Chapter 49: Quality Prevails…Yet again!
Dear Clients,
In Chapter 48 of our Investment Journal “Separating Signal from Noise in the Tariff Uncertainties,” we outlined our base case that the April 2nd Liberation Day Tariffs (the “retaliatory tariffs” we described) would become more targeted and streamlined in the end. Since that point, numerous signposts would suggest that this investment thesis is on track to being realized. Below, we outline the chronology of events leading us to our conclusions, or in the succinct words of renowned strategist Dr. Ed Yardeni, “From Trade Wars to Trade Deals”:
- April 9th: Pause on all Liberation Day Tariffs (except China) for 90 days. S&P500 up 9.52%
- April 29th: Announced a possible loosening of AI chip export rules; opening the door for greater diffusion of US AI chips, as a negotiating tool. S&P500 up 1.27% the next week; NVDA up 7.37% (April 29th to May 7th)
- May 8th: Announced the US and the UK have reached a trade deal. S&P500 up 0.58%
- May 10th-11th weekend: US & Chinese officials agree to pause and de-escalate all reciprocal tariffs for 90 days. S&P500 up 3.27% on Monday, May 12th.
- May 26th: Pause to all EU tariffs until July 9th. S&P500 up 2.05% the following day.
As investors can witness, tariffs are rapidly de-escalating and becoming more of a bargaining tool to get trading partners to come to the table and mutually lower trade barriers. While volatility may be heightened while deals are being reached, tariffs that were enacted have likely not had time to erode the resilient hard economic data underlying US stock market valuations. Therefore, our outlook for a stagflationary situation in the US remains low, and our confidence in positive economic growth for 2025 remains high.
We would now like to tie our outlook for positive economic growth in the USA to the company level results produced this quarter. First, data center investments supporting generative AI continued unabated, with a return on invested capital (ROIC) being realized by both suppliers of AI services, as well as the users. For example, META, MSFT, and GOOGL all reiterated their AI capital spending guidance, while even large money center bank, JP Morgan, is realizing an early return on investment from its $18B/year technology program (~2.5% of market cap as of this writing). As this anecdote shows, enterprise customers are still in the early days of adopting generative AI, while generative AI is in the early days of being monetized (our secular investment thesis since 2023). The second disparity we would like to highlight is between the soft economic data and the resilient hard consumer spending data. As Visa’s and American Express’s results showed, global payment volumes continued to outpace expectations at 8% and 7%, respectively. In addition, as American Express noted, travel and entertainment growth “was in line with the steady levels seen through most of last year.” Furthermore, even after the announcement of Liberation Day tariffs, “overall spending levels remained consistent with the first quarter in both goods/services and travel/entertainment.” (AXP CEO Stephen Squeri). As clients can see, there is a stark contrast between the soft economic confidence data, which is fleeting and led the markets down, versus the hard, resilient earnings data that have supported its recovery.
Finally, we would like to end off on a note about portfolio construction. During the sentiment led, tariff driven correction, we re-allocated capital into areas such as communications services, software & services, and luxury goods with personalization themes, which participated robustly during the earnings-led rebound. We would kindly remind clients that volatility is not the same thing as risk; that risk often comes with it a clear set of fundamentally and secularly driven trends; while volatility tends to be a shortlived phenomenon to be embraced, as seen in many historical examples outlined in previous installments.
We hope clients have found this installment helpful and wishing you a breezy summer season.
Warmest regards,
Grace Wang | Senior Portfolio Manager
Samuel Jang, CFA | Investment Associate
Leslie Mah | Associate Advisor
Katherine Yang | Associate
Steven Bos | Administrative Assistant
Grace Wang Portfolio Management Practice of RBC Dominion Securities
Email: gracewangpractice@rbc.com
Phone: 604-257-2483
745 Thurlow Street, 20th Floor
Vancouver BC, V6E 0C5
gracewangpractice.com