Market commentary: 1st April to 30th June 2025

TARIFFS CONTINUED AD NAUSEAM

Much as an ageing heavyweight boxer loses speed and power after the early rounds, Trump’s war against global trade norms is slowing down. At the start of the quarter (“Liberation day” was 2nd April), we had a flurry of announcements on tariffs – threats, announcements, retractions, penguins, delays – that caused international uncertainty. Markets responded as markets do to uncertainty – they fell. We took advantage of this, buying US equities on the morning of 7th. Our rationale was that “while his [Trump’s] ego and self-regard are colossal, he does not operate in a total vacuum. The damage to sentiment and markets will hurt. He will lose popularity and the Republican party will suffer. It seems more plausible that this is closer to peak disruption than it is to Trump deciding to escalate. It is also more in keeping with his style – threatening something drastic, securing modest concessions, claiming victory.” While the rapid pace of the tariff dance may have cooled, the consequences linger, and even slowing boxers can deliver a telling punch. We still have little certainty over the final end point of tariffs other than some limited headline numbers announced, the narrow UK “trade deal” for example.  

This also doesn’t resolve what happens after a deal. A 40% tariff on Chinese manufactured phones seems clear. But what happens if the phone is assembled in Taiwan? How much assembly can be done in China before the phone is defined as Chinese? Who polices this? What is the effect if that phone uses Chinese parts and intellectual property (IP). Or US parts and IP? Or EU parts and IP that have different tariffs again? This is exactly the sort of technical detail that Trump despises and China revels in exploiting. If he feels the protracted negotiations are going on too long, or feels the US is conceding too much then the boxer may take another big swing and concuss markets back into confusion.  

The tariff and retaliation situation is far from resolved. Even if it were resolved and the 16th June tariffs persist in perpetuity, it would be hard enough to model and understand the repercussions. However, the policy confusion and capricious nature of the tariffs impede any such endeavours. What is clear is that Trump wants the US to be less dependent on China for trade in general and certain products in particular. He also sees much of the rest of international trade as a loss for the US, or at least a negative.

The US are also not the only brawlers in the ring. China has started to and will seek to extend repairing their export deficit by diverting their attention to the EU. The economic and political cost of allowing Chinese exports to surge in Europe will prove hard to manage. The leadership of the EU may struggle philosophically with the notion of erecting barriers like the US, but denying democracy could see building tensions. This is fertile ground for more “exits” from the EU despite the poor execution of Brexit.

THE CONSEQUENCES OF UNCERTAINTY

We closed the trade we initiated on 7th April on 13th May after the S&P had risen by 18% (S&P 4982 at the open on 8th April, 5892 at the open on 14th May – source: Bloomberg) – the actual profit depends on the precise time the trade was undertaken for each client as there was significant volatility that morning. Subsequently we further sold down US equities. Our shifting of the dial is now very much towards caution again. We are seeing growing evidence of a slowdown in the US economy and additional evidence that the rate of recent growth was less organic than previously considered. 

Over the last quarter we have seen a material reduction in companies providing forward guidance in the US – this is the practise of companies guiding markets and investors towards their expectation of future profitability. Markets punish companies that fail to meet performance expectations and so companies have chosen to not provide it in the face of the uncertainty. However, this withdrawal is hardly neutral – if the volatility had caused rapidly growing sales, we would have heard about that at great speed. Our interpretation of withdrawal of guidance is that sales and profit expectations are lagging expectations and the companies are hoping that this lag will be a temporary measure. This is unlikely. For those companies most exposed to tariffs you have two ways of dealing with them: you can absorb them, leave your prices as they are and accept lower profits, or you can pass them on to your customers, raising prices and protecting profits but at the risk of reducing revenues and with the certainty of causing inflation. Obviously companies can elect a blend of the two, but both are negative for US growth. 

