Investing.com -- The market commotion triggered by U.S. President Donald Trump’s “Liberation Day” tariff announcement has subsided slightly over the past few sessions.

Economics research firm Capital Economics believes the worst of the turmoil has likely passed, although they see limited potential for a sustained market rebound.

The calming effect in the markets is attributed, in part, to the exemption of electronic goods from tariffs, alongside a 90-day pause in most "reciprocal tariffs," which has notably benefited tech stocks.

“​​That can partly explain why tech stocks, which were among the biggest losers in the immediate fallout, have outperformed over the past few days,” Capital Economics said in a note.

Still, U.S. equities have generally underperformed compared to other countries in April, particularly in dollar terms, reflecting the U.S. dollar’s significant drop since April 2.

Taking into account the ongoing uncertainty around U.S. policy, Capital Economics has outlined various trade war scenarios, with their base case predicting a 10% tariff imposition on all countries, except China, which they believe will negotiate the rollback of current tariffs.

In this scenario, the firm forecasts that U.S. economic activity will not decline enough to trigger a recession.

In that case, Capital Economics believes the S&P 500 would stabilize but not make significant further headway by the end of 2025.

“Our forecast is for the index to end the year around 5,500,” it noted.

The firm also anticipates that the recent headwinds in long-dated Treasury markets will likely ease over the coming weeks, potentially with intervention from the Federal Reserve if necessary.

However, Capital Economics predicts that the Federal Open Market Committee (FOMC) will maintain its policy rate until well into 2026, contrary to money market expectations of 80bp of rate cuts.

“That suggests that even if bond market dislocations ease, the 10-year US Treasury yield will end the year a bit higher than its current level of 4.40%,” the report says.

Meanwhile, the firm forecasts the U.S. dollar to see a slight recovery by year’s end, though not enough to offset losses since February, as interest rate differentials start to favor the currency.

Capital Economics notes that recent policy unpredictability has raised concerns over the dollar’s reserve currency status but adds that these fears may be overblown.

The macro research firm cautions that the range of potential outcomes has broadened, with risks tilted to the downside.

“Given that both U.S. equities and the dollar still look relatively over-valued on the longer-term basis, further U.S. policy uncertainty may reduce the appeal of U.S. assets further and lead to renewed drawdowns,” it concluded.