- Stock markets seem to be less and less worried by tariffs
- American share prices also seem unconcerned by the White House’s efforts to lean on the Fed, leading American firms and public officials
- But the dollar, US Treasury yield and emerging market equities may be telling a different story
“Efforts by a political leader to influence central bank policy, interference in the choice of chief executives of leading companies and the sacking of public officials who deliver unwelcome news might not be a surprise in an emerging market, but they are a mighty surprise in America, the world’s largest economy and home to its largest stock and bond markets,” says AJ Bell investment director Russ Mould.
“For now, American share prices seem to be taking all of this in their stride, but currency and bond markets seem to be less impressed, even if they are not quite taking the outright evasive action that investors would usually take when confronted with such behaviour in an emerging arena.
“Intel’s shares have held up well, even though state-backed stake-building and efforts to browbeat its chief executive are usually signs to investors that a company, or industry, may not be run strictly with the aim of shareholder value creation in mind, but to the benefit of a political agenda, in the form of local employment, investment, or both.
“Investors tend to fight shy of industries where national champions are promoted, as the profit motive tends to get lost in the political wash. Even if a stock, industry or country’s headline index are not entirely spurned, they tend to be afforded lower multiples and valuations to reflect the additional political risk.
“It remains to be seen whether US equities, or even just Intel’s share price, start to feel this gravitational pull over time, but there three other ways in which portfolio builders can track how other investors are assessing President Trump’s second term in the White House.
“The first is the dollar. Weakness would point to increased aversion to US assets, strength to renewed comfort with them. As benchmarked by the trade-weighted DXY, or ‘Dixie,’ index, the buck is down by 11% from its early 2025 highs.
Source: LSEG Refinitiv data
“The second is US 10-year Treasury yields, where Trump’s tax cut-and-spend plans raise fresh worries about the galloping US deficit, even if tariff income is a potential source of incremental revenue. Rising yields would speak of concern, especially if they keep going up as the Federal Reserve cuts interest rates, and falling ones of improved sentiment.
Source: LSEG Refinitiv data
“The third is trends in overseas equities. America’s headline indices have left the rest of the world way behind since the end of the Great Financial Crisis in 2009. However, emerging markets are traditionally a beneficiary of a weaker dollar. Emerging economies also learned their lesson from their own debt crisis of the late 1990s and, as a rule, carry healthier sovereign balance sheets than the US (and many other Western nations).
Source: LSEG Refinitiv data
“This third trend need not be confined to emerging markets, either, if investors do decide to diversify away from the dollar and US assets more widely. The MSCI Emerging Markets index is making a run at its prior all-time high of 2021 and the MSCI World ex-US benchmark just might be looking to break out and reach new peaks of its own. If both indices continue to run, then there really may be something afoot.
Source: LSEG Refinitiv data
“Gains for those indices would not mean the US is about to collapse, just that it may be ready to underperform after a lengthy period of dominance. For the record, a classic emerging market like Turkey trades on around 10 times forward earnings for 2025, way less than the 25 times multiple applied to the S&P 500 right now, according to Standard & Poor’s research.
Granted, this is an intentionally provocative comparison, and it can be rebutted quickly, on the grounds that the biggest constituents of Istanbul’s BIST-100 are arms manufacturer Aselsan, Türkiye Garanti bank, holding company Koc, construction firm ENKA Insaat and airline Türk Hava Yollari.
“They are all fine companies, but the highest market capitalisation among them is $20 billion and none of them can necessarily be seen as secular growth plays, especially ones with a strong whiff of artificial intelligence, for all of the Turkish economy’s considerable long-term potential and the country’s strategic and geopolitical importance.
“This is a marked contrast to the US equity market where Nvidia, Microsoft, Apple, Amazon, Alphabet and Meta Platforms are the six biggest stocks by market capitalisation. The other member of the Magnificent Seven, Tesla, ranks eighth.
Source: LSEG Refinitiv data
“Between them they represent 35.7% of the S&P 500’s $54.6 trillion stock market valuation, a smidgeon below the 36% peak reached in late 2024. Again, any move away from them and rotation toward more cyclical names, for whatever reason, could signal, and play a role in, market sentiment toward US assets more widely.
“That seems hard to believe right now given the unabashed enthusiasm for AI-related narratives, but lofty expectations can become an anchor for stocks over time.
“An impartial observer may note with interest how the Magnificent Seven’s combined market cap of $19.5 trillion exceeds the gross domestic product of China and thus the combined efforts of some 1.4 billion Chinese people.
“It is easy to be sniffy about such juxtapositions and brush them aside as optical illusions. Similar points were used to argue that Japanese real estate was overvalued in the late 1980s, when some wag asserted that the grounds of the Imperial Palace in Tokyo had been given a higher implied valuation than all of the state of California. No-one cared – at least until after the Japanese property and stock market crash of the early 1990s, and by then it was too late.”