We have previously explored the impact of higher government spending in the context that whoever won the US election the direction of the US budget deficit was northwards. A significant proportion of the US GDP growth in 2024 flowed from deficit spending (estimates of 1-2% of GDP growth – source FT). Trump’s “big, beautiful” budget has certainly maintained and even accelerated the pace of deficit spending. 

On 3rd May Warren Buffett said: “We’re operating at a fiscal deficit now that is unsustainable over a very long period of time. We don’t know whether that means two years or 20 years, because there’s never been a country like the United States. But you know, this is something that can’t go on forever…and it has the aspect to it that it gets uncontrollable at a certain point.” 

This is a dangerous support for US equity markets. Debt is not free, and US interest rates have been rising. 

Another form of “inorganic” or at least temporary growth to US GDP comes from the intense recent corporate investment in AI. It is hard to clearly define the impact of this investment on US growth due to elements of it that are potentially in tension with one another. Firstly, it has been estimated that the surge in Nvidia (the largest producer of the advanced AI chips used by companies to make AI models) profitability and related economic activity has increased US GDP by over 1% in the last twelve months (source: Bloomberg). The increase in value of Nvidia as a company has also added another 1.5% (source: Bloomberg) due to “the wealth effect”. This is the phenomenon whereby investors feel wealthier and (and indeed are) when the share prices of companies they own increases and therefore spend more. The total price of Nvidia shares in issue has risen from $323bn at the beginning of 2021 to over $4tn (trillion) today (source: Bloomberg). This market cap is the highest any company has ever achieved.

It is worth noting that, if this surge in spending is in any way wasteful, then there should be a counterbalancing of Nvidia’s share price rises with corresponding falls in the share prices of its customers. If the high levels of investment do not deliver economic value then Nvidia’s customers share prices should fall to reflect this value destruction, and in due course we would expect to see Nvidia’s share price fall to reflect the resultant lower demand for its products. This has, so far, not happened – both Nvidia and its customers’ share prices continue to rise. For this to make sense, the required productivity leaps from the investment in AI should be clearly evident. They are however not evident.

WITHER THE S&P

It is hard to justify the S&P standing at all-time highs in the face of these significant challenges to US GDP growth. You would have to assume that US deficit spending can expand at an increased pace with no consequence to the interest costs, you also have to assume that the consequences of tariffs on US profitability are immaterial, and finally that the recent boom on AI spending is both productive and will be sustained. 

This rosy perspective also allows no consequence from the escalation of conflict between Israel (and the US) and Iran. The oil price went from $67 a barrel to $78 a barrel before falling back to the $67 level in a little over one month (source: Bloomberg). It looks like oil traders believe the Strait of Hormuz will not be mined or impeded and will remain open. They may be right, but the risk of them being wrong is obviously higher.

 We entered 2025 with the following as our base position: 

• Inflation is now mostly controlled, if sticky.

• Interest rates look to have peaked and should slowly decline.

• The US economy faces some headwinds but will likely lead the G7 in terms of GDP growth.

• The UK and EU may avoid recession but will struggle to grow for structural and self-imposed reasons (climate change/net zero policies driving energy costs higher, high tax/low growth policy decisions). 

• Gold and silver should continue to deliver strong returns after achieving all-time highs in 2024: they have been a good hedge against political risk and inflation. 

• Our focus on short duration sovereign debt assets has protected our clients from falling prices and we have been puritan in our approach: minimising counterparty and duration risk. The potential rewards for accepting these risks have been (and remain) insufficient to justify them.          

 What is in front of us today is a temporary reduction in the Trump tariff psychodrama, which markets responded to with glee. Our concerns are that Trump is highly likely to roll the dice again on tariffs, especially in the face of sticky negotiations; that the recent psychodrama has undermined growth; and that this will become evident in the coming quarters. These positions are not significantly controversial but they absolutely conflict with the current level of US equities. 

The only major modification to the start of 2025 perspective is a lowering of US growth expectations. We are now underweight US equity and this position is likely to be maintained and extended.