The month of February has brought with it two potentially market-moving stories to digest.
First is the advances in artificial intelligence (AI) by Chinese startup DeepSeek. It has caused some investors to question America’s lead in the AI race and American Exceptionalism more broadly. To answer that question, it’s important to look at this idea holistically. U.S. advantages in research and development spending, capital markets depth, the dollar’s privilege as the global reserve currency, and more suggest U.S. exceptionalism will remain intact for the time being (and hopefully over the longer term as well).
The second major story line involves the outlook for US tariffs on our three biggest trading partners and the potential impact on the overall market. As we digest this news we attempt to keep several things in mind. First, it is generally agreed upon by Economists that the long terms use of Tariffs is inflationary by nature and not an effective policy tool.
That being said, the Trump administration thus far seems to be using tariffs mainly as a negotiation tactic with Canada and Mexico, creating leverage for working on issues like border security and drug trafficking. Any tariffs implemented in these countries will likely not persist since President Trump has so far stated that he does not want higher inflation or sharp stock market declines.
While the size and duration of tariffs remains uncertain, feedback from inflation data and market fluctuations could help mitigate the potentially negative impact resulting from these policies. Lasting and higher tariffs are more likely in China, making the path forward for the Chinese economy and the China-heavy emerging market indexes potentially very bumpy.
The economic impact of tariffs on consumer prices for some products could be manageable, as some costs are absorbed by currency fluctuations, our trading partners, and the companies themselves. Meanwhile, consumers may also find substitutes for some products, lessening the blow.
So, while inflation readings may tick higher in the short term and companies will likely experience some margin pressures, the economy should cool enough mid-year to keep Federal Reserve (Fed) rate increases off the table and bond yields in check.
As the AI and tariff headlines swirl, don’t forget that stock market fundamentals remain generally healthy at the moment. Steady economic growth, double-digit increases in S&P 500 profits, contained inflation, and likely additional rate cuts by the Fed later this year are a good mix for stable stock prices.
The looming questions that will likely need to be explored in the months ahead will surround the mass layoffs happening in the federal government and their potential impact on the markets and the broader economy (not to mention society as a whole).
On a positive note, the S&P 500 did rise in January, which history suggests is an effective barometer for stock prices over the balance of a year. As such, we may yet see a profitable year for stock investors in 2025, but be ready for some more ups and downs along the way.
As always, please reach out to me with questions.
Sincerely,
Bryan Foronjy, CFP®
Principal Wealth Manager
Foronjy Financial
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