Market Watch: Trump tariffs and Chinese AI rattle Wall St – why one fund manager remains optimistic

• Investors should focus on economic data and not react to every headline from US President Donald Trump.
• Trump’s tariff threats could lead to inflation and uncertainty, affecting interest rates and markets.
• AI integration may boost profit margins, potentially broadening the Wall Street bull run beyond tech stocks.

Investors need to remain calm and look through the flow of dramatic headlines currently being generated by new US President Donald Trump, says Pie Funds chief investment officer Mike Taylor.

“I would caution investors on reacting to every headline that comes out of the White House,” he said.

“We’re fast getting used to seeing Trump in the headlines every day. I think much of that is noise, and investors would be best to ignore that and focus on the economic data.”

One area rattling markets in the past few weeks has been Trump’s threats to impose sizeable tariffs on goods imported from China, Mexico, Canada and potentially the European Union.

Investors are concerned, not just about the potential for a trade war but the inflationary fallout for the US economy.

“It’s generally accepted across most economists, absent those inside the Republican administration, that tariffs are negative for economic growth and are inflationary,” Taylor said.

“They haven’t worked in the past. They’ve been tried and failed, and of course, in most countries for a very long period, we were looking for free trade agreements, including the US.”

The prospect of higher US inflation has been putting upward pressure on interest rate markets.

“We had a number of cuts priced into the Federal Reserve’s outlook for this year, but they’ve been wound back,” Taylor said.

Markets were now pricing just one cut for the year ahead.

“Generally, the Fed is still quite dovish, so they are looking to be more accommodative this year.”

So far there were no signs of an actual resurgence in inflation and rate hikes were not on the table, Taylor said.

“It’s still relatively benign,” he said.

“I would think that inflation would need to be looking towards the 3.5% to 4% [level]. If it gets to that level this year, that would cause the market concern.”

That kind of rise in inflation might see the US 10-year bond yield go through 5%.

“That would be quite a concern for equity markets if that were to happen,” Taylor said.

Trump’s tactics have raised the level of uncertainty for investors, something that was unsettling for markets.

“So there’ll probably be some sort of Trump impact priced into markets, whether that’s a 5% or 10% discount as a result of the uncertainty,” he said.

“I’ve heard recently of contracts being written where they’re having to put in a clause around trade wars.”

The threat of inflation and trade wars would slow down commerce, and it might start to have an impact later this year, he said.

DeepSeek

Markets also took a hit last month when the Chinese AI app DeepSeek was launched and appeared to have been developed at a much lower cost than its US rivals.

High-flying AI chip maker Nvidia saw its market capitalisation drop by $600 billion in one day.

“If we focus on, say, Nvidia, there was a concern that with the Chinese version of AI being much more efficient than what had been developed in the US, fewer chips would be required,” Taylor said.

“However, subsequent analysis by many market commentators has said, well, hang on if AI is becoming more, efficient and it’s becoming more ubiquitous for all of us, probably usage is going to go up.”

“So it might not necessarily be a negative because, as we’re finding with all our workplaces, AI is getting integrated more and more, and if we’re using more, then maybe the actual demand for chips won’t really change from what’s currently in market forecasts.”

Taylor said he expected to see more corporates putting AI into practical use this year.

“In ’23 and ’24, we didn’t see that many corporates citing AI as a reason for profit margin growth, whereas many companies this year will be looking at their budgets and saying, ‘Well, how can we improve our profit margins? Let’s bring in some AI to either make some redundancies or bring in some more efficiencies’. And obviously, Wall Street loves profit margins and profit growth.”

That could see the Wall Street bull run broadening out from just the major tech stocks, which have been the focus until now, he said.

“I feel optimistic,” Taylor said. “As long as we’ve got that earnings momentum, which should be coming from productivity improvements from AI.”

The broad trend was for lower interest rates with positive economic growth in most countries.

“Typically those environments are pretty good for equity markets,” Taylor said.

“Yes, there’s still a chance of euphoria creeping in, but I think with that uncertainty surrounding things at the moment, it’s probably going to keep the markets in check and stop them from racing away too much.”

Taylor said he wasn’t necessarily expecting a repeat of the big gains of the past two years but that didn’t mean it would be a bad year.

“A year where there’s a bit of back and forth, with markets running and then pulling back, is actually quite healthy for bull markets,” he said.

“Touch wood, that’s what we would be expecting this year.”

The Market Watch video show is produced in partnership with Pie Funds.

Liam Dann is business editor-at-large for the New Zealand Herald. He is a senior writer and columnist, and also presents and produces videos and podcasts. He joined the Herald in 2003.