Markets pivot after trade and geopolitical shifts

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What happened?

Uncertainty over US tariff and geopolitical policy continued to dominate markets on Tuesday, leading to large swings in the S&P 500. The index fell as much as 1.5% after US President Donald Trump initially threatened a 50% tariff on Canadian steel and aluminum, up from the initial 25% level, in response to the Ontario premier’s threatened surcharges on power exports to neighboring US states. Equity markets later recouped most of this loss after both the White House and the Ontario premier paused their planned incremental escalation. Markets were also encouraged by news that Ukraine had agreed to a US proposal for a 30-day ceasefire in the war with Russia, leading to a resumption of US military support for Kyiv.

The S&P 500 ended 0.8% down, having appeared at one point in the day to be heading into correction territory—falling more than 10% from the index peak in late February. The volatile session followed a 2.7% decline on Monday, as investors responded to comments by Trump suggesting his administration was willing to tolerate a temporary “disturbance” to economic activity and higher inflation in pursuit of its economic agenda. S&P 500 futures on Wednesday pointed to a 0.7% rebound from Tuesday's close, which was the lowest in six months.

But despite the pivots on both trade and Ukraine, there was further evidence that a lack of clarity is taking a toll on business confidence. Optimism among small businesses fell to its lowest level in four months in February, amid growing unease over tariffs, according to a survey from the National Federation of Independent Business. The share of business owners who said it was a good time to expand fell by the most since 2020.

What comes next?

Market sentiment has faced a series of challenges in recent weeks. First, negotiations between the US and its major trading partners have been fast-moving and unpredictable. We would expect them to remain a source of volatility in the near term. Canada’s incoming Prime Minister Mark Carney said on Tuesday that his government “will keep our tariffs on until the Americans show us respect, and make credible, reliable commitments to free and fair trade.” On Wednesday, the European Union announced countermeasures against US metals tariffs, with duties on USD 28 billion worth of US goods coming into the zone.

Second, recent policy measures by the Trump administration have challenged the widely-held assumption of a so-called “Trump put”: the idea that Trump would look at the health of financial markets as an indication of his political success and act accordingly. The US administration appears more willing to countenance a slowdown in growth or weakness in the stock market to achieve a broader reorganization of the US economy and its position in the world. Trump has said that tariffs could cause “some disturbance and that’s ok.”

Third, incoming economic data are showing that heightened economic uncertainty is already weighing on sentiment. Business sentiment as measured by the ISM purchasing managers' index, consumer confidence, and consumer spending all came in below our expectation.

We believe risks have increased. But our base case remains that US economic growth can remain resilient, enabling the equity rally to resume—supported by continued heavy investment in AI and progress toward monetization. While we take the economic data and the words of the Trump administration seriously, enacting and sustaining policies that contribute to a potentially protracted slowdown of the US economy in the hope of better growth or economic dynamics in the medium to long term would require a shift from an approach that has so far focused on achieving quick success.

In addition, there are still signs of economic good health in the US, including in the labor market. Data on Tuesday showed job openings rose 7.74 million in January, up from 7.51 million in December and slightly above consensus estimates of 7.6 million openings. In addition, we expect further progress toward moderating inflation, allowing the Federal Reserve to support the economy with two quarter-point rate cuts later this year.

How do we invest?

Our core message remains to stay invested in stocks, with a focus on the US, AI, and power and resources, but also hedging those equity exposures to manage near-term risks. Over the last hour, Trump's previously threatened 25% effective tariff on all steel and aluminum imports came into effect. With a 2 April deadline for further reciprocal tariffs, uncertainty is set to remain high. Investors should also ensure portfolios are well diversified with assets such as quality bonds, gold, and alternatives.

Specifically, our key investment ideas include:

Navigate political risks. Tariff-related uncertainty and trade policy shifts reinforce the need for portfolio diversification and risk management. In equities, capital preservation strategies can help manage downside risks. We continue to favor high-quality fixed income like investment grade corporate bonds, which may provide a hedge against trade risks.

Seize the AI opportunity. After a volatile start to 2025, the 4Q24 results season demonstrated that AI fundamentals remain intact, even as broader market uncertainty weighs on sentiment. While concerns over economic growth and policy uncertainty persist, we continue to see broad-based investment opportunities across the value chain, particularly in AI infrastructure with strong pricing power and megacap platform beneficiaries. We also expect private innovative companies to capitalize on the trend. Near-term volatility—whether driven by seasonality or macro uncertainty—presents an opportunity to build strategic, long-term AI exposure.

More to go in stocks. We see further upside for US equities and expect the S&P 500 to reach 6,600 by the end of 2025, around 18% higher than current levels. US policy uncertainty could lead to short-term volatility, but we believe that robust US economic growth and continued structural AI tailwinds should be supportive overall.