Iceberg!

"There is no danger that Titanic will sink. The boat is unsinkable and nothing but inconvenience will be suffered by the passengers." Phillip Franklin, White Star Line Vice-President, 1912

As investors stagger towards the midway point of the year, we have probably learned enough of the Oval Office plan to be getting on with life. A tetchier bond market was apparently enough to spur a hasty retreat from the Liberation Day broadside. The ‘art of the spiel’ has been hastily deployed since, burnishing necessarily lightweight agreements trickling in.

Even after this welcome de-escalation, we are still ogling US effective tariff rates not seen in nearly a hundred years.¹ This suggests that we should still expect a sizeable stagflationary pothole in the path ahead, as well as a (slightly) lower trend in US economic growth. This week, we look at what the UK deal and negotiations with China could tell us about the path ahead for US assets.

UK deal

The UK was bestowed with the first of the ‘deals’ flourished by President Trump. Accordingly, analysts have been rummaging around in the details for what might be inferred about potential agreements elsewhere.

The first point is that it is as insubstantial as you might expect. The only actual tariff reduction committed to by the US is for the first 100,000 cars imported from the UK, which will enjoy a 10% (rather than 25%) rate. There is a further, somewhat hazy promise to create a parallel system for British steel and aluminium.

Meanwhile, US Commerce Secretary Howard Lutnick suggested in the press conference that aircraft engines and parts would also be exempted from US tariffs – however, there is no mention of planes in the official document. The quid pro-quo is the US gets small tariff-free quotas for beef and ethanol exports.

As one well-known journalist argued, the agreement more closely resembles “…a protection payment to a mob boss than a liberalising agreement between two sovereign countries…”² The net result is trade policy between the two countries that is still several times more restrictive than before Trump took office.³

For appearances

Walking though Westminster this week, I was struck again by one of the hallmarks of our times – the selfie. Hordes of sullen teens briefly flickered with their well-practiced photo gurns. The palaces of Westminster could be swapped with any other architectural or natural wonder of the world – they are simply ‘room meat’, there only as garnish for the pouting protagonist in the foreground.

The performance has become all. Everything increasingly done with an eye on who might see or hear it. We have been funnelled into ever greater levels of self-absorption by decades of reality TV and the interaction between mobile video and the social media colosseum. The increasingly knowing appearance of activity, happiness, virtuosity and the rest may have ultimately overwhelmed important substance.

The TV star president has seemed to grasp this better than many. The appearance of activity will be reassuring to many of the disenfranchised and disaffected. In such a context, we should be particularly humble in our predictions about what remains of it all in just over 1,300 days.

There are admittedly some interesting rhymes with previous empire busts. Just as the construction and passenger manifest of the Titanic spoke of a hegemonic baton passing from the UK to the US, perhaps DeepSeek’s shock entry into the AI race is today’s analogue? (Figure 1) As this suggests, investors would do well to keep in mind that there are forces well beyond the direct influence of the Oval Office at work here.

Peak Magnificent Seven or just another staging post?

As Figure 1 suggests, shares in the largest seven companies in the US stock market began to underperform before the Liberation Day announcement. Investors were already showing signs of queasiness at the giant increases in capital expenditure by these corporate titans. DeepSeek’s breakthrough helped focus such fears. The Broligarchy argue for these huge outlays, with even more still promised, as entirely necessary to keep up in the AI race.

Figure 1: Since the announcement of DeepSeek, Magnificent Seven stocks have been declining

Source: Bloomberg, Barclays. Note that past performance is not a reliable guide to future performance.

We, of course, cannot know from our current vantage point. We must admit the possibility nonetheless that generative AI progresses no further, that model hallucinations remain un-squashable⁴ and take-up therefore disappoints. Generative AI turns out to be an off-ramp on the path to full General AI. In this scenario, the US stock market’s reliance on these seven mega corporations for its premium profitability profile would be quickly re-examined.

We are still at the very early stages of discerning whether all this investment in AI infrastructure will pay. So far, free cash flow margins seem to be holding up. However, this is something we are watching very closely. A turn in profitability for the tech sector will raise long-shelved questions about the scale of premium warranted for US stocks.

The answer is not about moving on wholesale from US assets. They will still play a core role in most of our funds and portfolios for the foreseeable future. It is more about being sure that the rest of your multi-asset class fund or portfolio is feathered with diversifying exposure to other regions and asset classes.

Investment conclusion

All of this is part of the reason why the regulator is right to warn of the messages you might think you can find in past performance. The past five, even ten years, are an incredibly biased sample from which to guess at the next five. Only if we were stuck in a hamster wheel of perfectly repeating decades, the past invariably prologue, would the investment community’s obsession bear out. Is that what this moment in time feels like to you?

Remember, however, the further back you stand, the more it is humankind’s capacity for problem-solving that stands out. This can be of little reassurance to the generations that unevenly (and mostly unpredictably) bear the brunt of the often brutally enforced dynamism inherent in technological (and therefore living standards) progress.

We must acknowledge that today’s policymakers are mostly downstream of these changes, reacting to events driven by arriving technologies and society’s enforced adaptations, rather than the other way around. It is the factors of production – land, labour, capital, and the ingenuity with which the billions of fellow earthlings organise these factors – that are in the front seat doing the actual driving, particularly when we think about the all-important trend in growth.

The world’s policymakers cannot quite be caricatured as the toddlers, wrangling with a toy steering wheel in the back of this same car. We should nonetheless be wary of granting them too much agency – these vast, unknowably complex economic machines mostly go their own way.

Appendix: Discrete annual price returns (%)

Source: Bloomberg, Barclays.