will make the Federal Reserve’s job of trying to decide the timing and magnitude of interest rate cuts more difficult. Keeping rates higher for longer has negative ramifications to both M&A activity and for below-investment-grade companies, which have to refinance their debt in the near future.
U.S. public markets reached a new all-time high in mid-February 2025, buoyed by expectations of business-friendly policies from the new administration. Since then, however, major indices have declined, wiping out all the gains for the year. This suggests that investors are starting to price in the impact of tariffs, and certainly the uncertainty about their magnitude and timing is making them nervous. Any major shifts in policy could trigger further market volatility and many investors are taking a cautious approach, waiting for clearer signals before making moves. With tariffs targeting raw materials, electronics, software imports, automakers and consumer goods, we will likely see industries like manufacturing, technology and retail start to restructure supply chains or shift sourcing strategies to mitigate risks and remain competitive.
Further, the impact on U.S. government spending from efficiency actions remains to be seen, both to the overall economy and to the trajectory of the national debt.
Internationally, the signaling by the U.S. administration that it will withdraw support (or limit funding) to transnational organizations (such as NATO) or to certain international accords (e.g., Paris Agreement, OECD Global Tax Deal) is already leading to investor capital reallocations globally. European defense stocks have surged under the expectation that European governments will have to increase spending budgets to rearm the region.
The private equity space is worth specific attention, as optimism around an M&A rebound in 2025 had been the expectation throughout much of 2024. With strong momentum stemming from both pent-up demand for exits from older vintage funds and demand from new funds looking to deploy capital, buyer and seller expectations have been aligning. It will be interesting to see whether the escalation of tariffs or a wider trade war could undermine that growing market confidence.
Despite headwinds, pent-up demand for private investment exits remains. The ability to execute deals will depend on interest rate movements and evolving economic conditions. For now, strategic patience remains the prevailing approach for investors and business leaders navigating these challenges.
