The trade war is back and escalating fast.

After a period of relative calm, tensions have flared once again.

Just last week, President Trump announced that the European Union will face 50% tariffs across the board starting in June. Then, just a few days later, he had a call with the European Commission President and agreed to delay the 50% tariff until the 9th of July.

And it did not stop there.

He also announced that Apple (AAPL) would be imposed 25% tariffs on all the foreign-produced iPhones it sells in the United States, which seems to imply that all other electronics could also face similar high taxes.

I think that is bad news for the entire stock market, but especially for REITs, because they are so sensitive to interest rates these days.

Higher tariffs result in higher inflation, and higher inflation then results in higher interest rates and lower REIT share prices.

Just look at how REITs reacted on the day when Trump made those latest tariff announcements. REITs dropped by about 3% on average, even as the rest of the market barely moved:

So there is no need to sugar coat this: it is bad news for REIT investors.

President Trump appears to be more stubborn about the tariffs than many of us were hoping for, and it increases the risk that we will suffer higher inflation and interest rates for a while longer.

We need to accept this new reality and prepare for it.

But there is a silver lining in all of this.

The constant changing of rules is inevitably going to hurt the economy, because it makes it harder for companies to plan long-term investments.

This may sound like further bad news, but in the case of REITs, it is actually good news because a weakening economy should eventually result in lower interest rates.

If you don't know what the rules will be next week, you also cannot make any long-term decisions, such as planning for the construction of a new major manufacturing plant. Why would Apple build a new iPhone manufacturing plant in the US if the tariffs might be removed next week, or at the latest, when Trump leaves office?

Moreover, even with a 25% tariff, it is still cheaper to produce in India than in the United States, so this is unlikely to lead to the domestic manufacturing boom that the current administration is hoping for. Also, the current rules do not even make sense because they would put American companies like Apple at a disadvantage relative to other foreign companies like Samsung, which only faces a 10% tariff when exporting their phones from South Korea to the United States.

Such inconsistencies in policies should further disincentivize companies from making major investment decisions, as they indicate a lack of clear planning and long-term commitment.

Therefore, I continue to think that this trade war and the uncertainty that it creates will ultimately weaken the economy. As this happens, consumers will also start to fear for their jobs and cut down on spending, further weakening the economy.

Then, as the economy starts to deteriorate, consumers and companies further delay major purchases, expecting lower prices for things like homes and raw materials, which then pushes the economy into a self-reinforcing cycle that could land us in a recession.

We already had one negative GDP quarter, and with this much uncertainty, the odds of us facing a recession have grown very high.

According to JP Morgan (JPM), we have a 60% chance of facing a recession in 2025, and even higher by the end of 2026.

This explains why the debt markets continue to expect significant rate cuts in the 12 months, even despite the recent surge in long-term rates.

In fact, the odds of significant rate cuts have only grown after the recent tariff announcements. Now the market is putting the highest probability on 100 basis points worth of rate cuts by Summer 2026:

By then, the leadership of Jerome Powell will also have ended, and it seems likely that he will be replaced by a Trump loyalist who will give him the rate cuts that he has been asking for.

With things changing so much from one week to another, it may seem like an eternity to think so far out, but this has been our thesis all along.

Thesis: REITs are priced at decade-low valuations due to high interest rates, which resulted from the pandemic. But as the global economy gradually normalizes and inflationary pressures ease, interest rates are expected to decline, paving the way for a strong recovery in REIT valuations.

This thesis has faced many bumps along the way, with the biggest ones being russia's invasion of Ukraine accelerating inflation, and Trump's victory igniting new inflation fears.

But this thesis has still been playing out since mid-2023, already resulting in 30% upside on average, and many REITs like our once biggest holding, EPRT (EPRT), have surged by much more than that:

This trade war is yet another setback to our thesis, but it shouldn't derail the long-term thesis for a return to lower rates and higher REIT share prices.

An even bigger long-term deflationary force that we are just now starting to discuss is the AI revolution. It has the potential to bring in an "age of abundance" with far cheaper prices for most goods and services, and this would surely also lead to much lower real interest rates.

So what are the best REITs to buy in this environment?