by Peter Jones, CFA
Executive Vice President
Research and Portfolio Management
Equity markets surged on Monday only to come under pressure to close the week at a 1.5% loss. Absent a rally greater than 4% on Monday, this will be the first quarter since the summer of 2023 when investors have lost money in domestic stocks.
After falling 10% from February 19 – March 13, the S&P 500 had seemingly stabilized behind solid economic and corporate fundamentals. Investors looking to pinpoint reasons for the reversal back to the volatility we saw early in the month had plenty to choose from. At the risk of focusing on extreme short-termism, there were three primary drivers of weak markets in the last couple of days: tariffs, AI fears and inflation.
First, there were continued whipsaw announcements regarding tariff policy. It has become a full-time job to stay up to date with tariff announcements since the inauguration, and this week came the unveiling of plans to add a 25% tariff on all automobiles imported into the United States. These tariffs are expected to go into effect on April 3. According to the Bureau of Economic Analysis, U.S. consumers spent around $730 billion on motor vehicles and parts in 2024, and Strategas reports approximately $300 billion of this spending was on production outside of the U.S. If one were to crudely assume that exporters did not eat any of the tariff increases and consumers did not change their behavior, it would represent an incremental tax of $75 billion. Given the highly competitive automobile industry, the reality is that those selling into the U.S. will share the burden. Even more impactful, consumers will change their behavior by deferring the purchase of a new car or buying a used car. As a result, used cars are likely to hold or even increase in value, and the share of domestic new car sales will increase. Ultimately, the overriding rationale for auto tariffs is the goal of bringing manufacturing and production stateside and reducing our chronic trade deficit. Unlike some industries, this cannot happen overnight or even in the next couple of years for automobiles. Auto production is capital-intensive and has a complex supply chain, so manufacturing cannot simply be shifted around to avoid tariffs. Even more, the breakneck speed of tariff announcements, adjustments, cancellations, exemptions and the like will delay corporate and investment decision-making. Like most of the tariff announcements we’ve seen this year, it would not surprise us to see modifications in the coming weeks.
While undoubtedly inflationary, we continue to believe that tariffs will not derail the U.S. consumer or the economy. Consumer spending was $19 trillion in 2024. Imported automobiles account for just 1.6% of that spending. Again, a crude calculation of a 25% tariff multiplied by 1.6% wallet share implies less than a 0.5% tax on spending. A manageable amount. At a high level, the lion’s share of consumer spending goes towards services. Just a fraction of spending goes towards goods shipped into the country.
Source: FactSet
Beyond this week in tariffs, rumblings around data centers drove companies in that arena, most prominently Nvidia, down for the week. Alibaba’s CEO indicated his belief that data centers are on the precipice of an oversupplied position. This interview was followed by rumors that Microsoft is canceling several large-scale data center projects. A couple of months after the DeepSeek scare, these tidbits have renewed fears that companies that rely on massive investment in data centers are set to see falling profits. Our view continues to be that this investment will remain very large and growing, and we are not inclined to abandon this investment theme despite recent volatility.
Lastly, on Friday, the Federal Reserve’s preferred measure of inflation, “Core Personal Consumption Expenditures (PCE),” came in hotter than expected. While still rangebound at a manageable 2.5% - 3.0%, inflation continues to prove stickier than many hoped. This most recent inflation data will drive investors to reduce their expectations for the number of rate cuts in 2025. We continue to believe the Fed will cut rates by around 0.5% in 2025, but we’re unlikely to see another cut until the summer or fall.
Takeaways for the Week
The S&P 500 is on track for its first quarter of negative returns since the third quarter of 2023
The tariff onslaught continues, this time on automobiles. While inflationary, the economy should be able to absorb this most recent announcement
Renewed fears of slowing in data centers and AI chips emerged this week, and inflation data came in hotter than expected