How Investors Can Navigate Higher-for-Longer Rates Amid Uncertainty

During a 2025 that's been punctuated by uncertainty, the last thing US investors will have wanted to hear is that expectations for further Federal Reserve interest rate cuts are balanced on a knife’s edge. 

After putting the odds of a June rate cut at ‘50/50', economist Jon Faust has suggested that a flare-up of conflict in the Middle East could cloud the Fed's outlook for the remainder of the year. 

Given that the Federal Reserve has already adopted a cautious approach towards rate cuts in the wake of President Trump's bold tariff-focused strategies on trade, the boiling over of tensions in the Middle East has pointed to the prospect of paused rates until December. 

Israel's decision to launch strikes on Iran on June 13, 2025, kicked off a series of attacks that saw oil futures climb 10% in a matter of hours. 

Such volatility has historically been challenging for the US economy, with most recessions experienced by the United States coming in the wake of oil price spikes. However, with the commodity trading at multi-year lows recently, there's likely to be more wiggle room this time around. 

For the Fed, however, the prospect of intensifying conflict in the Middle East is likely to be a major cause for caution. But what can investors do about higher-for-longer interest rate environments? 

Tariff Jitters Weigh Heavy

The Federal Reserve is competing with a cocktail of geopolitical uncertainty that has further complicated the outlook for the United States at a time when tariffs have spooked markets. 

Consumer sentiment had dropped 8.4% in April as Trump announced his reciprocal tariffs before posting their first rise in 2025, climbing 16% from 52.2 to 60.5, according to the University of Michigan's consumer sentiment report. 

While this indicates that consumers have begun to recapture some confidence amid the 90-day delays to Trump's tariffs, May's figures remain 20% lower compared to December 2024 and suggest that more work needs to be done to revive spending power in the months ahead. 

Although weaker consumer sentiment is usually a strong indicator for rate cuts, tariffs are inflationary by nature due to higher import costs being passed on to the consumer. With annualized inflation in the US ticking higher to 2.4% in May, markets may react to a fresh tussle to keep prices stable. 

Investing Amid Uncertainty

For investors in US stocks and shares, there are many different forces at play that can impact portfolios alongside static interest rates. 

Uncertainty in the Middle East, as well as ongoing tariff challenges, have coincided with growing competition for the brightest US tech firms in the form of Chinese innovation. 

The launch of China's major entry into the AI landscape, DeepSeek, saw the Nasdaq and S&P 500 fall 3% and 1.5%, respectively. More recently, the rise of Chinese biotech firms has seen the Hang Seng Biotech Index surge 60% in 2025. 

Given that many of Wall Street's FAANG old guard have long specified desires to turn their respective hands to biotech, there's a growing threat that Chinese innovators could challenge the dominance of US blue-chip firms. 

This can make the investment landscape more complex for investors looking for value in a higher-for-longer environment. 

We may see more financial stocks benefit from wider interest rate spreads, while classic hedges like utilities stocks could continue to hold value for investors wary of the clouded interest outlook. 

Purchasing stocks of major consumers of raw materials could hold additional value as Trump's tariffs contribute to the scarcity of some goods. 

With the price of raw materials generally remaining stable or declining during higher-for-longer environments, companies that stock them could expand their profit margins as acquisition costs drop. This makes the stocks a fairly strong bet against higher inflation, should tariffs cause prices to rise elsewhere. 

Maintaining a Long-Term Outlook

It's essential that investors remain focused on a long-term outlook for their portfolios as uncertainty continues to cloud the Fed's strategy on interest rates. 

The shock of the flare-up of conflict in the Middle East may have caused a downturn in the S&P 500, but the index rebounded more than 1% in the days that followed to return to generating a profit since the beginning of 2025. 

Given the disruption that's impacted US markets since the beginning of the year, the S&P 500's resilience shows that it's worth investors maintaining a level-headed and patient approach to their portfolios. 

The growth of US markets despite factors like tariffs, geopolitical conflicts, competition from China, and the prospect of higher inflation ahead shows that there are plenty of opportunities for investors who are willing to take on more risks in their portfolios. 

Finding the right balance between risk and opportunity could make 2025 a successful year for investors in the United States, but maintaining a long-term outlook is likely to help most navigate this period of uncertainty. 

Disclosure: On the date of publication, Dmytro Spilka did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer. Dmytro Spilka does not intend to make a trade in any of the securities mentioned above in the next 72 hours.