Macro Research

Navigating tariff uncertainties in the US

Although US President Donald Trump has paused tariffs on Mexico and Canada for a month, the threat of tariffs continues to loom over markets. Here’s how you should respond.

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  • Published on 05 Feb 2025

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• Markets recovered slightly after Trump agreed to pause tariffs on Mexico and Canada following emergency talks. 

• We remain optimistic about the US stock market, given the high concentration of high-quality companies, a diversified economy less vulnerable to trade wars, and US companies being key beneficiaries of the AI boom.

• While some sectors may be heavily impacted by the trade war, we believe companies with strong fundamentals that capitalize on long-term structural trends, such as AI, will perform well in the long run. 

The S&P 500 opened 1.2% lower on February 3 after US President Donald Trump announced 25% tariffs on Canada (10% on energy resources) and Mexico, and 10% tariffs on China. The tariffs were aimed at pressuring these countries to take stronger action in addressing illegal immigration and to halt the flow of fentanyl and other harmful drugs into the US.

However, losses were pared with the S&P 500 closing 0.76% lower, after Trump agreed to pause tariffs on Canada and Mexico for a month following last-ditch negotiations. To appease Trump, Mexico and Canada committed to deploying 10,000 personnel to strengthen border security. Canada also said it would appoint a “fentanyl czar” and committed USD 1.3 billion to reinforce the US-Canadian border. Meanwhile, Trump’s 10% tariffs on China have taken effect and the country has retaliated with 15% taxes on US coal and liquefied natural gas and 10% on crude oil, agricultural machinery, large-displacement cars and pickup truck. 

Although Trump’s tariffs and the consequent retaliations are not entirely unexpected, their actual implementation has weighed on market sentiment. Markets are likely to remain volatile until there is greater clarity on the extent and impact of tariffs. 

Stay invested in the US 


In spite of the latest developments, we remain positive on the US stock market for several compelling reasons.

Firstly, the US is home to many high-quality companies with strong economic moats that offer products and services that are integral to global consumers and businesses. As a result, any fall in demand for their products due to higher prices is expected to be minimal. Furthermore, their solid balance sheets enable them to withstand margin pressures from tariffs and perform well in an elevated interest rate environment, should inflation rise or stay persistent.

Secondly, the highly diversified nature of the US economy makes it less vulnerable to trade wars compared to countries like Mexico and Canada. Imports from Canada, for instance, account for only 14% of US imports but makes up 78% of Canadian exports. Similarly, imports from Mexico accounts for only 15% of US imports but makes up 80% of Mexican exports (Figure 1). This suggests that it is unlikely that Canada and Mexico will engage in a prolonged trade war with the US, and collaboration is the more likely outcome. 


Figure 1: Canada and Mexico are far more dependent on the US than vice versa
Source: UN Comtrade, Council on Foreign Relations. Data as of 2023.

Thirdly, US tech companies — a key pillar of the US market — have been major beneficiaries of megatrends such as AI adoption and automation. We expect their earnings to be driven more by these long-term structural trends rather than short-term factors such as tariffs. With the release of DeepSeek’s R1 model, we believe AI adoption will accelerate as AI models become more cost-effective. This will not only benefit the tech sector through greater demand for chips and AI solutions, but also enhance productivity across industries, ultimately boosting corporate earnings. 


Some sectors in the US may be greatly impacted 


While we remain optimistic about the long term prospects of the US stock market, we  acknowledge that not all sectors are created equal and that some may be significantly impacted by the trade war. 

Energy: More than 70% of US crude oil imports comes from Canada and Mexico. As this imported oil is refined in US refineries to produce gasoline and diesel, imposing tariffs on crude oil could ultimately result in higher petrol prices for consumers and/or lower profit margin for energy companies. Additionally, as refined petroleum exports to Mexico and Canada account for over 40% of total refined petroleum exports, reflationary tariffs would negatively impact the demand for US petrol. 

Automotive: US, Canadian, and Mexican automotive industries are highly integrated. According to the US International Trade Commission, vehicles and auto parts from Mexico and Canada account for over 45% of total US motor imports. As a result, US automotive companies such as Ford and General Motors may face lower sales should tariffs materialize.  

Consumer electronics: The margins of US consumer electronics companies such as Microsoft, Dell, HP, and Apple could be impacted as many of their parts and products are sourced and manufactured in China. However, some of these companies have reportedly stockpiled electronic components at the end of last year in anticipation of tariffs and urged suppliers to expedite the relocation of production lines out of China. Such anticipatory measures could help to mitigate the immediate impact of tariffs. 

Figure 2: Top five US imports by origin country 

Source: UN Comtrade, Council on Foreign Relations. Data as of 2023.

Figure 3: Top five US exports by destination country

Source: UN Comtrade, Council on Foreign Relations. Data as of 2023.

To conclude, we urge investors to remain calm in the midst of market volatility, and to take advantage of short-term market selloffs to buy high quality companies that benefit from long-term megatrends such as AI. Investors who are more passive can consider investing in our recommended funds through a dollar-cost-averaging approach. 

Table 1: Recommended products 

Recommended Products

US

ETF

Vanguard S&P 500 ETF (NYSE:VOO)

JPMorgan U.S. Quality Factor ETF (NYSE:JQUA)

Unit Trust

JPMorgan Funds - America Equity A (acc) USD

Natixis Harris Associates US Value Equity RA USD

Digital Economy

ETF

Invesco NASDAQ Internet ETF (NASDAQ: PNQI)

Unit Trust

Fidelity Global Technology A-ACC-USD

Eastspring Investments Unit Trusts - Global Technology SGD

Semiconductor

ETF

VanEck Semiconductor ETF (NASDAQ:SMH)


Declaration:

For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) holds a NIL position in the abovementioned securities. The analyst who produced this report holds a NIL position in the abovementioned securities. 

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