Tariffs, tech stocks, and the changing dynamics of the S&P & NASDAQ
Or: considering the benefits of a correction in the market
We’ve seen the S&P, NASDAQ and every other American indice get slammed in the last couple of days. Some people are panicking. A lot of people are panicking. If you go on Twitter (sorry — X dot com) you will find a lot of people who listened to a recommendation from a guy on YouTube about a trash stock like say, IonQ or HIMS, and are now fairly upset said YouTube guy (or Twitch guy, or whatever) got it wrong. I’ve been a bit of a bear on the US for a while — for one, tariffs (I wrote about them a lot here). Tariffs, much to the dismay of many of Trump’s supporters, do not work.
Here is an example of how tariffs do not work, using the cast of Sex and the City:
[EXT]. A bar in Manhattan. The girls are drinking Cosmos. It is crowded, there are still tarts with sundried tomatoes on the menu, and the room smells too much like c K one. Nobody has a cellphone.
Miranda: I’d like to sell you these Manolos, Carrie, but since I’m in lower Manhattan I’ll need to slap a 20% tariff on them. So they’re not $1000, they’re $1200!
Carrie: [I couldn’t help but wonder if Miranda’s tariffs were a sign of the times…Cosmopolitan prices were going up in the Meatpacking district] Ok, Miranda, I just know you’d love to buy the steel I have in my tiny apartment filled with Birkins — you need it for you midtown residential development and I happen to make a lot of steel, in my tiny apartment! So I’ll have to charge you 20% more on that.
Mr. Big: I love tariffs. America is great.
Samantha: [Slurps Cosmopolitan]
Miranda: [Slurps Cosmopolitan]
Carrie: [Changes outfit into something more ridiculous]
Here’s the issue — Miranda is paying 20% more and so is Carrie — there is no scenario where a SATC character, or a country, doesn’t retaliate with tariffs. Nobody wins. You just increase the costs of goods by 20% across the board. Which in turn lowers the value of money, because you have less bang for your buck, and that ends up with stagflation. That’s Trump economic policy in a nutshell — it doesn’t work.
For instance — today Trump was going to impose 50% tariffs on steel on Canada and then (about an hour ago as of writing) he decided he wasn’t going to impose tariffs. This is what I mean — tariffs are kind of bluster — a hey! Would be a shame if someone broke this nice store of yours! Trump says a lot of things. The reality is — and Scott Bessent knows this1 — is that any kind of high-level tariffs end up in a 1970s-like situation where you have rampant inflation. I doubt he wants that.
But this does, obviously, rile the market. You have talk of recession and you have talk of stagflation and of course — after the initial “Trump Trade” bump — you have a market in decline. Note we have had a bull market since ‘22, and prior to that, an extraordinary 10.8 year bull market (see chart from the University of Idaho below):
I try to avoid calling recessions, or corrections, because nobody really knows. Every so often there is someone who correctly calls it, after calling it for decades2, and then they get to go on CNBC and seem like a wise old sage who knew all along. But the truth is — nobody knows. And betting against the market is difficult because, as the old adage goes, “the market can be wrong longer than you can remain solvent”.
All I really know how to do (and hopefully I’ve got better at it, I’ve made many mistakes) is to find good companies and pay a reasonable price for them. A lot of tech stocks — the bulk of what has fallen as of late — still aren’t in that zone for me yet. Amazon still trades at a current multiple of 35x earnings and a fwd multiple of 28x — I can’t find much value in that, especially when I consider that Google, a company with +$83bn in net profit and a 32% operating margin, can be acquired for 16x fwd earnings3 (I had to check those numbers too just to be sure — when you’ve still got things like Palantir trading “to the moon” (and back), 16x4 seems like a reasonable price for the dominant advertising platform in the world).
This is to say — I’m not getting too excited yet (other than Google/Alphabet, which I’ve been spending a lot of time thinking about). I’d be very happy if stocks pulled back more, because there are extraordinary American companies — the problem is they often trade for extraordinary prices.
