Introduction
When we wrote the 2025 Market Outlook, we were optimistic for positive market performance in 2025 – corporate earnings growth, continuing US corporate and foreign direct investment, strong consumer spending, low unemployment, and moderating inflation had the economy well-positioned for continued gains. We still believe in the long-term value of investing in financial markets, but tariffs have thrown a serious wrench into near-term growth and have created a frustrating market environment over the past few months. In this market update, we hope to shed light on market movements year-to-date and how we are positioning portfolios to best prepare for a variety of outcomes. We will cover:
- Tariff Turmoil – Our outlook for tariffs and their economic impact
- Trump 2.0 – The Trump administration’s plans and the impact on markets
- The Federal Reserve – Taking the wait-and-see approach to monetary policy
- DeepSeek and AI – How artificial intelligence developments are impacting stock market investment
- The Market Correction – What’s happening and how do we position from here
Tariff Turmoil – Raining on the Parade in Financial Markets
There is no doubt that tariffs are the driving force behind recent market weakness. We intentionally delayed the release of this quarterly update to ensure Trump’s April 2nd tariff announcement day was in the rearview before we could properly assess longer-term tariff impacts. Even so, tariff policy and the market’s perception of tariff impacts are in dramatic flux. Therefore, we are going to give our best assessment of the tariff environment at the time of writing and release additional notes moving forward according to how the macro environment changes.
What Has Been Implemented?
Tariffs announced on April 2nd were far more widespread and severe than many economists and market analysts anticipated. A synopsis of the tariff proposals follows:
- 10% Baseline Tariff: Effective April 5, 2025, a 10% tariff applies to all imports globally.
- “Reciprocal” Tariffs: Higher tariffs are applied to countries with substantial trade deficits with the U.S. or those imposing high barriers on American goods. These rates include:
- China: 34% (in addition to the previously announced 20% tariff)
- European Union: 20%
- Other countries face rates ranging from 11% to 50%:
- Canada and Mexico “Fentanyl Tariffs”:
- A 25% tariff on most goods was introduced, though exemptions apply to USMCA-compliant products.
- 10% Tariff on Canadian energy and potash imports
- Trump has stated that these tariffs are largely tied to border security and reducing fentanyl flow into the U.S. Fentanyl seizures at the border have reduced dramatically, so it would be positive to see these tariffs reduced soon
- Sector-Specific Tariffs
- Steel and Aluminum: A global tariff of 25% was reinstated in March 2025 without exemptions
- Automobiles: A 25% tariff on foreign-made vehicles
- Notable Exclusions:
- Copper, pharmaceuticals, semiconductors, lumber, critical minerals, and energy were excluded from reciprocal tariffs so far as the administration evaluates tariffs on those goods.
How Were Reciprocal Tariffs Calculated?
Most analysts expected “reciprocal” tariffs to be implemented on an industry-by-industry basis, based on the rates other countries charge our industries. In reality, country-wide tariffs were proposed via a simplistic formula based primarily on trade deficit figures. (i.e. If we buy $1000 worth of your goods, but you only buy $200 of our goods, then you have a ($1000-$200)/$1200 = 75% “tariff” on our goods). A full explanation of the tariff calculation can be found HERE.
We, along with most market analysts, don’t believe this method of calculating trade “unfairness” is productive or realistic. There’s simply no way that a country like Vietnam will ever be able to purchase the same dollar value of goods from the U.S. as we do from them. This will almost certainly need to change, which brings us to the economic impact of implementing tariffs.
Economic Impact
Increased Prices – The most obvious impact of tariff implementation comes in the form of increased costs for U.S. businesses and consumers. At the end of the day, tariffs are essentially a tax on consumers. Foreign countries and our trading partners can only absorb a certain amount of the tariff cost. Companies will have to increase prices to compensate, and that will impact the U.S. consumer.
Slower Business Activity – As companies evaluate how to reorganize supply chains, it is likely that investment activity slows. Tariff policy remains a moving target, and companies are caught like deer in the headlights. Depending on how long tariffs remain in place and how severe the tariff “endgame” is, we may eventually see some companies relocate supply chains domestically or to countries without tariff barriers.
Dollar Devaluation – Limiting trade reduces the demand for U.S. dollars. This is most likely to lead to U.S. dollar weakness and relatively more expensive goods internationally for U.S. consumers. Global assets are likely to become relatively more expensive, but this will also make U.S. goods relatively cheaper for foreign countries, possibly boosting export activity.
In total, the economic impact of tariffs is net negative. The severity of downside impacts will depend heavily on the duration of tariff implementation and the severity of any tariffs that stay in place.
Where We Go from Here
As proposed at the time of writing, current tariffs are simply untenable from an economic perspective. If implemented for more than a short period, these tariffs will increase prices, reduce economic activity, restrict trade, and if held for too long, will ultimately lead to a U.S. recession (or possibly a global one). For this reason, we don’t believe the tariffs will remain in place as proposed. The impact on political constituents is too great, and if Trump doesn’t make the move to negotiate quickly and remove tariff barriers, Congress will eventually have to act. Our hope is that negotiations will be swift and lenient, enabling us to arrive at a global system of even freer trade.
