Initially introduced as a means to achieve a better equilibrium in commercial flows, President Trump’s trade policy is now turning into a punitive measure – for alleged “violations” that often have little to do with economics. And the import/export exemptions recently granted to specific US companies stand to make the global playing field even more uneven. The free market of recent decades is effectively disappearing before our eyes, and informed decision-making is becoming increasingly difficult both for company managements and investors.
Albeit based on a questionable and simplistic computation, the tariff levels first announced by the US President in April were linked to existing trade flows (of goods, not services) between each respective country and the US. The proclaimed goal being to eliminate US trade deficits and, through a reshoring of production, to boost domestic employment.
Four months later, we can only observe that tariff policy has also taken on a punitive character. Emboldened perhaps by the power he believes he wields in trade negotiations, Donald Trump appears to be considering the whole issue as a “game” and now using it to settle personal or political scores. Indeed, the 50% tariff imposed on many Brazilian exports to the US is a response to the judicial woes of his ally, former president Jair Bolsonaro. South Africa, for its part, has been inflicted a 30% tariff (the highest on the African continent alongside Libya and Algeria) because of alleged racism against white farmers.
To make matters worse, recent Trump decision-making has shifted to the corporate level. Although official US geostrategic policy precludes selling high-end semiconductors to China, Nvidia and AMD have been explicitly allowed to export AI chips to that country – in exchange for a 15% retrocession to the US government of revenues thereby generated. Similarly, Apple will be exempted from the 100% tariff that the US administration plans to impose on semiconductor imports – on grounds that the company has committed to investing USD 600 billion in the US over the next four years.
Such specific business arrangements highlight the increasingly “Wild West” nature of global trade, where the law of the strongest prevails. Few counterforces have emerged so far. US courts have been seized at many levels and on many counts but appear to be somewhat “fearful” too of the new administration.
Federal Reserve (Fed) Chairman Jerome Powell is holding his ground despite continued intimidation to lower interest rates, but his days at the helm of the US central bank are counted, with his term expiring in May 2026. Not to mention that a new Fed governor has just been appointed by Donald Trump, increasing the number of dissenting voices within the interest rate decision-making committee.
As for the army, the generals who expressed concerns prior to the presidential election seem to have disappeared, giving President Trump a free hand (or at least allowing him to take it) to deploy troops within the US against his own people. We refer here of course to the recent events in Los Angeles and Washington DC.
Thus far, stocks markets have appeared largely unaffected by these developments, maybe not really believing many of the announcements given President Trump’s tendency to later backtrack on decisions. There also appears to be a disconnect between the overall macroeconomic risks posed by US trade policy, in the form of slowing domestic growth and heightened inflation, and the microeconomic reality. Equity indices are made of a multitude of companies, each trying to adapt to the new situation. And not so badly for the time being, judging by second quarter corporate results.
That said, the still solid overall earnings growth of the S&P 500 index masks significant divergences between sectors and companies. Indeed, stock selection is becoming very challenging in the current context of an ever evolving, and no longer level, global corporate playing field for companies. While maintaining our equity exposure, in part due to a lack of alternatives, we therefore continue to emphasise the importance of diversification. As well, of course, as steering clear of the most richly valued stocks, which would suffer the biggest losses in the event of a correction.
A final comment on the oil price which, to our surprise, is holding steady despite the further production hikes announced early August by OPEC+, now representing a boost in production of almost 1 million barrels per day since the start of the year. Given the apparent stability of inventory levels, either global economic growth is slowing less than feared, allowing these additional barrels of oil to be absorbed for the time being, or the production hikes (by Saudi Arabia and the United Arab Emirates) are only outpacing the recent decline in Russian output. Whatever the case, we also note that US production is stabilising (and could even starts decreasing in a year or two) and that US oil companies are scaling back their investment plans, despite President Trump’s “drill, baby, drill” slogan. This means that they, at least, are concerned about lower prices in the future, for instance if a peace agreement is reached between Russia and Ukraine, and Russia regains normal market access (and even more importantly access to Western oil technological resources) or if OPEC+ continues to increase its production in the second half of the year. We do not foresee higher oil prices until at least 2027, unless the geopolitical situation spirals further out of control.
