While President Donald Trump’s levy announcements were expected on Wednesday, a good deal of damage has been done already, with the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite all ending the quarter with losses.
Even if the tariffs turn out to be less draconian than the punishing 25% levies on all foreign autos unveiled last week, the Trump administration’s chaotic deployment means consumers and businesses will be slow to trust the ordeal is really over.
At the same time, the tariff rollout is forcing other countries to look away from the U.S. and its constantly fluctuating policy, which could have long-term negative repercussions for America in terms of world trade. That is also calling into question the competitive edge of domestic companies, and is one reason why the big tech stocks that led the rally have also led the decline.
In short, Americans are worried about a resurgence of inflation as tariffs push prices higher, and a potential souring of the job market. Consumer spending is already starting to crack.
Unfortunately, that could exacerbate the situation, as personal consumption has accounted for more than four-fifths of all gross domestic product growth since 2020, notes BCA Research Chief Global Strategist Peter Berezin.
As long as people are employed, they tend to spend fairly regularly, and optimists have noted the employment picture has so far held up well. But that could be false comfort, Berezin warns, because unemployment claims tend to be a leading indicator of a recession’s end than its beginning (companies simply stop hiring when a slowdown approaches, before they start firing as it worsens).
The upshot, he writes, is “the U.S. and most other major economies are likely to enter a recession in 2025. Tariff-induced inflation will limit the ability of central banks to respond, thus prolonging the downturn.”
Berezin thinks the S&P 500 will fall to 4450 by the end of the year—one of the lowest targets on the Street. He has held that target since the start of the year rather than the recent turmoil, as BCA raised its recession odds postelection. Although international stocks will struggle, too, he thinks they will likely outperform U.S. equities once there is a global recovery.
That leaves U.S. investors with few options. In Berezin’s scenario, defensive stocks are clearly better than cyclical ones. That much has already been playing out, with the Consumer Staples Select Sector SPDR outperforming the broader market so far this year.
For those not willing to abandon tech, one option is to look to different areas of the AI trade beyond the picks and shovels approach that has been so popular in recent years, writes Christopher Smart in his Leading Thoughts newsletter.
“Think of mining firms that automate their excavation operations to drive higher returns on their massive investments. Look for banks that adopt artificial intelligence to review contracts, streamline administrative tasks and detect fraud,” writes Smart.
Likewise he thinks electricity demand will remain a constant, although beyond the utility stocks that have gained.
“Watch for surging demand for electricity from all sources, including traditional hydrocarbons, nuclear, wind, solar and geothermal,” he writes.
In fact, Trivariate Research President Adam Parker notes that although the Magnificent Seven stocks have attracted plenty of headlines for their huge investments in AI research and development, that hasn’t carried over to small and mid-cap companies. The median tech company sports almost the lowest capital intensity of the past 25 years.
That, along with inventories—which are still high after stockpiling during the supply chain shortages that marked the pandemic years—could be key to stock performance this earnings season, Parker argues, with 41% of tech companies recording high inventory-to-sales ratios compared with historical trends.
Among tech companies, he highlights Flex, Lam Research, and Western Digital among those that have high but declining inventory-to-sales ratios.
Whatever happens this week, uneasiness about the market and the economy will likely remain. That wasn’t the case for much of the rally in the past two years—and a different backdrop will likely produce different winners.
Write to Teresa Rivas at teresa.rivas@barrons.com
