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I normally try to keep my weekly notes brief as I assume we are all busy people and our attention spans are (unfortunately I think) getting shorter and shorter. This week though being brief will be a challenge. I can’t remember a week that has had so many different (and often opposing) themes going on at the same time.
For those interested, there are some charts at the bottom illustrating the themes I discuss here. The question for us is whether these opportunities are shorter term trades or longer term investment themes. If the latter, we want to make sure we have some meaningful exposure to them.
- Tariffs tariffs tariffs. There is of course the impact all the tariff headlines create on business investment and confidence. But there is also the mechanical impact increasing tariffs has on the economy and GDP. Goldman Sachs estimate the overall effective US tariff rate will rise from 2.5% to around 12.5% when everything they currently expect to take effect is in place. They project this will reduce 2025 growth by 0.8% and increase inflation by 0.4%. These are big numbers. And this of course ignores the impact on those countries (like Europe and China) on the other side of these tariff announcements.
- Even without tariffs we were starting to see a slowdown in the US. The Atlanta Fed GDPNow model is currently running at -2.4% for Q1(!) Part of this is their their estimate is adversely affected by the front running of imports ahead of potential tariffs. But even adjusted for this (and after a decent payrolls number on Friday) their estimate is 0.4% for Q1 (vs a number which has been consistently above 2% recently).
- Finally we are seeing some of the wind come out of the AI optimism bubble. In part this is because China’s Deepseek model showed there could be smarter and cheaper ways to build useful AI models. Nvidia has re-rated from almost 80 times earnings a year ago to 38 times today. A lot of US equity market leadership came from the US technology giants. Without this, investors are looking elsewhere for market beating returns. European banks are now ahead of the US Magnificent Seven stocks for the last 12 months.
- On this, I like the idea that Trump is so bad for Europe he is actually good for it (or MEGA as one market wag coined it). Friedrich Merz’s announcement of €500bn of infrastructure investment last week combined with a significant increase in German defence spending really does feel like another “whatever it takes” moment for Europe. European equities and bond yields (both up strongly for the year) are certainly trading like this change of approach is here to stay. Any peace deal in Ukraine would probably help here too.
- Finally, the technology optimism that swept through US markets in the last few years looks to have moved into China. Alibaba is up 66% year to date and Tencent is up 28%. These two technology driven stocks make up 27% of the MSCI China index. China’s Magnificent Two are showing returns can be made in technology and all things AI outside of the US.
Some charts illustrating these points are below. I think some of of the (dramatic) moves we have seen in the last few weeks are hot money investors (like hedge funds) rotating out of their structural winners of the last few years. These risk management driven moves can be fast and hard but when they are done they are done. For the relative out-performance of China and Europe to continue we will need to see companies in these markets continue to deliver some earnings growth investors. The good news is that these markets (and especially China) continue to trade relatively cheaply, so there is plenty of upside if they do.
US Growth slowdown: This chart is distorted by the pulling forward of imports (and especially gold) ahead of tariffs. But even after adjusting for the this the current Atlanta Fed estimate of 0.4% for Q1 is low:
US tech slowdown: Nvidia’s (trailing) price to earnings ratio has almost halved over the last year:
Resurgence of Europe: European banks (red line) have actually out-performed the US Magnificent Seven technology stocks (green line) over the last year, with most of the move happening in 2025:
Finally, investor positioning in China remains low. There is more upside here if Chinese stocks (and especially technology stocks) continue to deliver.
Chris Brown, CIO
cbrown@ipscap.com
The value of investments may fall as well as rise and you may not get back all capital invested. Past Performance is not a guide to future performance and should not be relied upon. Nothing in this market commentary should be read as or constitutes investment advice.
