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Investment Strategy

Disasters Have a Way of Not Happening

May 1, 2025

By Joe Zidle

The surprising tariff announcement on April 2nd sent U.S. and global financial markets into full defense mode.

Risk assets sold off, while so-called safe havens like the U.S. dollar and Treasuries failed to offer protection. Volatility spiked to levels not seen since the depths of COVID and before that the Global Financial Crisis. Now, the strain on the global economy is becoming more evident. Exactly how much remains to be seen.

While we note the many risks that these tariffs bring—economic slowdown, inflation, recession, greater volatility, longer-term uncertainty—we can also be clear-eyed about what can go right for investors.

This edition of The Connection doesn’t ignore what’s going wrong. But as my former partner and mentor Byron Wien often reminded us, “disasters have a way of not happening.” I’m not offering false optimism. Conditions on the ground are clearly more challenging than they were just a few weeks ago, forcing investors to navigate first, second- and third-order effects of tariff uncertainty. That said, nothing is predetermined—things may get worse, or they may not. Either way, I believe that history can be a guide, and it suggests that during periods of dislocation, opportunities often emerge for those willing to look.

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A Negative Feedback Loop

Economic growth in the United States was solid, but already slowing before the tariff shock, albeit from above-trend levels.

In 2023, GDP grew a robust 2.9%. That pace cooled slightly to 2.8% in 2024, and early forecasts for 2025 were closer to 2.4%. Manageable, certainly, especially with strong balance sheets and low unemployment. But the deceleration was underway. Soft data was slipping, such as household sentiment and small business confidence. Even hard data like retail sales showed cracks forming.

Then came the April 2 announcement. The consensus had been for something closer to Trump 1.0 tariffs—headline-grabbing, but ultimately diluted through exemptions. In 2018, tariffs were imposed on many goods, but many more were carved out through negotiation and industry influence. The effective rates paid by companies rose only modestly.

US Effective Tariff Rate [ 1 ]

Fig01_US_Effective_Tariff_Rate_v1

Global trade didn’t contract as many feared. Instead, trade routes adjusted and supply chains reorganized. China lost market share, but Mexico, Canada, Vietnam, and India stepped in. The disruption was more surgical than systemic, at least until COVID.

US Imports by Country [ 2 ]

(Share of total; seasonally adjusted, 12-month moving average)

Fig02_US_Imports_by_Country_v1.

Trump 2.0 tariffs feel different. If implemented as proposed, Trump 2.0 tariffs would represent some of the most aggressive trade restrictions since the Smoot-Hawley Tariff Act in the 1930s. Even if tariffs are negotiated down, which seems likely, the uncertainty alone is proving disruptive. Uncertainty is a tariff in its own right—and for now, it’s being priced as a costly one.

The early signals are unmistakable. Business confidence is deteriorating amid growing uncertainty. The latest NFIB Small Business Optimism Index has fallen to levels seen only during the COVID recession and the Global Financial Crisis. Households are feeling the same unease, taking the University of Michigan Consumer Sentiment down to multi-decade lows.

Forward indicators, including new orders, shipments, and capex plans, are softening. This earnings season, an above-average number of companies pulled their forward guidance. Conversations in boardrooms are shifting from growth to defense.

Add it all up, and the risk of a negative feedback loop is rising.

Negative Feedback Loop

Fig03_Negative_Feedback_Loop_v1.

Once a loop like this one sets in, it becomes self-reinforcing. Breaking it requires either a decisive shift in monetary policy or a meaningful fiscal response. Right now, neither looks imminent. Monitoring signals like the Challenger Job Cut Announcements and initial jobless claims will be important to determine if this feedback loop is beginning. While federal job cuts have appeared in the Challenger Job Cut Announcements, private industry layoffs announcements remain low, as do initial jobless claims.

Inflation Is A Risk

To make matters worse, there is a possibility that some parts of the inflation basket may rise even as others decline.

Easing shelter costs should offer some relief in the months ahead. However, as tariffs take effect, higher prices are likely for core goods, which account for almost a fifth of the overall index. Textbooks might call tariffs a one-time price adjustment, but the real world is messier. As input costs cascade through supply chains, pricing power could become contagious. Historically, import prices show one of the strongest correlations to CPI.

