Article last updated 26 February 2026.
Quick take• Trump tariffs were ruled illegal, spurring new trade uncertainty. |
The strapline for the film Jaws 2 could apply to equity markets, “Just when you thought it was safe to go back in the water…”
A few weeks with no big policy statements from President Trump had seen a modicum of calm settling over financial markets by the end of last week. But that peace was shattered on Friday afternoon by the Supreme Court of the US (SCOTUS) ruling that the ‘liberation day’ tariffs imposed under the 1977 International Emergency Economic Powers Act (IEEEPA) were unlawful. Cue more uncertainty around global trade.
As with lots of political events in the US, this drew attention from other matters, but that won’t stop me from fulfilling last week’s promise to say more about what’s been going up in markets while AI-threatened sectors and stocks have been falling out of bed.
Trump overruled
The 6-3 SCOTUS ruling was notable for the fact that two of the three justices who were considered to be more politically aligned with the President, yet voted against him, were Trump appointees. There’s hope yet for an independent judiciary to uphold the Constitution of the United States.
However, we knew immediately that this would not be the end of tariffs as other means are open to the President (see figure 1 below). These were originally enacted to address issues such as national security, unfair foreign trade practices and discrimination against US commerce. Indeed, the first two are already in force against some countries.
In the event, Trump went straight for section 122 of the Trade Act of 1974, initially with a 10% universal tariff, which he quickly raised to the upper limit of 15%. This tariff has a shelf life of 150 days before it needs to be approved by Congress, which takes us to 23 July. That’s still three months or so short of the mid-term Congressional elections. It might give the President a chance to extend, but only if no Republicans vote against it. We should prepare for lots of horse trading and browbeating and expect to see more action on other tariff measures left available after the Supreme Court ruling.
Figure 1: Avenues still available to Trump
Trump also laid out plans for a deeper investigation into section 301 tariffs (unfair foreign trade practices), requiring an investigation by the office of the US Trade Representative, with China likely the main target. Even so, there is no great expectation of immediate action on that front as Trump appears to be taking a softer tone with China at the moment. He and President Xi are due to meet in Beijing in April. Meanwhile, he’ll have to balance his ‘make America great again’ rhetoric with the need to keep the domestic economy firing on all cylinders.
To which end, any reduction in tariffs potentially takes a bit of inflationary pressure off US household budgets and provides extra support for corporate profits, although it of course also increases the fiscal deficit. The full implications are as yet unclear, not least because any decision about refunding tariffs already collected (around $175bn) has been deferred to a lower court.
Outside the US, this could mean lower tariffs on imports from China, but it's probably too early to assume that the new rate is the final outcome given the policy volatility over the last year. For now, countries that had enjoyed 10% rates, which include the UK and Australia, will lose out from the new 15% rate.
The overall market reaction was relatively muted, partly because there was a high expectation (75% in betting markets) that SCOTUS would deliver this ruling, although the timing was always going to be uncertain. But it does remind us not to be complacent when it comes to US politics. And the volume will only increase ahead of November’s mid-terms.
Who is winning in the stock rotation?
As I commented last week, the relative surface-level calm in major equity indices and balanced portfolios masks the wild gyrations that are occurring beneath the markets’ surface. The rot set in at the end of October when investors began to question in earnest the future returns on current AI-related capital expenditure.
Since then the market’s former leaders, the Magnificent Seven group of mega-cap technology stocks, have fallen a not-so-magnificent 7% as a group. But software services companies and those that rely on huge troves of data to provide their services and products have borne the brunt of the selling. The MSCI Software & Services index has fallen 27.5% in those four months since the end of October.
However, fears that such as sell-off would bring overall markets down haven’t come to fruition. Over the same period, the MSCI World Index is up 3.4% (in dollar terms) while the S&P 500 has risen 0.7%. One way of observing how gains have broadened out is to look at the equal-weighted version of the S&P 500 (which as the name suggests gives an equal weight to each company, rather than weight them by the size of the company). This is up 8.9%.
In local currency terms the FTSE 100 is up 11.6%, MSCI Europe ex-UK 8.2% and Japan’s TOPIX 16.9%, while the MSCI Emerging Markets index is up 14.5% in dollar terms (all figures are total returns). Several of those ended last week at all-time highs, which might come as a surprise to many given the media’s predilection for doom-laden headlines. Even politically challenged France has scaled new peaks.
Figure 2: Non-US equities at new highs
Real stuff versus artificial intelligence
There are two factors at work here. One is a rotation into the companies that produce real stuff and not intangible intellectual property. Some of this is down to the lower likelihood of their products or services being disrupted by AI. Sectors such as Healthcare (9.5%) and Consumer Staples (13.3%) were often largely ‘under owned’ by active managers and there has been a rebalancing of positions.
But the bigger winners have been companies benefitting from the AI-related capital expenditure and also the willingness of many governments to dial up spending on things like defence and infrastructure. The global materials sector has risen 23.9% with industrials up 13.5%. And don’t forget geopolitical tension, which has put a bid under the price of oil again. The energy sector is up 21%.
New investment money has also been favouring non-US markets rather than being attracted to the large cap US magnet as it has been for several years. This is partly down to the more favourable sector exposure outside the US. There has also been a bit of buyers’ strike on US financial assets in the current political climate, although we have not seen a headlong exit. The wheels of asset allocation tend to turn very slowly for large US institutions such as pension funds and endowments, and they really haven’t had to contemplate this sort of situation for many years. Home bias had paid off. Not so much now. It would be reasonable to expect more allocations to head abroad from the US.
It might not be reasonable to expect similar returns to be repeated over the next few months, but the aphorism that “the only free lunch in investing is diversification” seems to be holding true again. We try never to ‘bet the farm’ on narrow outcomes. Sometimes, that can mean lagging the most positive returns, but it provides a lot of comfort in more testing times.