Once again, US events have dominated the financial market narrative this week. There were – at least – four separate pieces of news that caught our collective attention US trade policy, Nvidia earnings, press releases from the US central bank and the latest US GDP data for the first quarter of 2025.
First, on trade policy, a US trade court blocked most of President Donald Trump’s tariffs in a sweeping ruling on Wednesday that found the president overstepped his authority by imposing across-the-board duties on imports from US trading partners.
Second, Nvidia showed strong earnings growth, and the company indicated that the outlook for chip demand was even more robust.
Third, the US central bank released the minutes of its latest interest rate policy meeting, expressing their concern that we could see slower growth and higher inflation as a result of US trade policy. That’s a difficult combination for US central bankers in particular, since they have a dual mandate of maximising employment and keeping inflation under control. But with unemployment still low, policy-makers look likely to be cautious about cutting rates.
Finally, first quarter US GDP data was revised slightly at the headline level. But underlying domestic demand grew at a slower pace than had been previously reported.
On trade, this isn’t the first time that a court has ruled that the US administration has overstepped its bounds. But we think that the administration probably still has enough tools available to implement tariffs. So, it might be marginally positive news for those who see tariffs in a negative light, but we don’t think it will significantly change the underlying dynamic.
Nvidia earnings, meanwhile, served as a reminder that tariffs aren’t the only game in town. Spending on Artificial Intelligence (AI) remains a key driver, and the outlook there seems pretty positive. Two points stood out for us, first, Nvidia did suffer a bit from US policy restricting export of certain chips to China and, second, Nvidia does sell most of its chips today at least to a relatively small number of large customers. At some point, large tech businesses will want to see a return on their investment in AI, but for now, we think it’s something those businesses feel they have to do.
On monetary policy, it’s a more familiar story. Policy uncertainty is making life difficult for central bankers who generally seem to believe that tariffs will constrain growth but raise inflation. In that scenario, and with inflation still above target, caution on further rate cuts seems to be the order of the day. That view seems well understood in financial markets currently investors only expect two 25 basis point cuts this year.
At first glance, the latest US GDP release might have seemed like a non-event – after all, the initial estimate had already pointed to a 0.3% contraction in the economy during the first quarter of 2025. This revised release actually showed a smaller contraction (0.2%), but what caught the attention was the revision in domestic demand. Initially, the data suggested that so-called real final sales (consumer spending and private sector investment) had grown at 3%. The latest release revised that down to 2.5% – still a healthy figure, but weaker than expected.
What does all this mean for markets and portfolios?
We come away from this with two contrasting stories. First, the macro outlook remains quite uncertain. Tariff policy has impacted consumer confidence and made life harder for central bankers. And the latest GDP release suggests the economy, while still healthy, wasn’t quite as strong as we had thought. And that’s before we really see the impact of tariffs feed into the numbers.
Second, the AI theme remains alive and well, and it should be a significant driver for US equities, where large tech businesses dominate the indices. As usual, expectations are already high, but for now it looks like we might still be in the early stages of AI-related spending.
From a portfolio perspective, we keep a cautious stance given the macro headwinds, but we remain mindful that there are still some secular trends in markets and the global economy that extend beyond the discussions around tariffs and inflation.
*As with all investing, financial instruments involve inherent risks, including loss of capital, market fluctuations and liquidity risk. Past performance is no guarantee of future results. It is important to consider your risk tolerance and investment objectives before proceeding.
