The U.S. stock market survived Nvidia's plunge, but failed to survive the tariff threat

Source: Barron's Chinese

The speed with which the new tariffs are arriving is undermining hopes that Trump is using tariffs merely as a negotiating tool.

Last week, the U.S. stock market was hit by the DeepSeek chatbot, earnings reports from large technology companies, and the Federal Reserve's interest rate meeting. Just when the stock market seemed to have weathered these storms, the tariff threat came.

The S&P 500 fell 1% last week, which is not a particularly large drop, but the severe impact on artificial intelligence themes and Nvidia (NVDA) stocks - one of the key drivers of the rise in U.S. stocks - should still attract investors' attention.

Last week's U.S. stock market trend

The stock market crash last Monday (January 27) reflects such an anxiety: if DeepSeek can really be comparable to ChatGPT, then the price of artificial intelligence may be much lower than previously expected. That’s a potential boon for users, but a blow to big tech stocks that have poured billions into their projects, and a blow to the idea that the U.S. is ahead of the rest of the world in AI.

It’s a big shift, though how much of a difference it will make remains to be seen. “We are still shocked that tech investors think DeepSeek will dramatically change the $2 trillion in AI spending expected over the next three years,” Wedbush analyst Dan Ives wrote in a research note.

Investor focus then almost immediately turned to earnings from Meta Platforms (META), Tesla (TSLA), Apple (AAPL) and Microsoft (MSFT). They did their best to reassure the market, and the first three succeeded, while the last failed. Overall, though, comments from tech company management gave investors some comfort, and many even saw a positive side.  

While investors are concerned about Silicon Valley's dominance in artificial intelligence, the S&P 500 was essentially flat as of Thursday's close: the index did not fall again to the lows it hit last Monday, with 333 components rising and 169 falling. "Stable short-term breadth is a sign of strength in the stock market," said Ed Clissold, strategist at Ned Davis Research.

Meanwhile, Tom Essaye, president of Sevens Report, pointed out that economic data also performed well. "The fourth-quarter GDP data was slightly weak, but not particularly weak, consumer spending remained strong, and the U.S. economy was basically in a 'Goldilocks' state," he wrote in his research report. The Federal Reserve, which was on the sidelines, announced that it would keep interest rates unchanged after concluding a two-day meeting, which did not have much impact on the stock market.

All is not calm in Washington, D.C., however, and a sustained stock market rally is never a sure thing. A pleasant rally turned to a decline on Friday when President Donald Trump reiterated that he would impose 25% tariffs on Mexico and Canada.

Starting on February 4, the United States will impose 25% tariffs on goods imported from Mexico and Canada, 10% tariffs on energy products imported from Canada, and 10% tariffs on China.

The speed with which the new tariffs have arrived appears to be undermining hopes that Trump will be able to use tariffs as a negotiating tool to any great extent. The new U.S. tariffs have already triggered threats of retaliation from other countries, and Trump has also threatened to impose tariffs on goods imported from the European Union.

ING economist Inga Fechner wrote in a research note, "Almost half of U.S. imports will be subject to higher tariffs, which could disrupt supply chains and severely affect the economies of the U.S., Canada and Mexico. Industries such as automotive and manufacturing that are deeply integrated with U.S. supply chains will face rising costs and supply disruptions."

U.S. trade policy is once again dominating the headlines, and it won't stop there, James Reilly, senior market economist at Capital Economics, wrote in a research note.

Perhaps it's time for investors to leave the market for now.