Is the tariff tide finally turning?

Are the U.S.-U.K. trade deal and the unwinding of restrictions on microchip sales a sign of good things to come?

Market recap

• Equity markets were mixed this week with the Federal Reserve on hold, and some incremental progress on the trade front.
• The S&P 500 dipped 0.5%, with modest gains in consumer discretionary and industrials offset by weakness in health care and communication services.
• The TSX rose 1.3% on strength in telecom, materials and energy.

Trump

It was a busy week for the U.S. president. In addition to meeting with newly elected Canadian Prime Minister Mark Carney in the Oval Office, last week Donald Trump also announced a new U.S.-U.K. trade deal¹ and unveiled plans to rescind and revise restrictions on the sale of artificial intelligence (A.I.) microchips that had been put in place under the Biden administration.² In our view, Trump’s overarching message was clear: he is trying to claim that all of his moves have been right, that these new deals and relationships are the result of the hard lines he had taken previously, and that the U.S. economy will be stronger going forward as a result. It remains to be seen whether that will be the case. Last week, I’d expressed some surprise that the Trump administration hadn’t announced more trade agreements. But now, Trump and his advisors are hinting that more deals could be announced soon. Also, it is becoming clearer that a 10% tariff is a minimum. Bluster aside, the potential for resolution to some ongoing trade conflicts is likely to bring some positivity to markets. However, the tariff situation with China is unclear—earlier in the week, Trump has reiterated that he was standing by the 145% tariff on Chinese goods, while on Friday, he suggested that it could come down to 80%.³ That uncertainty could temper expectations somewhat. On the Technology front, we’ve already seen Nvidia and other chipmakers’ stocks react positively to the likely easing of chip export restrictions. The situation is worth monitoring over the longer term, however, because it is fundamentally a matter of competitive advantage: the U.S. is hoping to maintain it, but China is closing fast—it’s just a question of how fast. Our expectation is that the Trump administration will do whatever it can to hold U.S. companies’ advantage for as long as possible.

Bottom line: New trade deals and the easing of A.I. chip restrictions are good news for investors, though whether that momentum can be sustained remains to be seen.

The Fed

Last week, the U.S. Federal Reserve (Fed) held interest rates steady, prompting more criticism from Donald Trump, who has repeatedly said that rates should be lowered to spur economic growth. It is a tricky situation for Fed Chair Jerome Powell, and most investors appear to understand that. Powell has warned that if Trump’s tariffs persist, they could reignite inflation and hinder economic growth.⁴ What many people don’t realize, however, is that the 10% tariff only applies to the raw goods that are crossing a border or coming into a port. Typically, that represents about 40% of the actual cost of the product. The other 60% of the good’s cost—the value that is added after the raw good has already entered the country—isn’t subject to the tariff. So, if, say, a product costs $100, a $10 tariff would not necessarily raise the price of the product to $110. Rather, the tariff would only apply to about 40% of the product’s value, so the overall cost for consumers would increase to about $104—if it were only the tariff causing the price increase. Many companies opt to mark up the price of the product further, knowing that they can blame tariffs—for instance, they may increase it to $108, and that markup translates into higher inflation. There are also companies that do most or all of their business domestically, and therefore aren’t subject to tariffs at all. Those companies could choose not to raise their prices, and therefore gain market share compared to companies that are affected by tariffs, or increase the prices marginally in an attempt to gain some market share AND increase margins. Again, this kind of markup would increase inflation. We still believe that we could see a couple of interest rate cuts from the Fed before the end of the year. But for all the reasons above, Powell and the Fed have to be very careful how they handle the situation, because too many cuts, or cuts that are too early, could contribute to a rebound in inflation.

Bottom line: The Fed continues to be driven by the data, and our sense is that the more Trump pushes for rate cuts, the less likely the Fed is to comply.

Earnings

In last week’s column, I discussed Q1 earnings for some key U.S. companies and sectors. But how are Canadian companies holding up given the tariff situation? Generally speaking, the story is not dissimilar to the U.S.—earnings reports have been decent, but companies have felt compelled to include comments about the uncertain landscape (especially with regard to tariffs) moving forward. Like their American counterparts, some Canadian firms have provided whatever guidance they can on their expectations for the future, while others have sidestepped the question entirely. That’s unlikely to change in the short term, and looking ahead, we expect that companies’ response to tariffs and overall uncertainty will vary from firm to firm. Still, it is a positive sign that we haven’t yet seen the bad earnings that some were expecting—they aren’t as strong as last quarter or last year, but they aren’t bad given the circumstances. The trend is still downward, and some companies are highlighting that the consumer may be weakening. But importantly, earnings from credit card companies do not show that the consumer has stopped spending—people may be travelling less, for instance, but otherwise their usual spending is continuing. To be sure, it will take some time for the tariffs to work their way through the economy and begin to seriously affect consumers. But as the dynamics slowly shift, consumers will have some time to adapt to the additional 10%–and needless to say, 10% is a lot more palatable than 40%.

Bottom line: So far, Canadian earnings have held up better than expected, and while rising costs due to tariffs may prompt consumer to be more selective about how they spend their money, the overall impact may only be marginal.

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Originally Posted May 12, 2025 – Is the tariff tide finally turning?

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