US CPI Diffusion Index [ 3 ]

US_CPI_Diffusion_Index

For now, the Federal Reserve appears more focused on labor markets than trade policy. Fed officials recognize the risk of a negative spiral but have yet to act preemptively. So why wait? The logic is tactical: acting now would risk depleting their ammunition too early. But hesitation carries its own cost—the longer they wait, the greater the odds that they’ll have to do more, not less, and the less likely a soft landing becomes. Watching closely, of course, are the markets, which currently reflect the possibility of four rate cuts in 2025.

Disasters Have a Way of Not Happening

In any period of uncertainty, it’s worth stepping back from the barrage of bad news and assessing the longer-term fundamentals.

That’s especially true when stress is high—when reaction becomes reflex and knee-jerk decisions can lock in damage that might have been avoided.

As mentioned earlier, there’s still a lot we don’t know about these tariffs, including what industries will be targeted or spared, how much pass-through will occur, and how long the measures will last. While we await more clarity, we can find perspective in what we do know and what it tells us: The road ahead may be uneven, but it’s not uncharted, and it’s far from hopeless.

The U.S. economy is like a tree—it just grows. Over the long run, economic growth is simply the sum of changes in the working-age population and productivity, and the U.S. has the best demographics in the developed world [ 4 ] and benefits from one of the strongest productivity stories anywhere. Its natural trajectory is toward growth, not contraction. Most estimates of long-run potential sit between 1.8% and 2.0%, and in my view, the current investment and productivity cycle offers upside to that range.

Investment, or future productivity, has been running nearly 50% higher since 2018 than the pre-COVID average.

Nonfinancial Corporate Business Total Capital Expenditures [ 5 ]

(USD in trillions)

Fig05_Nonfinancial_Corporate_Business_Total_v1

Much of that surge followed a structural labor shift. After the Global Financial Crisis, the unemployment rate peaked near 10%, and it took nearly a decade, until 2018, for it to fall to 4%. At that level, labor tightness drove wage pressures, and companies responded by investing in efficiency and automation. That was before the current wave of AI investment even began. Considering the scale and scope of these investments, the U.S. may be on the cusp of productivity gains similar to those that followed the 1990s tech revolution.

10-year Average Labor Productivity and Nominal GDP [ 6 ]

(YoY%; seasonally adjusted)

10-year_Average_Labor

US Real GDP and Real Private Fixed Investment [ 7 ]

(4Q’24 versus 4Q’19 percentage change)

Fig07_US_Real_GDP_and_Real_Private_Fixed_Investment_v1

The U.S. enters this period of uncertainty from a position of relative strength. Sentiment has clearly deteriorated, but fundamentals haven’t cracked, especially when it comes to household and corporate balance sheets, which are in solid shape. In fact, many of the traditional warning signs of recession aren’t flashing red at all.

Start with the corporate sector. While the impacts from current market volatility and economic uncertainty remain to be seen, portfolio company data has thus far shown healthy revenues, strong margins, and CEOs who, while cautious, remain confident in their ability to manage through the noise. [ 8 ] [ 9 ] At the same time, we’re not seeing signs of real stress beneath the surface. One of the earliest indicators of real corporate stress is when gross interest expense rises as a percentage of revenue, forcing companies to slash investment or cut labor costs. But that’s not what we’re seeing. Gross interest expense as a share of revenue remains near historic lows. Also, financing remains accessible. Most firms, especially large ones, locked in low-cost capital when they had the chance and are now benefiting from that prudence.

The household picture is similarly resilient. Net worth is at an all-time high. Unemployment, at 4.1%, remains historically low. Jobless claims are stable. Perhaps most important, household debt service burdens are still below pre-COVID levels. Households don’t just spend out of income, they spend out of wealth. And with wealth up, spending power is stronger than the macro narrative might suggest.

Also, credit is still flowing. The Fed has already cut rates by 100 basis points since September 2024, and globally, this is shaping up to be the most coordinated rate-cutting cycle since the Global Financial Crisis. Money supply growth, which had turned negative in 2023, is now back in positive territory. Credit creation is the lifeblood of the economy and, for now, that blood is circulating.

US Corporate Gross Interest Payments as a Percentage of Revenue [ 10 ]

(4-quarter moving average)

Fig08_US_Corporate_Gross_Interest_Payments _v1

What Can Investors Do? See the Opportunity

Portfolio diversification isn’t broken, but it’s being severely tested.

