As tech weakness, escalating trade risks, and renewed economic growth concerns prompted a US sell-off, and as Mexico, China and Canada retaliate, wealth managers discuss the impact and asset allocation.   

US stocks fell and bonds rose on Monday as tech weakness, escalating trade risks, and renewed economic growth concerns, prompted a broad sell-off.

The S&P 500 fell 1.76 per cent, while the tech heavy Nasdaq dropped 2.64 per cent, weighed down by US tech firm Nvidia which fell 8.8 per cent. Nvidia’s decline accounted for 30 per cent of the fall in the S&P 500 index. Bonds rallied as investors sought safety, with the 10-year US Treasury yield falling 5 basis points overnight to around 4.16 per cent. On Tuesday, Japan's Nikkei 225 led declines with a 1.6 per cent fall, while the MSCI Asia ex-Japan index slipped 0.3 per cent.

Several factors contributed to the decline in stocks, with Nvidia already under pressure in recent days after its quarterly results disappointed investors' high expectations. On Monday, US President Donald Trump confirmed that he would go ahead with a new 25 per cent tariff on Mexico and Canada, which are the most impacted by this measure, and double tariffs on China to 20 per cent over border and narcotics-related issues. Trump also said that a separate order for reciprocal tariffs would come into effect on 2 April.

Gold was up, amid the highest levels of uncertainty this year in the US market, whether for stocks or bonds, coinciding with the US escalating its trade war with Canada, Mexico and China.

Retaliation
Canada has retaliated with a 25 per cent tariff on C$30 billion ($20.6 billion) of US imports, which will extend coverage of a further C$125 billion of US imports in 21 days if no resolution is met. China enacted a 10 to15 per cent tariff effective 10 March, targeting a raft of US agricultural products ranging from beef and pork to dairy, fruit, and grains, specifically targeting soybeans, of which it is the largest importer, purchasing over $12 billion in 2024. Mexico is also expected to announce its response. 

While the tariff rhetoric has rattled markets, Mark Haefele, chief investment officer at UBS Global Wealth Management, sees it as part of Trump’s negotiation strategy rather than a fundamental shift in trade policy. He has historically used aggressive language as leverage, often walking back threats after securing concessions. On Monday, for example, Taiwan Semiconductor Manufacturing Company (TSMC), the world's largest contract chipmaker, announced plans to make an additional $100 billion investment in the US and build five additional chip factories. Though near-term uncertainty remains high, Haefele does not expect tariffs on key trading partners to be broad, sustained, or disruptive enough to derail US economic momentum.

Jeff Schulze, head of economic and market strategy at ClearBridge Investments, part of Franklin Templeton, also said at Franklin Templeton’s UK Investment Conference in London on Tuesday that he expects the tariffs on Mexico and Canada to be temporary, as part of a negotiation strategy, but he believes that those on China are there to stay. However, China exports less to the US and many Chinese firms have already accelerated their localisation strategy which should mitigate the tariff impact.

“Tariffs are likely to add upward pressure to inflation and be a headwind to economic growth at the margin, an unfavourable combination for risk assets broadly. In the near term, this risk remains unknown, which could weigh on markets, as the 25 per cent tariffs on Mexican and Canadian imports were not widely expected to come into effect and many believe they are likely to be at least partially removed (lower rate and/or key exemptions granted) in the coming weeks," Joshua Jamner, senior investment strategy analyst at Clearbridge, said.

As the trade war unfolds, investors will re-price tariff expectations, which could lead to ongoing market volatility. “The largest companies in the benchmark have an outsized share of revenues derived from overseas, making them potentially more vulnerable to trade war escalations. For example, the S&P 500 equal-weight index was down by 0.7 per cent less than the cap weighted version during Monday’s tariff-driven sell-off," Jamner added.

“At this juncture, the trade war sell-off may represent an opportunity for long-term investors. Investor sentiment has reached an extreme as evidenced by the AAII Bull-Bear spread notching one of the 10 most bearish readings in its almost 40-year history last week. Historically, the S&P 500 has delivered a +13.6 per cent price return on average over the subsequent 12 months from bottom-decile readings in the AAII Bull-Bear spread, as is the case today,” Jamner said.

Despite tech sector weakness and trade-related concerns, both Schulze and Haefele expect resilience in US equities, supported by solid earnings and AI tailwinds. “The US consumer is still in a good position and balance sheets are strong,” Schulze said. “Nvidia’s post-earnings pullback weighed on sentiment, but its strong guidance and AI-driven capex trends reinforce his confidence in artificial intelligence (AI) as a structural growth driver, even amid short-term volatility,” Haefele added.

While market sentiment remains sensitive to AI demand trends and tariff risks, Haefele believes that earnings growth, AI investments, and economic stability should continue to support stocks.

“While volatility may persist, we continue to see room for upside in equities, supported by resilient earnings, AI-driven tailwinds, and monetary policy easing. We continue to expect the S&P 500 to reach 6,600 by year-end,” Haefele said.

Meanwhile, the annual session of the National People’s Congress (NPC) which began on 5 March, with the week-long session expected to reveal a more pro-growth agenda compared with last year. Schulze believes that the stimulus measures will be more pronounced this time, boosting the economy and business confidence. Swiss private bank Julius Baer recommends that investors broaden out their exposure in the Chinese market by including non-IT sectors because select subsectors such as semiconductors are starting to look pricey.