The probability of a U.S. recession this year has surged to 90%, according to Torsten Sløk, chief economist at Apollo Global Management. His outlook centers on the economic burden tariffs are placing on small businesses—a cornerstone of the domestic economy.
These enterprises are particularly vulnerable to sudden shifts in trade policy, and the current wave of tariffs introduced by the Trump administration threatens to deliver a destabilizing blow at a moment when many are already managing thin margins and limited access to capital.
Sløk estimates that tariffs could subtract as much as four percentage points from U.S. GDP, based on the precedent set by the 2018 tariffs on China, which led to a marked decline in economic momentum.
While tariffs are often positioned as a strategic tool for renegotiating trade terms, their unintended consequences on the domestic supply chain, especially among smaller firms, may outweigh any geopolitical gains.
He frames the current environment as entering what he calls a “Voluntary Trade Reset Recession.” According to his analysis, the implementation of the tariffs has been disorderly and disruptive, especially for businesses that have long depended on predictable cost structures and uninterrupted global sourcing. These smaller firms often lack the liquidity and working capital required to absorb new costs.
As a result, Sløk warns of worsening supply chain snarls, canceled purchase orders, and widespread financial distress—potentially culminating in a wave of bankruptcies among long-standing, family-owned businesses.
This potential damage carries serious macroeconomic implications. Small businesses are not only a major employer but also a substantial engine of capital formation and GDP contribution.
Apollo’s data show that as of early 2024, businesses with fewer than 500 employees were responsible for approximately 110 million jobs—more than four times the workforce employed by larger firms.
On the capital investment front, small firms also punch above their weight. Private fixed investment in the U.S. totaled $4.2 trillion in the first quarter of 2024, a figure that dwarfs the roughly $1 trillion in capital expenditures logged by the S&P 500 over the same period.
In terms of GDP contribution, the most recent comprehensive data show that small businesses accounted for $5.9 trillion in output in 2014, equal to 44% of total GDP. These numbers underscore the systemic risk posed by economic policies that disproportionately strain smaller enterprises.
Wealth advisors and RIAs should pay close attention to how these macro-level pressures could reverberate across client portfolios, particularly for those with business-owner clients or exposure to small-cap equities.
If small businesses begin to retrench en masse—whether through layoffs, cutbacks in investment, or outright closures—the cascading effects on employment, local economies, and broader consumption patterns could accelerate recessionary dynamics.
The challenges small businesses face today are compounded by inflationary headwinds. Tariffs not only increase input costs but also contribute to downstream price pressures on consumers. According to a March survey by Vistage Worldwide, conducted for the Wall Street Journal, nearly two-thirds of small businesses expected to be negatively affected by trade-related developments, including tariffs.
For firms that rely on imported components or goods, the added cost is immediate and non-negotiable. And while large corporations often have the flexibility to shift production overseas or hedge against currency risk, small businesses operate with far less strategic optionality.
Sløk warns that logistics and operational disruptions could intensify. He notes that many shipments may remain stranded offshore, awaiting customs clearance due to tariff disputes or cost uncertainty. In some cases, suppliers are declining to fulfill orders from U.S. businesses until price structures are renegotiated.
This could lead to inventory shortfalls, particularly in sectors such as retail, manufacturing, and construction, where just-in-time inventory management is common and where delays can halt entire production cycles.
The potential fallout is not confined to Main Street. Investors and advisors should consider the knock-on effects across the financial system. Credit conditions for small businesses, already tightening in the wake of recent interest rate hikes, may deteriorate further if default risks spike.
Community banks and regional lenders, which provide a substantial share of small business loans, could face elevated delinquency rates. Advisors with exposure to financials, particularly those concentrated in local lending institutions, should reevaluate credit risk assumptions under this scenario.
Further, public market exposure to small- and micro-cap equities may be especially vulnerable. Many small-cap companies are highly sensitive to input cost fluctuations and consumer demand shifts—both of which are influenced by tariffs.
An extended period of volatility or policy uncertainty could deter institutional capital from the sector, leading to diminished valuations and lower trading volumes. For client portfolios with an overweight allocation to small-cap growth strategies, a recalibration may be warranted.
For business-owner clients, especially those in import-dependent sectors such as manufacturing, technology hardware, consumer goods, or apparel, advisors should initiate conversations around risk mitigation.
Exploring domestic sourcing alternatives, renegotiating supplier contracts, and strengthening liquidity positions could help preserve operational resilience. Additionally, RIAs can play a vital role in guiding clients through potential succession planning scenarios, particularly if business valuations begin to deteriorate under mounting pressure from tariffs and slowing growth.
Sløk’s warning also arrives at a politically complex time. The rhetoric around trade policy has increasingly taken on a protectionist tone, but the economic mechanics at play may prove far less advantageous than campaign narratives suggest.
While the intent may be to protect American industry, the blunt application of tariffs without corresponding support measures—such as working capital relief or strategic subsidies—can distort markets and undermine domestic firms.
Wealth advisors should remain alert to how evolving trade policy intersects with fiscal policy, consumer sentiment, and monetary dynamics. The convergence of these forces—at a time when the Federal Reserve remains cautious about declaring victory over inflation—could amplify downside risk across asset classes.
As Apollo’s projections show, a four-percentage-point drag on GDP would be enough to erase much of the economy’s post-pandemic growth momentum and force a reset of earnings expectations across industries.
Beyond immediate recession risk, there are long-term implications for capital formation and entrepreneurship. Persistent uncertainty in the trade environment may discourage business formation, delay hiring, and reduce capital expenditures among high-growth startups and mid-market firms alike.
That chilling effect could narrow the opportunity set for investors looking for innovation-driven growth and shift capital flows into defensive, low-volatility sectors.
In summary, Sløk’s analysis represents a stark warning that the costs of the current tariff structure may significantly outweigh its intended benefits. Advisors should be proactive in stress-testing portfolio allocations, reviewing liquidity positions, and helping clients build contingency plans that account for escalating economic uncertainty.
For clients with concentrated exposure to small businesses—whether as owners, lenders, or investors—the months ahead may require both financial flexibility and strategic foresight.
