When I gave my Top5 Picks to start the year, I led with cash invested in money market funds yielding over 4% and had no Magnificent 7 stocks on that list for the first time in years. My conservatism was driven by 1) the impact of new government policies 2) the S&P trading at a lofty 25x trailing PE and 3) fears of an AI digestion phase. As for government tariff policies which were much worse than I expected, there is still time before these new tariffs kick in on April 5th for the baseline of 10% and April 9th for the extra tariffs on countries like China, the EU and India. President Trump campaigned on putting on universal tariffs and especially on China and he followed through. But the goal of these tariffs is to get countries to renegotiate down their tariffs on the US and commit to moving more manufacturing to the US. We can only hope it works versus this escalating further with retaliatory tariffs from other countries. Recent comments by countries like France are not encouraging in that regard. And Treasury Secretary Scott Bessent has said, retaliatory tariffs by other countries will result in escalation by the US. Commentary today about $TSM potentially doing a JV with $INTC and a deal for TikTok by US investors certainly adds to credibility of these tariffs being a stick to drive changed behavior from other countries. We will see if either of these come to pass but it would not surprise me to see tariff terms relaxed with both Taiwan and China as a result. On a slightly positive note, main trading partners Canada and Mexico are exempt from reciprocal tariffs. Though existing tariffs remain, USMCA goods remain tariff-free. Also some sectors like semiconductors, pharmaceuticals, copper, lumber, gold and energy for example are exempt from these increased tariffs. But the president is looking at separate tariffs so this is still a risk. US tariffs will go from roughly 3% to start the year to roughly 20% if they all get enacted. This would be the highest level in nearly 100 years and we are likely to get a global recession if they do not come down. No country including the US wants that. If all sides negotiate tariffs down, I believe the US economy will be fine. A recession is still not my base case as I believe cooler heads will ultimately prevail. That faith, however, is being tested in the short-term. Regardless of whether tariffs come down or not, the S&P still trades at 23x trailing estimates which is higher than what seems more appropriate given the risks. Historically the trailing PE has been 19x when, inflation has been between 2.5-3.0% as an example. Investors had been able to ignore high valuations with the Fed cutting in 2024 with expectations of more rate cuts in 2025. However, with increased policy uncertainty, I believe valuations will continue to come down as investors appreciate the risks more. In a more dire recession type scenario, a mid-teens multiple is more likely. The Magnificent 7 stocks were already down 6% on average by the end of February YTD despite the S&P up 1% because forward estimates on six out of the seven names were cut after they reported CQ4 earnings. In fact, Wall street revenue estimates had been coming down for $AMZN, $AAPL and $MSFT since the middle of last year and for $TSLA starting in 2023. But it is just easy to ignore estimate cuts and come up with reasons to like stocks for the long-term when the Fed is cutting and the overall market multiples are expanding. Greed/FOMO are powerful motivators when stock prices are going up. If tariffs were the main reason for the US stock market down 8% YTD through 4/3/25, then why is the $EWW (Mexico ETF) up 16% YTD and $EWC (Canada ETF) up 1% YTD which are the two countries that have the most to lose in a trade war with the US? The All Country World Index excluding the US is up 5% YTD, the $EZU (Eurozone ETF) is up 12% YTD while the $EEM (emerging markets ETF) is up 3% YTD. The EU and China are likely to be tougher tariff negotiations given the export disparity is much closer than for Canada and Mexico but these regional ETFs are clearly doing better than the S&P. Again, this does not lend credence to tariff uncertainty being the only issue for the US stock market. In addition, $KWEB (the China internet ETF) is up 18% YTD versus the 20% decline for the Magnificent 7 so this is not hatred for tech stocks in general. The emergence of DeepSeek in China earlier this year, low relative valuations and multi-year avoidance of this sector by investors has certainly been a more important factor. Looking forward, I think tariffs will ultimately sort themselves out given no foreign country wants to lose access to US consumers which are about one sixth of global GDP. The % of US exports to Canada/Mexico is 16-17% while for them it is ~80% to US. China to US is 16% while US to China is 7%. But EU to US of 20% is only slightly higher than US to EU of 17% which may make that the toughest of the tariff negotiations. As for AI capex digestion, spending for the biggest companies is forecasted to grow at mid-single digits sequentially during the first half of 2025 versus growing in the mid-teens in 2024. This is based on company capex forecasts following Q4 results. I also believe AI hardware demand is overstated right now from foreign countries trying to get in front of export controls. This adds risk to forward guidance. But even during the 49% S&P decline over 31 months following the internet bubble bursting, the S&P rallied seven times by 14% on average despite the recession in 2001. Any type of improvement in the tariff landscape could certainly spur a rally near-term. But with earnings season looming in a couple of weeks, I would see how stocks react to earnings cuts. Overall market valuations are still high and stocks are going down on bad earnings guidance despite their selloffs year-to-date. $RH declining by 40% today in reaction to earnings despite low expectations is certainly not what I want to see. When I did my 2025 forecast, I started and ended my writeup with the following quote: “It is not the strongest nor the most intelligent of species that survives, but the one that is most adaptable to change.” – Charles Darwin. This is still how I am thinking about 2025 with all the changes I expect (on a daily basis in the near-term) in governmental policy between now and the end of the year.