U.S.-China Trade Tensions: Market Impacts and Future Predictions

The equity market flashed in red last Friday, then green back to red before turning before turning back to green this morning just like Christmas tree lights.

While Fetcher Powell signaled the central bank remains on course to cut rates again later this month and pointing to weakness in the job market even as inflation stays stubborn.

While earnings season underway with big banks and consumer names coming out with results and guidance.

Joining me.

Weigh in and talk macro and market sectors is Sonu, Varghes, BP and global macro strategist at Carson Group.

Good morning, Sonu.

Thank you so much for joining me.

Well, a lot going on when it comes to macro as well as the markets.

So tell us about some of this volatility we've been seeing across asset classes in Q4, and how are you digesting the latest tit for tat between US and China?

Yeah, that's all we needed, right?

Once again, tariff headlines creating volatility in markets and it's back to April again.

Not quite.

Look, the difference is we are coming out of a market that's had really strong momentum.

The market's up, the S&P 500's up 35% thereabouts over the last 6 months, right?

The bull market, which, you know, in our view started on October 12, 2022, that just hit its three year mark, right?

So we have a few things going on for it.

Bull markets that make it to the three year mark usually make it to the four year mark, and you know, the median return in the 4th year for historical bull markets has been about 13 to 14%, right?

Even the 3rd year for this bull market was actually quite strong historically.

It's the average return has been about 3.5% or so, but this year it was closer to 13%.

So this has been a strong year.

It's been a strong bull market, strong momentum, and markets like momentum.

I like to think of it as momentum begets momentum.

So we have that going for us.

But at the same time, you know, I'm not too unhappy.

See some volatility over here.

October historically has been volatile.

To see some consolidation maybe.

I mean, I say this even as markets are rallying this morning, right?

So but you know, October volatility is not a surprise, of course the cause is always going to be something different, right?

And this time it is tariffs, but we have this.

Tit for tat going on between the US and China.

The US is like, you escalated, so we're going to escalate.

China's like, No, you did it first, so we are going to escalate.

So I think both sides think the other side is playing with some bad faith there, but we'll see where this goes for now.

The stock market, you know, momentum continues.

Yeah, and so, as you mentioned, a lot of headlines that are coming through.

So I do want to get your take on the Fed.

So Powell said the Fed is walking a fine line, cut too fast and risk leaving inflation unfinished, move too slow and risk deep job loss.

Losses and here in the nation's capital in DC we are hearing from Fed officials as well as from Treasury Secretary Besson and the trade representative as well.

But what is your outlook for the Fed, at least for now?

I think we're getting rate cuts.

It's as simple as that.

The Fed has two mandates.

It's got A stable inflation on one side and maximum employment on the other side.

And right now the stable inflation, I should say low and stable inflation, right, because the target is 2%.

I think inflation, whether you look at official numbers, whatever it is, probably closer to 3%, maybe going in the wrong direction as well, but they point to that and think of it as, you know, the dreaded T word is transitory.

But I think that's honestly how they're looking at it.

It's not to say that I agree with it, but it is what it is, right?

What the Fed thinks is what matters.

And right now they think the priority should be to protect the labor market.

And so we expect them to cut in October and based on all the comments Fed officials have made this week, last week, except maybe one or two, everything points to one more rate cut in December as well.

And of course we have been dealing with a lack of data, but it does appear as though we will be getting CPI on the 24th of this month.

But I do have to ask you about AI related investments because we have seen that match consumer spending when it comes to its contribution in terms of growth, even though it's a much smaller part of the economy.

So how sustainable is that level of investment and could it signal another tech-driven boom like the dot com era?

I think we're already in the middle of that, right over the first half of 2025.

AI related equipment spending and software spending, it makes up about just over 4% of GDP, which by the way, is as high as it ever got during the dot-com boom in the late 90s.

It was about 4, 4.5% of GDP.

That's where we are now.

So this small part of the economy.

Contributed about 1.1% points on average to GDP growth in the first two quarters of 2025.

That's as much, Remi, as consumption contributed, and consumption makes makes up 70% of the economy.

So we are seeing an absolute boom here, but the boom is in investment spending, right?

You're in the previous segment, your reporter talked about all the deals open.

AI is making, I mean, with the largest tech firms in the world and even with companies like Walmart, right now the interesting part is, oh, it's not like OpenAI is a lot of money for this, but we are seeing the circular set of arrangements between OpenAI and all these firms, whether it's Nvidia, AMD, Broadcom, things like that.

OpenAI forms partnerships with these companies, chip companies, and even the hyper scalers like Microsoft, Oracle, Amazon, Google.

Uh, what, what did those companies get in return?

Chipmakers get new orders and AI workloads, and OpenAI gains preferential access to chips and compute infrastructure, right?

And then you look at the stock market, which I think is a big key piece in all this.

The stock prices of these chip makers and hyper scales, now even Walmart looks like, surge on the back of investment. optimism, right, and OpenAI's valuation also increases.

They're viewed as a central player in this AI ecosystem.

OpenAI, because of that, gets easier access to funding, and they use these higher valuations to pursue more aggressive investment.

So we are in this, you know, investment related to AI, this flywheel, if you may, that keeps turning and turning, and I think investor optimism is a big piece of it.

OK, Sonu, always great to have you on the show.

Thank you so much for joining us and thank you for all of your insights as well as your perspective today.

Thank you for having me.