US Strategy Weekly: Fear is Good

A day before President Trump’s State of the Union speech, a wave of panic rolled over the equity market. Some of this was due to a multitude of questions left unanswered by the Supreme Court after it struck down many of the administration’s tariffs. The law at the center of the case is the International Emergency Economic Powers Act, known as IEEPA, which authorizes the president to use the law “to deal with any unusual and extraordinary threat, which has its source in whole or substantial part outside the United States, to the national security, foreign policy, or economy of the United States, if the president declares a national emergency with respect to such threat.” A separate provision of the law provides that when there is a national emergency, the president may “regulate … importation or exportation” of “property in which any foreign country or a national thereof has any interest.” President Trump initiated tariffs early in 2025 after declaring a state of emergency and asserting that unfair trade posed a threat to the US economy. The Trump administration used tariffs to conduct foreign policy and at the same time to boost jobs and manufacturing in the US. After the Supreme Court decision, he responded by signing an executive order that imposes a 10% duty on articles imported to the US for a period of 150 days. In the interim, the administration will be looking at ways to reinstate its tariff policy.

Unfortunately, since the Supreme Court took no stand on tariffs already collected it leaves the US government open to lawsuits that will take many years to resolve. However, we ponder why companies would be suing the US for reparations if it is true, as most economists suggest, that tariffs were a “tax” on households and that they hurt the US consumer. Both cannot be true. And as we reported last week, the January 2026 CPI report showed that price indices for durables rose 0.4% YOY and nondurables rose 1.3% YOY. If tariffs on imported goods were the source of inflation, it should show up here. On the contrary, it was service sector inflation that rose 3.2% YOY and services have been the source of inflation throughout 2025.

A New York Federal Reserve study found that 86% to 94% of the burden of 2025 tariffs hurt US businesses and consumers, not foreign exporters. Yet, if this is true why did General Motors (GM – $81.29) and Ford Motor Co. (F – $14.20) report solid 2025 financials despite absorbing significant EV-related charges? Tariffs on autos were some of the first to go into effect, were some of the highest tariffs enacted, were not tied to IEEPA, and continue to be in force. And yet, General Motors generated $12.7 billion in adjusted EBIT and $2.7 billion net income, despite absorbing significant EV-related charges. Moreover, the company indicated that its core business remains highly profitable, and they expect profits will increase in 2026 despite roughly $7 billion in fourth quarter 2025 EV restructuring. In our opinion, too many economists and media commentators are quoting each other instead of looking at the actual numbers.

The other catalyst for a selling wave this week was a report by a little known firm called Citrini Research that rattled investors by envisioning a future in which autonomous AI systems – or agents – upend the entire US economy, from jobs to markets and mortgages. A warning from Nassim Taleb, author of the 2007 best-selling book “The Black Swan: The Impact of the Highly Improbable” told investors they should brace for escalating volatility as the AI rally enters a fragile phase and even bankruptcies could be ahead for the software sector. In response, International Business Machines Corporation (IBM – $229.32) fell 13% on February 23^rd.

There is another development that has investors worried and that is the vast and opaque $1.8 trillion private credit market. Blue Owl Capital (OWL – $10.73), an asset manager specializing in private debt financing, recently announced it was limiting withdrawals from a $1.6 billion fund. This sent ripples through the private credit industry. We are concerned about this as well, particularly since this is an unregulated area of finance. It is unlikely that the private debt market represents a systemic risk to the banking system, however, private credit firms have been partnering with insurers which potentially broadens the risk they represent. 

While no one likes to see the stock market go down, we see a silver lining to the recent selloff. If the stock market were in a bubble – and one could materialize someday – this kind of panic linked to concern about future fundamentals and earnings, is not typical of a market top. And as we noted last week, as the S&P approaches a milestone of 7,000 it is not unusual to see a bit of fear and consolidation. In short, this fear is good. It is also showing up in investor surveys. Last week’s AAII sentiment survey showed bullishness fell 4.0% to 34.5% and bearishness fell 1.2% to 36.9%. Bullishness is now below average for the first time in 12 weeks. Bearishness is above average for the fifth time in 12 weeks. The 8-week bull/bear index is 10.2% and neutral. The last significant signal in this indicator was a positive one in late September. See page 10.

There was a series of economic releases during the week, and in a nutshell, it showed that the economy was slowing at the end of 2025. This begins with the first estimate for fourth quarter GDP of 1.4%, which follows on the heels of the 4.4% reported for the third quarter. The weakness was concentrated in a decline in residential investment and decline in government spending, but the consumer, while still resilient, did slow consumption. Housing starts for December were down 7% YOY despite a small gain for the month. Single-family starts fell 9% YOY. Housing permits were down 2.2% YOY and single-family permits declined 11% YOY. For the year ending in December, 1.5 million housing units were completed, a decline of 8% from the previous year. See page 3.

International trade was an interesting release. In 2025, the trade deficit in goods and services was $901.5 billion, down $2.1 billion, or 0.2% from 2024. Exports were $3.4 trillion, up $199.8 billion, or 6.2%, and imports were $4.3 trillion, up $197.8 billion, or 4.8%. The oddity of 2025 was the erratic trade in nonmonetary gold — which is included in the trade numbers for goods. Much of this activity in gold trade was triggered by uncertainty regarding tariffs announced in April 2025 and the shift to hard assets. Some of these tariffs are now nullified by the recent Supreme Court decision. Nonmonetary gold imports surged to a record $80.8 billion in the first quarter of 2025; however, nearly half of this, or $34.8 billion of gold was exported in the second quarter of 2025. Notably, the $34.8 billion gold exports represented 6.5% of total exports in the second quarter — a record. See page 4. However, what gives us comfort is earnings growth. This week the LSEG IBES consensus earnings estimate for 2026 rose $0.17 to $314.62 and the 2027 forecast rose $0.54 to $364.54. The S&P Dow Jones estimate for 2026 rose $0.33 to $310.72 and the new consensus estimate for 2027 debuted at $360.22. This means the market is trading at 21.7 times 2026 estimated earnings and 18.75 times 2027 estimated earnings. Although PE multiples are a bit rich, the forward earnings yield of 4.7% and dividend yield of 1.15% compare well to a 10-year Treasury bond yield of 4.08%. Plus, the 12-month sum of operating earnings shows a gain of 16.7% YOY, far better than the 75-year average of 8.1% YOY. We remain a buyer on weakness.

Gail Dudack

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