For those of you who would prefer to listen:
This was yet another wild and eventful week for the Market. Where to start?
Well, we found out this: President Trump didn’t have the powers to impose those global tariffs. That, from the U.S. Court of International Trade which struck down the tariffs imposed under the International Emergency Economic Powers Act. The trio of judges on the panel found the President overstepped his authority by imposing across-the-board duties on imports from U.S. trading partners. These include the 10% baseline tariffs, the 20% incremental tariff on China and the 25% tariffs on non-USMCA compliant imports from Mexico and Canada. No surprise, the Trump administration immediately filed an appeal, and the appeals court gave it a stay. That means for the next 10 days, everything remains in place. The tariffs will be charged. This case appears destined to land on the Supreme Court which could make this a long, drawn-out process. It’s yet another confusing fakeout for investors. That’s sort of the way this trade war has been since inception.
With this fresh ruling, is there a willingness for countries to continue to fast-track trade talks with the White House? I mean, pretty much every country has to be puzzled by this activity and likely wondering what this trade war has been all about. Stating the obvious, Washington is a really confusing place on Earth. The judicial process and questions surrounding the legality of the tariffs certainly complicate trade negotiations, as if they weren’t complicated enough. Countries will now weigh whether to continue efforts to secure deals or freeze negotiations in hope of gaining leverage if courts rule against the White House. Most likely, they’ll be sitting back and watching with interest and perhaps newfound leverage.
Importantly, the $23 Billion in Chinese tariffs from Section 301 of the Trade Act still exist. That’s the code that addresses unfair trade practices, which China has guilt. And remember the pause coming out of Switzerland? That alleged harmony has evaporated. Treasury Secretary Bessent indicated discussions have stalled. President Trump accused China of violating their agreement on trade. The breakthrough in Geneva, which led to the great pause, has frayed. A return to the trade war seems imminent. This could lead to expanded restrictions on American semiconductor technology and aerospace equipment to China. The Chinese could increase restrictions of rare Earth exports to the United States. Rare Earths are essential for digital devices. China has vast deposits. It’s an area where America is very vulnerable.
Importantly, China has dug in from day 1 on tariffs, choosing to play hardball with the White House. While other nations quickly secured meetings and made concessions, China stood pat. It’s showing no signs of abandoning that strategy either. Then there’s this: JP Morgan CEO Jamie Dimon, who can move Markets, caught investor attention Friday when he said his recent visit to China made it clear that “China isn’t scared.” Tensions are mounting again.
At the heart of all of this trade war is the strategic positioning in this Digital Revolution. The stakes are so high. The United States has been in the lead. China is doing everything it can to catch up. One American company seems to hold the keys to Digital Dominance. That company is Nvidia. It reported earnings this week.
Nvidia climbed back to become the most valuable company in America. It didn’t last. But at #2, behind Microsoft, it alone accounts for a roughly 7% weight in the Stock Market. Nvidia has been the biggest driver of AI as its chips and platforms provide the computing power which is fueling the Digital arms race. When the company announces news, the Market moves.
Nvidia’s Q1 revenue hit $44 Billion. It grew 69% compared to last year. That beat Street estimates by $800 Million, despite $2.5 Billion in lost sales from the China embargo. CEO Jensen Huang said global demand for AI infrastructure remains strong. But Nvidia is caught squarely in the middle of the trade tensions with China. The Chinese Market has essentially been cut off for Nvidia and other innovative companies that produce advanced systems and chips. National security is an obvious concern. Huang warns that blocking Chinese access forces them to develop themselves which can have a long-term, lasting impact. It’s already having an impact in the short term. To counter the revenue slip in China, Nvidia landed new and substantial investments in the Middle East. It coincided with President Trump’s first planned foreign trip.
American business was on display in the Middle East. CEOs across industries joined the trip. It was financially rewarding. Roughly $2 Trillion in deals were done. Partnerships were established. American data centers will be built to help the regional AI rollout. They’re also buying a vast amount of American defense and Boeing planes. For the United States to maintain its lead in the Digital Revolution, it needs to create a global ecosystem. It’s critical that the rest of the world uses American technology and embraces American platforms and infrastructure. Alternatively, if not American innovation, China would be more than happy to fill that void.
