From the studio

Video: Paul Donovan on what next for the Fed (8 min)
Podcast: (18 min)

Thought of the day

US equities rallied on Monday, recovering more than half of Friday鈥檚 losses as President Donald Trump softened his criticism of China and signaled a desire to avoid economic harm. The S&P 500 rebounded 1.6%, while the tech-heavy Nasdaq and semiconductor SOXX index rose 2.2% and 4.7%, respectively.

Additionally, shares of Broadcom jumped 9.9% after OpenAI announced a partnership to develop custom AI processors, further boosting sentiment in the tech sector. The Broadcom deal differs from some other recent announcements by Open AI in that there appears to be no financing component involved. Optimism around upcoming earnings and expectations for further Federal Reserve rate cuts also helped support US equities, even as concerns linger about elevated valuations and the durability of recent gains.

The turnaround followed a volatile weekend marked by escalating US-China trade and tech tensions, which sent the S&P 500 down 2.7% on Friday.

While the tone improved in US markets, Asian stocks were mixed on Tuesday as investors remained cautious. S&P 500 futures are down 0.8% at the time of writing, while gold has risen to another record high above USD 4,100 an ounce. Silver hit an all-time high above USD 53/oz.

With investors left parsing conflicting headlines and mixed signals from both Beijing and Washington, we make several observations:

New tariffs would likely impose a cost on tech producers, consumers. A 100% tariff on Chinese imports could significantly raise input costs for US tech firms, especially those with complex supply chains in mainland China. Our analysis suggests margins for high-end smartphones could be compressed by up to 10%. Consumers may also face higher prices, with tariffs on chips and components potentially lifting costs for flagship smartphones and AI server chips by 10-12%. Price impacts will depend on supply chain adjustments and cost absorption. As advanced chip manufacturing in the US grows, inflationary pressures should ease. We also note the Trump administration has a history of offering blanket exemptions for major US tech firms, as was the case with Apple.

Tariff threats have tended to be watered down. Earlier this year, President Trump backed away from initial tariff positions on China in particular, with media reports suggesting this came alongside clarity on the economic costs. We believe imposing an additional 100% tariff, on top of the existing 30-40% average rates, would be too damaging for either country to sustain for long. Markets quickly interpreted President Trump鈥檚 Sunday social media comments, writing 鈥渄on鈥檛 worry about China鈥 and 鈥渢he US wants to help China, not hurt it,鈥 as a dovish interjection after his Friday escalation. We note the Section 232 semiconductor probe has yet to be settled, though prior to this episode, White House commentary had suggested the possibility of a less punitive outcome.

Tech pullbacks have historically been buying opportunities. The current correction follows a robust rally, with the Nasdaq Composite still up over 4.5% over the past two months. Historical backtesting shows that 3-7% drawdowns in tech indices have typically led to strong forward returns, averaging 6.7% over six months and 15.3% over a year. Deeper corrections in the 7-12% range have been followed by even greater rebounds. While each episode is unique and past performance is no guarantee of future results, periods of elevated volatility driven by policy shocks have often rewarded investors who add exposure during market stress.

So it is possible we could see more two-way volatility in the near term for global tech and chip sectors amid ongoing US-China talks. Nonetheless, we remain cautiously optimistic that both sides will ultimately pursue a negotiated resolution, given the significant economic stakes and prior momentum for a face-to-face leaders summit at the APEC conference at the end of this month. We recommend investors use this market pullback as an opportunity to build exposure, especially to AI and tech, while pursuing a balanced allocation across the enabling, intelligence, and application layers of the AI stack.

We continue to see strong global AI capex growth of 67% this year and 33% next year, and we note that consensus forward estimates for capex have been surpassed threefold over the past two years. More broadly, we maintain a preference for US tech, China tech, and our TRIOs thematic opportunity set ( Artificial Intelligence, Power and resources, and Longevity). Gold also remains an effective portfolio diversifier and a resilient hedge against ongoing macroeconomic uncertainty. Structured strategies, including options or hedged products, can help manage risk during periods of uncertainty.