The traditional 60/40 portfolio already proved less reliable after the volatility of 2022 and 2023. A long period of negative correlation between stocks and bonds broke down as inflation and interest rates surged in 2022. Where investors once relied on bonds to provide ballast to equity volatility, both asset classes declined together.

That positive correlation persisted into 2023, as both stocks and bonds recovered, and it remained positive through most of 2024. Now, in the face of a sharp, policy-induced risk-off move, the usual safe havens aren’t behaving as expected. The U.S. dollar has swung wildly to a two-year low, and demand for 10-year Treasuries has been weak, pushing yields higher. Investors aren’t just repricing assets, they’re rethinking assumptions, and that’s much harder to reverse.

But periods like this one don’t just reveal stress, they also reveal opportunity. Uncertainty breeds volatility, and volatility creates dislocation, which is precisely when long-term investors typically lean in. That’s where private markets come in—not just for their historical resilience when public markets falter, but for their long-run return potential. Historically, some of the best private market vintages have emerged in the aftermath of economic shocks. When capital is scarce, pricing improves. When public markets are in retreat, private markets step in with resilience.

Private equity has a long track record of outperforming during downturns. Over the past several decades, private equity returns relative to the Russell 2000 tend to be strongest when public markets are weakest. During the Tech Bubble, the Global Financial Crisis, and other stress periods, private equity consistently delivered above-market returns. The average outperformance across recessionary downturns? 8.3 percentage points when public markets were down greater than 10%. That’s not marginal alpha—that’s compounding power.

Relative Outperformance of Private Equity Versus Russell 2000 mPME [ 11 ]

Fig09_Relative_Outperformance_of_Private_Equity_v2

Private real estate tells a similar story. During the eight calendar years since 1980 when the S&P 500 posted negative returns, private real estate delivered an average return of +6.2%, while the S&P fell by nearly -14%. With low correlations to public equities and a negative correlation to investment grade bonds, private real estate has provided a powerful source of diversification when it was needed most.

S&P 500 Versus Private Real Estate During S&P 500 Declines [ 12 ]

(Average Annual Total Return)

Fig10_SP_500_Versus_Private_Real_Estate_v2

It’s not just about performance, it’s also about repositioning. In today’s market, where traditional diversification is breaking down and liquidity is still available, now may be the time to consider rebalancing toward private assets: equity, real estate, credit, and infrastructure. These aren’t panic moves—they’re strategic reallocations that could position portfolios for long-term durability.

In the section that follows, my colleague Mike Forman, Senior Managing Director in our Real Estate group, discusses one of the most compelling stories playing out in real time: the intersection of infrastructure, power, and digital transformation in Blackstone’s data center business.

This lens offers a different angle, but the message is consistent: Uncertainty doesn’t have to mean paralysis. With focus, patience, and a willingness to lean into change, investors can find real opportunities, even now. In moments of dislocation, history rewards the investor who tunes out the noise and keeps their head.

