Trade tariffs and the AI race keep dominating the market narrative

This note contains an overview of our market views, what we are watching, and our portfolio strategy. Any reference to portfolio positioning relates to our Flagship Solution. Clients with bespoke discretionary or advisory portfolios should consult their Client Advisor for the latest update on your portfolio.

Trade tariffs | How are economies and markets adjusting?

Last week was dominated by investors digesting the implications of President Trump imposing a 25% tariff on imports from Mexico and Canada, and 10% on China, plus a 25% tariff on steel and aluminium. Canada and Mexico vowed retaliation but then negotiated some measures leading to the temporary suspension of the US tariffs. At the same time, China sought legal action via the World Trade Organization (WTO) and announced some retaliatory tariffs too (though not so high as to trigger a further US response). The EU remains unaffected by broad-based tariffs for now, but we think they are likely.

Nearly half of US imports face higher costs, which may slow US growth and fuel inflation. However, a stronger dollar could mitigate the impact of higher import prices. Policy stimulus could also offset some of the negative effects as a significant fiscal boost could help sustain economic growth. For the rest of the world, tariffs are likely to have a more negative impact, including weak growth in the eurozone and the UK, which is why we expect the US economy to stay robust. In fixed-income markets, bond yields fell after pricing in weaker growth.

Our view is that tariffs could impact non-US equities and trigger bouts of volatility. So, we’re maintaining our overweight position in US equities. We’re also hedging downside risks in European markets through an overweight in short-dated bonds and an ‘insurance’ instrument that appreciates when European equities fall, cushioning portfolios in case of unforeseen drawdowns.

That said, equity markets, after an initial negative reaction, have shown significant resilience. Most equity markets across the US, Europe and the emerging world posted weekly gains, encouraged by the temporary suspension of some of the US tariffs and the limited escalation out of China. So far this year, we’ve seen a change in leadership in equities, with Europe outperforming the US, which has been hit by the volatility in tech stocks (see below). Despite that volatility, we continue to like tech stocks due to the AI narrative and solid earnings, and they are a core position in our strategic asset allocation. However, we’re also invested in an equal-weighted US equity index, which provides greater relative exposure to more attractively valued sectors that could benefit from US fiscal stimulus and deregulation, such as industrials and financials. It’s this equal-weighted index that brings our tactical US equity position to overweight.

While we currently prefer US equities, we still hold a neutral allocation to European equities. We don’t see a reason for being overly negative on Europe: absolute valuations are average and they’re attractive vs the US. We also saw, as explained above, that Europe has the potential to perform or even outperform when tech stocks are under pressure, acting as a useful diversifier and reducing concentration risks in portfolios.

AI | Will we see continued volatility in tech stocks?

AI hardware names such as NVIDIA and ASML have seen short-term volatility and price declines recently. However, the efficiency gains demonstrated by China’s DeepSeek model, if accurate, could spur greater AI adoption in the long term (the so-called Jevons Paradox), boosting demand for infrastructure. US tech giants like Microsoft, Alphabet and Amazon remain well-positioned due to unmatched distribution capabilities despite potential pricing pressures from Chinese competition.

For now, we think volatility in AI-related stocks and equity indices will likely persist in the short term. This is one reason why we hold an ‘insurance’ instrument to mitigate the impact of hypothetical drawdowns of US equities. Over the long term, we think AI will remain a structural driver of growth as tech giants continue to invest in the sector.

This week | Inflation likely to keep the Fed on hold

Apart from the ongoing busy news cycle from the White House and the progressing Q4 earnings season, our focus this week is on the US inflation report for December (Wednesday), which markets expect to stabilise around 3%. This remains above the US Federal Reserve’s target, reducing the likelihood of immediate pressure on the central bank to resume rate cuts following its pause in January. On Thursday, producer price data will be released, followed by US retail sales and industrial production figures for January on Friday. Industrial production in the eurozone should be negative (Thursday), painting a weak economy. UK Gross Domestic Product (GDP) growth out the same day, while a backward-looking indicator, is also likely to be close to zero.