There are two dynamics at play here. This first is, I think, the salient fact that tech margins are likely to decrease — Google expects CapEx spending to increase to +$75bn from 2024’s $51bn — that shaves operating margin down some. Amazon expects to spend a whopping +$100bn on CapEx in 2025. This is because everyone is racing to build AI data centres, and build the infrastructure needed to run it. You need to think of a lot of these tech companies as more like the traditionally CapEx-heavy oil and gas industry5. The good news is — oil and gas still makes money; as will tech. So you need to reduce those tech margin expectations — personally, I’m a lot happier thinking of Google’s 32% margins being cut down +10% (pick a number, any number6), rather than thinking of the prospect of Amazon’s threadbare +11% margins being cut any further.
The second dynamic is the change from the US as a manufacturing economy to a service economy. I think Russell Napier explains it best7:
Blue collar America was left to adapt to the exodus of jobs to countries acting to undervalue their exchange rates. The wealth gap between asset owners with white collar jobs and blue collar workers with no assets grew and grew. The ‘water’ of the global monetary system had huge real-world impacts, particularly in the US. In other societies, corporations were not as free to move their manufacturing capabilities, fire people or engage in financial engineering. The freedom of US corporations to adapt to the realities of this global monetary system produced high levels of corporate profitability in the US which, when combined with rising equity valuations, produced very good returns for the S&P 500.
What Trump is trying to do — by enacting tariffs — is to onshore those blue-collar jobs again. Blue collar industries typically have lower margins, because there are higher staff costs, higher costs of leases, etc. Take Foxconn, one of the world’s pre-eminent manufacturers (they make iPhones, etc) — their net margin is a measly +2.3%. Nevermind the fact that China has lower labour costs, and a far more advanced supply chain (imagine trying to replicate that in the US…). The net result — of these tariffs (even if they are fantasy) — is that the overall net margin of US public companies goes down.
Yet that’s all supposition at this point — tariffs get “enacted” then “revoked” — it seems to me like a kind of fantasy to sell to the MAGA-loyal. The first point, though, is not supposition — CapEx at tech companies is going up, and that means lower margins.
At the start of this newsletter I wrote that a lot of people are freaking out, which often happens when markets sell off. We have been in an environment where “stonks go up”. Frankly, a correction is a healthy thing because it allows investors to purchase good companies at more reasonable multiples.
I have no idea where the market goes from here. I can’t see the future. I admit this sell-off has me adding tech stocks (and other American stocks) to my watch-list, and I’ll continue to monitor them. Here’s Buffett, in his 2008 essay — Buy American, I am:
A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors. To be sure, investors are right to be wary of highly leveraged entities or businesses in weak competitive positions. But fears regarding the long-term prosperity of the nation’s many sound companies make no sense. These businesses will indeed suffer earnings hiccups, as they always have. But most major companies will be setting new profit records 5, 10 and 20 years from now.
Buffett was right, of course. If you purchased stocks in 2008 and held them you would’ve done pretty well (as long as you didn’t buy Lehman Brothers!). The GFC saw stocks fall 48% from their peak — if we are indeed heading towards that territory there is more room to fall. I have no idea — examining the basket of tech stocks I look at, the only one that presents any value is Google. It’s reasonable at 16x fwd earnings. If it traded at 12x earnings, it would be a bargain - in my opinion. How low can you go?
Bessent interned for Jim Rogers and then ran Soros’ London office, famously being part of the team that shorted the pound and made +$1bn.
Nouriel Roubini, Jeremy Grantham…
The way I think of it is: would you like to own a business generating $83bn of earnings, with a fairly predictable business (ads)? Would you also like YouTube? Also, would you like the leading self-driving company — Waymo? [Informercial voice] “All this and more can be yours…for the low, low price of 16x earnings…call now!” Not investment advice; please do your own research!
All multiples sourced from Bloomberg, 12 March 2025
When people said data is the new oil, I’m not sure if they meant that…
“I’d rather be vaguely right than precisely wrong” - Keynes
https://www.ruffer.co.uk/en/thinking/articles/the-ruffer-review/2024-03-what-the-hell-is-water