By: Aaron Wall, CFA
Partner, Portfolio Manager
Happy Friday everyone! The equity market continues to grind higher, a reflection of the incredibly strong results from Q1 earnings. Heading into this week, the S&P 500 has had nine weeks of positive performance in a row, something you tend to see during a bull market, not near the end. For this edition, we wanted to provide an update on our thinking around key stories across the market.
Tariffs Update
This week, the White House announced its latest step in the ongoing tariffs saga.If you remember from back in February, the Supreme Court struck down the majority of last year’s tariffs, which were imposed using the International Emergency Economic Powers Act, or IEEPA. As we discussed at the time, the administration was ready with a backup plan.
The tariffs announced this week utilize Section 301 and apply a 10-12.5 percent tariff on countries that are deemed noncompliant when it comes to forced labor. Section 301 allows broad authority to apply tariffs after an investigation confirms unfair trade practices.
In this case, the unfair practice is either not having strong enough laws preventing forced labor, or not having strong enough trade policy to prevent products of forced labor to be imported. More than a dozen countries, including China, the European Union, Japan, and India, are impacted.
These tariffs are not unexpected, and it’s worthwhile to contextualize them against where we were last year. According to Dan Clifton at Strategas Research, the effective tariff rate was 11 percent in October and currently sits at 7 percent. He concludes that on a year-to-date basis, corporations have received more money from the recent tax cuts than they have paid in tariffs.
Tariff refunds, for tariffs collected under IEEPA, have been flowing this year as well and provide additional stimulus as an offset. Moving forward, we anticipate at least one additional Section 301 investigation as the administration endeavors to get tariffs back to what they were under IEEPA.
IPO Market Heating Up
SpaceX will IPO next week, kicking off an IPO season unlike any other. OpenAI has been clear about its path towards an IPO this year, and Anthropic filed IPO paperwork this week.All three companies are AI businesses, leading to their IPOs being a clear metric of the demand and durability of the current AI trend. They will also be debuting on the market at significant valuations.
SpaceX is seeking to raise $80 billion, which would be the most money ever raised in the IPO market, and is expected by some to debut with a market cap of $1.75 trillion.
OpenAI and Anthropic, given they are pure AI plays, will likely have similar high valuations, but SpaceX benefits from its ownership of xAI, Starlink, and its core rocket business.
Importantly, we are paying attention to how this will impact the broader stock market indices, which typically require some form of “seasoning” period post-IPO before they will consider adding a stock to their basket.
Given the size of SpaceX and the likely size of OpenAI and Anthropic, index providers are starting to discuss changing those rules to include these stocks much faster.
For example, Nasdaq changed its rules to allow for index inclusion just 15 days after IPO. S&P reviewed its rules and announced Thursday that it is not shortening its existing 12-month seasoning period.
This is important because if these stocks are quickly added to indices, ETFs that track those indexes will become big buyers of the stocks. The seasoning rules existed to prevent highly volatile IPOs from impacting broader index fund investors. The indices, however, are in a difficult position given the sheer size of these companies.
We’ll be paying close attention to how these rules shift over the next few weeks and also watching the success of these large raises to gauge investor appetite for the overall AI trend.