The United Arab Emirates agreed to import up to 500,000 of Nvidia’s most advanced AI chips annually. That will start this year. The plan is to build massive AI data centers, creating one of the world’s largest AI campus clusters outside the U.S. Saudi Arabia’s sovereign wealth fund will acquire “several hundred thousand” advanced Nvidia and AMD chips. The state-owned AI company, Humain, plans to build AI infrastructure and partner with Amazon Web Services to invest over $5 Billion in an “AI Zone”. These are really big numbers fueling Silicon Valley’s continued success.
The Middle East Tech deals were clearly designed to establish Saudi Arabia and the UAE as major hubs for US-backed Artificial Intelligence. Of course, concerns have been raised about security and technology leakage with these investments. But it’s a calculated risk. Not doing it could have proven much more costly. The Saudi Kingdom and the Emirates are rich in resources and cash. Crude has been their game for decades. Both have embraced more modern ways and are eager to diversify their economies and be a big player in this Digital Age. The Saudis and Emirates have made it clear they prefer to have American tools and infrastructure over that of China. They’re going to invest aggressively in the cause. If not in U.S. infrastructure, it would land somewhere else.
China is the world’s largest creditor. Beijing will collect $35 Billion in debt this year. The bulk of it, a record-high $22 Billion, is owed by 75 of the poorest countries in the world. Most of the funds were lent a decade ago as part of the Chinese infrastructure export plan, commonly known as the “Belt & Road Initiative”. Nations in Africa, Latin America and Southeast Asia are amongst the recipients of Belt & Road. In addition to being poor, these indebted nations are also very young. They are nations that are emerging, and their growth is rooted in China. An increasingly isolationist United States and a distracted Europe have withdrawn their traditional support over the years. The 21st century is quite different from the 20th. New ideas and new approaches are required. China saw an opportunity and China seized it.
China has spent heavily on traditional infrastructure as well as digital. The country is no longer just a maker of cheap stuff. China is now home to 50% of the AI researchers in the world. It’s being reported that China’s DeepSeek’s first meaningful upgrade matched the performance of global competitors, including OpenAI and Google. Competition is fierce. Jensen Huang said the ultimate winner is the one with the most developers. The platform that succeeds hinges on talent, size and scale. The key is to get the rest of the world on America’s tech stack. The American platform has to receive worldwide adoption. It needs both mindshare and Market share. America needs to secure its lead in AI.
A trusted AI ecosystem requires clear rules that are enforceable. It requires security and safety. China doesn’t seem willing to provide such a thing, having a track record of manipulation and spying. It can be an easy choice. Washington can create an environment where foreign companies and countries are rewarded for choosing America for its innovative solutions. There were elements of that in the Middle East trip. But this is merely the beginning. Washington needs to get both smart and responsible on AI.
Back to the Market:
One thing is clear; Innovation and Global Markets move at a much faster speed than do government and regulations. The United States can’t control global commerce and what other countries do. But it sure can influence it. The argument the Market seems to be making is Washington should stop worrying about who’s buying American innovation and worry more about who might instead buy it from Beijing. Digital Dominance is the prize for this 21st century.
Despite all the confusion and chaos, it was risk-on for the Stock Market in May. The S&P 500 and Nasdaq recorded their best months since November of 2023. It was the best May since 1990. But we mustn’t forget what April felt like. Many of the issues have yet to be resolved. We anticipate the volatile price action to continue into the Summer. Investors are feeling pretty good heading into June. The April crash seems like a distant memory to some. Not us. The Market goes up. It also goes down. There’s nothing like price action to dictate sentiment.
Congratulations to all you graduates. My daughters Sammy and Nikki are among them. It’s an exciting time. It’s a scary time. That’s always the case. You all have your whole life ahead of you. Embrace it and take advantage of every opportunity presented. Remember to be kind and helpful to others along the way.
Have a nice weekend. We’ll be back, dark and early on Monday.
Mike
