Weekly market commentary

We have argued for a few years that mega forces, like geopolitical fragmentation, are transforming the world. U.S. trade policy is adding to this transformation. This isn’t a business cycle, but a long-term structural shift. It raises big questions about the trajectory for global markets, making long-term expectations more sensitive to short-term news. We focus on themes that can drive returns over broad asset classes. We see the AI mega force driving returns over time, mostly in the U.S.

Deeply intertwined
China share of U.S. imports and their share of U.S. production, 2024

U.S. stocks rose 14% from their April lows last week as the U.S. showed signs it may soften its trade stance on China – more evidence economic rules can limit what’s possible in trade negotiations, we think. We track these rules instead of trying to predict policy shifts. Decoupling from China, bringing production to the U.S., and supply chain diversification are U.S. strategic priorities. Yet global supply chains can’t be rewired quickly without major disruption – an economic rule. China is a key supplier of critical minerals, semiconductors, industrial parts and auto parts, U.S. Census data show. How intertwined are the economies? U.S. imports of computer and electronics are bigger than total U.S. production of these items. See the chart. Tariffs could up costs, cut access to key inputs and halt production. A cooling U.S. stance would point to growing awareness of the risks tied to a supply shock.

Big questions remain about the damage tariffs could cause, even if the binding effect of economic rules means it will take time to uproot current trade relationships. We see more cause for concern on the supply side, as disruptions could lower productivity and the growth trajectory – like the pandemic shock. Long-term capital spending could also be hurt by uncertainty as happened after the 2016 Brexit vote. To gauge how long the damage could last, we’re monitoring indicators like capital spending plans, consumer confidence, high-frequency data on port traffic and early reads on trade flows.

What we're eyeing

We look for signs of pressure on companies in earnings reports: think mentions of changes in supply chains, the ability to pass costs to consumers and consumer demand. For the “magnificent seven” of mostly big tech companies, we’re eyeing any changes in their plans for artificial intelligence (AI) capital spending given more efficient AI models and exposure to the trade war. In consumer goods, we are tracking guidance on any impacts from weakening consumer sentiment and potentially higher prices. Analysts have cut forecasts for 2025 S&P 500 earnings growth to about 9% from 14% in January, LSEG data show. Prolonged uncertainty could spur further cuts. The consumer discretionary and industrials sectors have suffered sharp declines for 2025 forecasts given their reliance on foreign revenues and global supply chains.

How to invest amid policy uncertainty? We think this calls for more dynamic portfolios. Economic rules help gauge where trade negotiations could settle, so we see uncertainty easing over six to 12 months. We stay positive on DM stocks but expect ongoing, near-term volatility. Our expectation for clarity and support from mega forces is why we favor some alterative assets on a strategic horizon of five years and longer. Policy uncertainty has caused dealmaking to slow as investors struggle to value assets near term. We see dealmaking resuming as clarity returns. Yet private markets are complex and aren’t suitable for all investors. We also like publicly listed real estate and infrastructure as they’ve diversified portfolios, outperforming U.S. large cap stocks since their February peak, Bloomberg data show. Plus, they stand to benefit from a host of mega forces.

Our bottom line

Economic rules can put bounds on the maximal stance in trade negotiations. We stay positive on DM stocks but expect ongoing, near-term volatility. We also favor publicly listed alternative assets as portfolio diversifiers.

Market backdrop

U.S. stocks jumped more than 4% last week and are now up 14% from a 14-month low hit earlier in the month, driven by tech. Yet uncertainty over tariffs has prompted more companies to withdraw or soften earnings guidance. Europe’s Stoxx 600 rose nearly 3% last week and is up roughly 10% from its April low. U.S. 10-year yields fell to near 4.25% but are still up about 40 basis points from their April low. The U.S. dollar inched up from three-year lows against major currencies.

We are closely monitoring the U.S. payrolls report out this week. The report could show early signs of changes in business confidence and hiring decisions even as the U.S. has paused tariffs announced on April 2 for most countries for 90 days. Recently strong jobs data had shown still elevated wage pressures. The pace of job gains was also not consistent with core inflation falling back near the Federal Reserve’s 2% target – even before factoring in the inflationary impact of tariffs.