Trump’s tariffs, AI rivalry, and US earnings boom

Our Chief Investment Officer, Richard Flax, reviews a dynamic month for markets. The US macro outlook remains strong, while policy shifts and AI innovations from Deepseek bring new developments.

First, on tariffs. We’ve seen a lot of activity from the new administration in the US and that has included announcing tariffs on a number of trade partners. Mexico, Canada and China have all been targeted, and the President has threatened tariffs against the European Union in the near future. Equity markets initially fell in response to the news. After discussions between the various leaders, it seems that the US will delay implementing tariffs against Mexico and Canada, but will probably go ahead with a new 10% tariff on Chinese goods. China is set to retaliate. 

What does this all mean? We know that the President generally likes tariffs as a way to raise tax revenues and to negotiate with partners. The administration seems prepared to accept that higher tariffs could mean higher inflation and slower growth in the short term. There’s some debate about whether we’d see sustainably higher inflation. It could be that companies feel they can’t pass on tariffs to their customers in the form of higher prices. Our general view is that a round of higher tariffs would slow down growth and probably raise prices. And that could be tricky for risky assets.

There are a couple of points to make. First, investors have had some time to digest the prospect of higher tariffs. The president has been talking about them for some time. Second, it does look like he’s using tariffs as a negotiating tool. That could mean that the tariffs we do see are more targeted and so have less of an impact on the overall economy. 

January saw some interesting moves in the Artificial Intelligence Arena. A Chinese AI researcher, Deepseek, released a new model that performed very well against global (mostly US) peers. It was suggested that Deepseek had achieved these results using older and cheaper technology, and at a fraction of the cost, compared to US peers. That conclusion raised concerns about future demand for the newest and most expensive processing units, and raised questions about whether all the money that large tech companies are pouring into AI will generate the sort of returns they’re hoping for. Maybe AI will soon become a commodity that everyone has access to. These concerns prompted weakness in some large tech stocks, but most notably Nvidia. 

We think it’s too soon to say that the Deepseeks results are a real threat to the incumbent tech businesses. For now, we think demand for Nvidias products will remain strong. The large tech businesses will continue to invest to look for ways to make money out of AI services. Having cheaper alternatives could spur increasing overall investment in the space, improving adoption and innovation. At the same time, we remain aware that expectations for the large US tech space are still high – and we’ve looked to broaden our equity exposure.

Finally, we’re seeing US companies report their earnings for the last quarter of 2024. We won’t have all the results for another few weeks, but it looks like US companies ended 2024 in pretty good shape. Companies that had reported by the end of January (around 36% of the total) reported year on year profit growth of around 13%. If that’s maintained, it would be the fastest quarterly growth since the fourth quarter of 2021 – when US companies were coming out of COVID. As we’ve already said, expectations in the US are already high, but listed companies are generally performing well.

So, we’ve certainly seen a lot of activity from the new Trump administration, and that’s translated into some more uncertainty in markets. It’s something that we’ll continue to monitor in the coming weeks and months. But overall companies, particularly in the US, continue to have some helpful tailwinds as we move further into 2025, notably decent economic growth and lower interest rates.