Financial markets in 2025 have been heavily shaped by the ongoing narrative around tariffs. At their core, tariffs are simply taxes – and like any tax, they tend to dampen economic growth. Slower growth, in turn, is generally negative for risk assets such as equities.

To understand the broader impact of tariffs, it’s useful to take an historical perspective. Governments, across time and geography, have often impeded wealth creation, whether through excessive regulation, inflationary policies, costly wars, bloated bureaucracies, or burdensome taxes and tariffs.

While governments play a critical role in maintaining infrastructure, enforcing the rule of law, and providing public goods, the idea that they can create wealth is misguided. As most credible economists will agree, the best economic outcomes typically occur when governments facilitate rather than interfere with free markets.

A compelling example lies in US history: between 1900 and 1913, America prospered with zero income tax and tariffs averaging below 5 per cent. The real engine of rising living standards has always been innovation and technological advancement – not government intervention. From transportation and healthcare to microelectronics and semiconductors, it is innovation that has driven wealth creation and improved lives.

This context makes the Trump Administration’s tariff policies particularly concerning. What began as a belief that President Trump would champion pro-business policies – reducing regulation and allowing markets to operate freely – has given way to heavy-handed interventionism.

The administration's push to direct corporate decisions and erect trade barriers stands in stark contrast to the principles of free-market capitalism. While certain initiatives, such as attempts to shrink government waste and extend tax cuts, align more closely with a pro-growth agenda, they are outweighed by the economic drag created by tariffs.

The administration’s protectionist stance is not only out of step with market expectations but also contrary to the consensus among economists. A vast majority – more than 90 per cent – agree that tariffs do not improve US economic welfare.

The imposition of trade barriers and pressure on companies to restructure operations has introduced unnecessary uncertainty and contributed to declines in stock market valuations.

However, not all is bleak. At a time when government policy threatens to hinder growth, emerging technologies are providing a counterbalance. Advances in artificial intelligence, robotics, and high-performance computing are enabling greater efficiencies across the service economy. These technologies have arrived at a critical juncture, offering the potential to offset policy missteps with productivity gains.

In such an environment, investors should maintain a broadly diversified portfolio. Corporate leaders are increasingly holding larger reserves in lower-risk assets such as short-term bonds and money market instruments – a prudent strategy retail investors should consider emulating.

Yet, defence alone is not enough. A successful investment strategy requires both protection and growth potential. Diversification into some lower-risk, inflation-hedged securities offers stability, while exposure to innovative technology and consumer discretionary sectors can provide long-term upside. Companies with wide economic moats and strong market positions are well positioned to weather policy volatility and may benefit significantly if trade tensions ease.

Ultimately, while the tug-of-war between innovation and government intervention continues, history suggests that innovation tends to prevail. Investors who maintain discipline, balance risk, and position themselves to benefit from long-term technological trends are likely to be rewarded.

• Bryan Dooley, CFA, is the chief investment officer at LOM Asset Management Ltd in Bermuda. Please contact LOM at +1 441-292-5000 or visit www.lom.com for further information. This communication is for information purposes only. It is not intended as an offer or solicitation for the purchase or sale of any financial instrument, investment product or service. Readers should consult with their brokers if such information and or opinions would be in their best interest when making investment decisions. LOM is licensed to conduct investment business by the Bermuda Monetary Authority