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US International Trade Commission (12/31/2024), Yale Budget Lab (4/9/2025) and Bloomberg. The proposed tariff rate is measured pre-substitution. Assuming there are no shifts in the import shares of different countries, the 2025 tariffs to date are the equivalent of a 24.6 percentage point increase in the US average effective tariff rate. This increase would bring the overall US average effective tariff rate to 27%, the highest since 1903. This assumes imports from China remain at 14% of total US imports, consistent with their 2024 share, and that the newly announced 125% tariff applies to a specific subset of goods from China. The “reciprocal” tariff rates announced on April 2 and effective April 9 have been suspended for 90 days. During this period, a 10% minimum tariff applies universally to the countries and product categories covered in the April 2 announcement, excluding China. For China, the April 2 reciprocal tariff increases to 125%, and when combined with the existing 20% IEEPA tariff, results in a maximum rate of 145% on the April 2 base. For commodities excluded from the April 2 announcement but subject to existing tariffs (e.g., steel, aluminum, automobiles), a 45% rate applies. For other carve-outs like lumber, pharmaceuticals, and semiconductors, the current applicable rate is 20%.
US Census Bureau and Macrobond, as of 2/28/2020.
US Bureau of Labor Statistics and Bloomberg, as of 3/31/2025. Represents the share of total CPI components with rising prices on an annual basis, indicating the breadth of inflation.
US Bureau of Labor Statistics, International Comparison of Annual Labor Force Statistics, as of 1/21/2025.
US Federal Reserve and Bloomberg, as of 12/31/2024.
Bloomberg, US Bureau of Economic Analysis, as of 12/31/2023. Labor productivity represents non-farm business sector labor productivity. Post-tech bubble is from 3/31/2002 to 9/30/2007. Post-GFC is from 9/30/2009 to 9/30/2019.
US Bureau of Economic Analysis, as of 12/31/2024. Intellectual Property Products represent non-residential related investment. Equipment represents both residential and non-residential.
The Blackstone CEO survey referred to herein is a survey of a subset of portfolio company CEOs. For Q1’2025, the survey reflects responses from 92 Blackstone portfolio companies (56 U.S. CEOs) largely within Blackstone’s private equity and credit businesses (the “CEO Survey”). Note that survey composition varies from quarter to quarter. The CEO Survey was initiated on March 11, 2025, and closed March 24, 2025. The responding portfolio companies are not necessarily a representative sample of companies across Blackstone’s portfolio and the views expressed do not necessarily reflect the views of Blackstone. The views expressed reflect the responding CEOs’ views as of the date of their responses, and Blackstone does not undertake any responsibility to advise you of any changes in such views. References to “CEO” or “CEOs” herein refer to respondents to the Q1’2025 Blackstone CEO survey.
Portfolio company data reflects corporate private equity operating companies as of 3/31/2025. Excludes select public investments, select Energy investments, select FIG investments, certain new investments, investments where YoY growth rates are not comparable due to divestures and certain other companies for which timely forecasts are unavailable.
US Federal Reserve, as of 9/30/2024.
Blackstone Investment Strategy Calculations, Cambridge Associates and Bloomberg, as of June 30, 2023. Private Equity is measured using the Cambridge Associates US Private Equity Index. Russell 2000 performance is shown as Modified Public Market Equivalent (mPME) which is a public market equivalent methodology developed in-house by Cambridge Associates. The methodology provides a consistent means to affect a performance comparison between a private investment and public alternative. The relative performance is measured as a ratio of returns over 12 months rolling period. Grey shaded areas represent NBER defined recessions. We calculate the relative performance as a ratio and annualize it assuming continuous compounding. The table looks at the following periods: “Early 90s” recession figures are based on calculations from September 1989 to December 1991; “Tech Bubble” figures are based on calculations from March 2000 to September 2002; “Great Financial Crisis” figures are based on calculations from December 2006 to March 2010; “COVID-19” figures are based on calculations from December 2018 to March 2021.
S&P and NFI-ODCE Index, as of December 31, 2024. Covers annual total returns during S&P drawdowns since 1980 (1981, 1990, 2000, 2001, 2002, 2008, 2018 and 2022).  

Important Disclosures

This commentary does not constitute an offer to sell any securities or the solicitation of an offer to purchase any securities. This commentary discusses broad market, industry or sector trends, or other general economic, market or political conditions and has not been provided in a fiduciary capacity under ERISA and should not be construed as research, investment advice, or any investment recommendation. Past performance does not predict future returns.

The views expressed in this commentary are the personal views of the authors and do not necessarily reflect the views of Blackstone. The views expressed reflect the current views of the authors as of the date hereof, and neither the authors nor Blackstone undertake any responsibility to advise you of any changes in the views expressed herein.

Blackstone and others associated with it may have positions in and effect transactions in securities of companies mentioned or indirectly referenced in this commentary and may also perform or seek to perform services for those companies. Blackstone and others associated with it may also offer strategies to third parties for compensation within those asset classes mentioned or described in this commentary.
 
Investment concepts mentioned in this commentary may be unsuitable for investors depending on their specific investment objectives and financial position. Tax considerations, margin requirements, commissions and other transaction costs may significantly affect the economic consequences of any transaction concepts referenced in this commentary and should be reviewed carefully with one’s investment and tax advisors. All information in this commentary is believed to be reliable as of the date on which this commentary was issued and has been obtained from public sources believed to be reliable. No representation or warranty, either express or implied, is provided in relation to the accuracy or completeness of the information contained herein.