Weekly Investment Perspective

U.S. equity markets were down sharply in this week’s early trading, as are global stock markets, as President Trump imposed 25% tariffs on Canada and Mexico and a 10% tariff on top of existing Chinese tariffs. However, both Mexico and Canada tariffs are on hold for 30 days, pending in depth negotiations. China tariffs are moving forward.

Some still hope that the levies, which are expected to cover a third of American imports, or $1 trillion in goods a year, won’t last long. But business leaders, economists and investors are wary that President Trump’s open-ended goals mean they’ll be in force for a while, leading to a trade war that could materially weigh on the momentum of the American economy and deal a devastating blow to Canadian and Mexican economies. According to Oxford Economics, the tariffs, if maintained, are forecasted to shave 0.7% off of U.S. GDP in 2025 and could push the unemployment rate up from 4.1% to 4.5%. Meanwhile, the Canadian and Mexican economies are at much greater risk of falling into recession.

The countries have pledged retaliation, in what would be a quick escalation of a trade battle against three of America’s biggest trade partners. Trump’s executive order authorizing the tariffs allows Washington to ratchet up its levies if the targeted countries impose counter-tariffs. There are a lot of moving parts, but an early estimate from The Budget Lab at Yale University says that the tariffs will boost the average effective tariff rate in the US from 2.5% to 8.6-8.8%, the highest since 1946. The underlying dynamics encourage Federal Reserve officials to stay patiently on hold to assess the impact on prices.

Worries of an escalating trade war are adding fuel to near-term inflation expectations and lifting short-term interest rates as rate cut expectations are getting further dialed back. Beyond the short-term implications, as this episode appears to involve higher and broader tariffs than those implemented in 2018, the long-term growth impacts should be more substantial, providing downward pressure on yields at the long end of the curve.

The trade war headwinds threaten to throw sand in the gears of stock market momentum as U.S. equities closed out a choppy but overall positive month of January with the S&P 500 advancing nearly 3%. Last week’s headlines were dominated by the rise of Chinese artificial intelligence startup DeepSeek. The performance of the firm's low-cost language model came as a reality check for mega-cap U.S. firms that have poured billions into AI and forced traders to take another look at their extended valuations. The S&P 500 Information Technology sector was the only one of the 11 sectors to end in the red in January.

Separately, a hawkish hold on interest rates by the Federal Reserve also pressured sentiment. The central bank maintained its key policy rate after three straight rate cuts to end 2024. Fed chair Jerome Powell noted that inflationary risks had returned.

On a positive note, noisy headlines have overshadowed what has generally been a solid earnings season that showed corporate America closing out 2024 with positive momentum. With over 36% of its constituents’ results in the book, the S&P 500 is on track for 13% year-over-year earnings growth in the fourth quarter, which is the highest growth mark in three years, according to FactSet. Last week’s reports from tech heavyweights including Apple, Meta, Tesla, and Microsoft generally met high investor expectations, though Microsoft came under pressure for more modest forward growth guidance for its Azure cloud unit than analysts were projecting. The heavy flow of earnings reports will continue in the week ahead with over a quarter of S&P 500 index members set to report.

Investors will also have plenty of economic data to digest this week, with Friday’s jobs report being in the spotlight. The Job Openings and Labor Turnover Survey for December will provide another look at the employment situation. An update on the U.S. consumer sentiment will round out the week on Friday.