Ultimately, free trade is a very good thing for the global economy, and the U.S. shouldn’t have a problem with trade deficits when it comes to goods. The fact of the matter is that the U.S. exports technology, software, financial services, and consulting expertise to the rest of the world. Just because these can’t be physically touched and aren’t measured in the trade balance doesn’t mean they shouldn’t be considered when examining the global trade system. While we agree that a fairer playing field in industries like auto manufacturing is something that should be negotiated, we don’t believe goods trade needs to be “balanced” to be a net positive for the United States.
When it comes to portfolio positioning, we were already tilting conservatively heading into tariff decisions, but if it appears tariffs will stay in place and inflict significant economic harm, we will certainly raise larger cash positions. We hope negotiations ensue and the worst is avoided, but hope is also not an investment strategy. If we believe tariffs will stay in place and create economic hardship, we’ll pivot to avoid what we believe could be a crippled economy for some time.
Trump 2.0 – Moving Fast and Breaking Things
Beyond tariff implementation, the Trump administration has been highly active in its first days in office, unafraid to drive policy change even if it means ruffling feathers and shifting strategy along the way. In our 2025 outlook, we discussed expectations for the Trump administration; here, we’ll focus on what has already been instituted, namely, government efficiency initiatives and budget cuts.
The Department of Government Efficiency (DOGE)
Besides tax policy, perhaps the most visible— and hotly debated —initiative in the Trump 2.0 administration is Elon Musk’s DOGE and the promise of government budget cuts through the termination of waste, fraud, and abuse. The DOGE team has already cut many government expenditures, aiming to create great efficiency within the federal government. Rather than opining on the merits of individual programs being slashed, we will note the economic and market impact of budget cuts:
The Good
The Federal debt and annual budget deficit are unsustainable at current levels. To address this issue, the government will need to either: (1) increase revenue through higher receipts, or (2) cut budgetary expenditures to balance spending. The DOGE efforts are clearly aimed at the latter, and while the full extent of what can be cut without impacting government effectiveness is yet to be seen, the elimination of waste is a positive step. A more balanced fiscal picture will help keep long-term bond yields lower, increase confidence in the US dollar, and ensure the United States remains the driver of international financial markets.
The Bad
While the elimination of government waste is a positive, creating efficiencies and cutting costs does mean fewer dollars are flowing through the broader economy. Government spending contributes to GDP growth, even if spent inefficiently, so a pullback in government spending may result in a short-term reduction in GDP. While efficiencies are built for the long term, GDP and employment may experience a short-term decline as private industry fills the gap.
The Federal Reserve – Maintaining the Status Quo
As we mentioned in the 2025 Outlook (HERE), the markets have been Fed-driven for the past few years, and as we predicted, the Fed has become a less significant market driver in 2025. Jerome Powell has continued to reiterate the Fed’s data-dependent approach and willingness to keep rates elevated until the data improves further. The Fed’s most recent “dot plot” shows that Fed officials expect two 25-basis-point interest rate cuts in both 2025 and 2026, but this is largely contingent upon economic indicators. SEE FED PODCAST EPISODE – To be uploaded on 4/7
When examining the economy, the Fed focuses on two key areas: Inflation and Employment. Inflation has remained subdued so far in 2025, but static enough that Fed Funds Rate expectations haven’t shifted dramatically. The labor market has also stayed fairly stable, with low unemployment but also a relatively low number of jobs being added. In our view, changes in inflation could prompt the Fed to either increase or decrease rates, while only a deterioration in the job market could prompt them to cut. A tighter labor market could give the Fed confidence to hike rates given an uptick in inflation, but would not, by itself, prompt the Fed to hike rates.
The most important Fed decision of the year was its move to reduce the runoff of the Fed’s balance sheet. During COVID, the Federal Reserve bought trillions of dollars of US Treasury securities and mortgage-backed securities (MBS). This was achieved through a policy known as Quantitative Easing (or QE for short), which gained popularity during the Great Financial Crisis. When the Fed went to hike rates, they also reversed the QE process by letting these securities mature, or “roll off” of the balance sheet in a process known as QT or Quantitative Tightening. At the latest meeting, the Fed announced that it would cut the rate of QT to $5 billion of US Treasuries per month, down from $25 billion. The rate of MBS roll-off was held at $35 billion per month, as the Fed no longer wants to hold securities other than US Treasuries. This represents an easing of Fed policy, akin to a small interest rate cut.
Given the current trajectory of Tariffs, the Fed is stuck in a difficult place. Jerome Powell’s greatest fear is stagflation – a combination of heightened inflation and economic stagnation. While there has been a low probability of the US entering a stagflationary cycle, an economy burdened by overly restrictive tariffs is more susceptible to stagnation. This, combined with the naturally inflationary effects of tariffs (moving production from low-cost countries to higher-cost, domestic factories), significantly increases the possibility of the Fed’s nightmare. Stagflation is particularly concerning to the Fed because its toolset can only address either stagnation or inflation at a time, to the detriment of the other. By increasing interest rates, the Fed slows the economy, thereby bringing down inflation. By raising rates, it does the opposite; however, no combination of Fed actions can fix both at once.
