The US economy is currently experiencing robust growth, fueled by strong GDP numbers, significant investments in emerging technologies like AI, and increased defense spending. This positive economic picture could be disrupted by a resurgence of inflation, however, potentially triggered by a combination of factors, including coming tariffs. This presents a significant risk to financial markets, which may be unprepared for the consequences.

The current economic landscape is characterized by approximately 3% GDP growth. This is supported by high stock prices, substantial investments in AI data centers by major tech companies, and increased government spending on defense. However, the introduction of tariffs could act as a catalyst for inflation, further exacerbating the current economic climate.

The possibility of increased inflation raises the specter of interest rate hikes by the Federal Reserve. If inflation accelerates due to a strong economy and policies that contribute to inflationary pressures, the Fed might begin raising rates as early as its mid-year meeting. 

This action could significantly surprise markets that currently anticipate the Fed maintaining current rates or even implementing further reductions. The potential for multiple rate hikes in the latter part of the year is a distinct possibility if inflation takes hold.

Several factors are contributing to the potential for renewed inflation. Tariffs on steel and aluminum have already been implemented, and additional tariffs on a wider range of goods are being considered. These tariffs, while intended to protect domestic industries, can lead to increased costs for businesses, which may be passed on to consumers in the form of higher prices. Their impact on inflation is a subject of debate, with various estimates suggesting a range of potential increases in key inflation indicators. For example, some economists project that existing steel and aluminum tariffs alone could modestly increase a key inflation measure. Broader tariffs could lead to even greater increases.

The financial markets appear to be underestimating the risk of rate hikes. The potential impact of sustained tariffs on corporate earnings is a major concern. If tariffs are implemented, companies may face increased input costs, which could lead to lower margins. 

Alternatively, companies will pass these increased costs on to consumers, potentially leading to decreased sales volumes. Another possibility is that companies may attempt to negotiate lower prices with their suppliers to offset the impact of tariffs.

The lack of preparedness in the markets for potential rate hikes could lead to significant adjustments in profit estimates. If the US implements sustained tariffs, corporate earnings could be negatively impacted. This could force markets to revise their expectations and potentially lead to declines in stock prices. 

The combination of rising inflation and potential rate hikes presents a complex challenge for investors and businesses alike. Navigating this environment requires careful consideration and a steady hand.