The Fed Calls Inflation “Transitory” Again?
As discussed above, we don’t expect tariffs to exist in their current form for long enough to cause true stagflation, and Jerome Powell has already suggested any inflation seen from tariffs will likely be “transitory”, the infamous term used throughout 2022 to describe inflation that is temporary – an increase in prices, but not a durable acceleration in the rate of price increases. While many are alluding to 2022 in his usage of “transitory”, it’s worth noting that during Trump’s first term, when tariffs were instituted, we did see transitory inflation; a scenario that is more comparable to today than the underlying issues that spurred inflation in 2022.
DeepSeek and AI Capex
DeepSeek Concerns
DeepSeek rattled the market at the end of January when it launched a very competitive LLM that claimed to be developed (trained) on a very small budget, with multi-generation-old chips. This created consternation in the markets as to whether the AI trade led by Nvidia had staying power, or if the hyperscalers, currently pouring hundreds of billions of dollars into AI infrastructure, would pull back and find more efficient solutions.
In the subsequent two months, AI-related capital expenditures (capex) expectations have grown, and Nvidia’s Jensen Huang has become even more optimistic about the future demand for AI chips. This is partly due to DeepSeek itself, as DeepSeek’s success shifted the emphasis from training loads to inference.
Implications
DeepSeek is what’s referred to as a “reasoning model,” which means that, much like a human, it “thinks” through a question, often multiple times, to deliver a better result. This innovation has caught on, and single-handedly increased the inference workload 10x from what other models required.
Capex Expectations
Top hyperscalers (Amazon, Google, Meta, and Microsoft) are planning to spend $320+ billion on AI capex in 2025 alone. This figure doesn’t include other major spenders, such as Oracle, OpenAI, and SoftBank. These three companies recently announced a joint venture called “Stargate,” in which they committed to investing $500 billion in AI infrastructure over the next four years. While these are still only estimates, they’ve been reiterated over time, even after DeepSeek raised doubts among investors about whether it’d come to fruition.
At Beck Capital Management, we anticipate that AI infrastructure spending will continue at a rapid pace across most economic environments. This capex could prove to be resilient despite macroeconomic uncertainty because semiconductors have so far been excluded from tariffs, and the majority of AI investment is coming from US-based companies.
The Market Drop and Where We Go From Here
Q1 was a disappointing quarter for investors. After starting the year strong in January, the following two months were negative, ultimately resulting in a loss of about 4.6% on the S&P for the quarter.
Valuations exited 2024 at relative highs, with the S&P starting the new year selling for around 22x estimated 2025 earnings (for every dollar of EPS this year, you would be paying around $22). We discussed some rationale around a higher multiple in the Q1 newsletter (HERE). To recap, strong growth expectations from the largest companies significantly contributed to the high multiple, but high multiples can create a drag on further upward price movement.
Over the first quarter, the markets repriced significantly, with the S&P 500 and the Nasdaq both formally entering correction territory – meaning they’re down over 10% from the all-time highs reached in February.
The market sell-off primarily affected companies that generated strong returns in 2023 and 2024 – namely, the mega-cap tech companies in the Magnificent 7 and those closely tied to the AI megatrend. While the (size-weighted) S&P 500 was down 4.6%, the equally-weighted S&P 500 index was only down 0.7%
This price movement reflects a broadening out of equity returns – price appreciation that was limited to a handful of companies over the past two years is broadening out as the rest of the market outperforms.
As we enter Q2, we would expect generally broader market returns than we’ve seen over the past couple of years, save for the implementation of tariffs. Given new market uncertainty, we’re now expecting a flight to safety – which in previous years has included mega-caps. Buying is likely to be less concentrated in mega-cap tech than in more conservative sectors, such as consumer staples and healthcare. We’re already seeing companies like Walmart leverage their scale and extensive supplier base to negotiate price cuts, while smaller retailers lack the same negotiating power and optionality.
Bond spreads (the additional yield from corporate bonds vs that of US Treasuries) remain tight, leading us to avoid many corporate bonds in favor of alternative options. When spreads are tight, the investor isn’t being compensated for default risk to the extent they have historically. As treasury yields drop, it is likely to see these spreads start to widen out, which is negative for corporate bond holders.
Conclusion
Ultimately, all that matters for global equity markets right now is tariff policy. How long will they stay in place? How severe? How quickly will we reach the tariff endgame? These are the questions that matter right now. As mentioned, economic fundamentals remain strong beyond tariff interruptions, so it is very possible to get back to a strong economy, but this remains a question of how much pain Washington is willing to let the economy and market withstand until a reversal is made. Our hope is that the tariff situation will become much more tenable in the coming days and weeks, but until progress is made, we will remain very defensive in our positioning.