This article originally appeared in The Post
US markets sold off on Friday as Donald Trump threatened to put additional tariffs of 100% tariffs on China following the imposition of export controls on rare earths. The S&P500 fell 2.7%, while the Nasdaq fell 3.6%, and the Dow declined 1.9%. Gold and silver surged, while crypto currencies and oil sold off. Time will tell if this is all just jousting to try and increase the bargaining position of trade negotiations. Earlier today the Trump administration said that the door was open for China to do a deal, with Vice President JD Vance calling on Beijing to “choose the path of reason.”
Markets didn’t react well to Donald Trump’s threat around China. We have had a few trade deals of course, but the big one that is unresolved is that between the world’s two largest economies. He announced new tariffs of 100% on imports from China, “over and above any tariff that they are currently paying,” starting on November 1. He also said that the US, on that same date, would also impose export controls on “any and all critical software.” Trump also threatened to cancel his upcoming meeting with Xi which was scheduled for the APEC Summit in two weeks’ time.
China controls about 70% of the global supply of rare earth minerals which are critical for high-tech industries, so this is clearly a real “bargaining chip.” Beijing claims that the new controls are legitimate and accused the US of double standards given its export control list has 3,000 items, triple that of China. Beijing also announced that it would start charging US ships for docking at Chinese ports, but this was after Washington started imposing fees on Chinese vessels arriving at US ports.
The current tariff truce expires on November 9, and it looks like we will get lots of jostling for position before then. We have seen these sorts of tactics used in the lead up to other trade negotiations this year (Europe and South Korea as examples) and it has very much been about sabre-rattling. It is interesting to note that following the moves on Wall Street on Friday, the Trump administration has already offered an olive branch of sorts.
Trump also added on social media, “Don’t worry about China, it will all be fine!” US stock market futures opened positively on Monday.
Markets took the opportunity to ease over the developments on Friday, but have had a good run, with the S&P500 up over 14% year to date and the Nasdaq around 18% higher.
Across the Atlantic, the Bank of England issued its latest quarterly update last week. In its report, the BoE’s Financial Policy Committee noted that, on several measures, equity market valuations appear stretched -particularly among technology companies focused on artificial intelligence. The central bank observed that “The market share of the top five members of the S&P 500, at close to 30%, was higher than at any point in the past 50 years.”
Officials highlighted potential downside risks, including “disappointing AI capability or adoption progress, or increased competition, which could drive a re-evaluation of currently high expected future earnings.” They also pointed to “material bottlenecks to AI progress — from power, data, or commodity supply chains — as well as conceptual breakthroughs that change the anticipated AI infrastructure requirements for the development and utilisation of powerful AI models” as factors that could undermine valuations.
However, the Bank also acknowledged that “forward-looking valuation metrics and compression in US equity risk premia remained elevated relative to historical levels.” At the same time, it noted that the S&P 500’s one-year forward price-to-earnings ratio of 25 times is still below levels reached during the dot-com bubble.
Questions around the durability of the surge in AI-related stocks is not particularly new (there were other several related media articles over the weekend), however there are a number of points worth noting. First, demand is real, particularly for AI chips and the associated infrastructure rollout now underway. This is evident in recent quarterly results from companies such as Nvidia, Alphabet, and Oracle. Unlike many during the dot-com era, today’s leaders are generating substantial earnings and cash flows.
While valuations may appear extended - and some of the deal activity across the sector has undoubtedly added to the hype - it’s worth noting that the S&P 500’s higher multiple is, to an extent, justified by the larger weighting of high-growth technology names compared with the past. There are elements of “frothiness” but also many companies whose fundamentals are supporting investor optimism. Nvidia, for instance, trades at around 40× earnings, but its revenues and earnings are forecast to grow by roughly 50% through FY26.
The Generate Funds have exposure to Nvidia and other technology leaders. However, as active investors, we remain focused on ensuring that our portfolios are invested in high-quality businesses with sustainable growth characteristics.
Looking ahead to this week, we are probably not getting economic data out of the US due to the government shutdown, but there will be a lot of interest in the earnings season which gets underway this week. Many big banks are reporting which typically sets the tone. Other companies to report this week including Johnson & Johnson, Taiwan Semiconductor, and American Express. Expectations are for a solid reporting season, with 8% earnings growth, which would be the 8th consecutive quarter.
The Kiwi market was fairly flat last week. The big news was the official cash rate being cut by 0.50%, which caught many by surprise, but was something we were calling for.
The easing should provide some much-needed assistance to our economy. There was another print on Friday showing our manufacturing sector is still in contraction. The BNZ Business NZ Performance of Manufacturing Index went into contraction in August and stayed there in September at 49.9.
Earlier in the week, the latest Quarterly of Business Opinion (QSBO) showed a net 15% of firms expect an improvement in general economic conditions over the coming months, which was a decline from the net 26% expecting an improvement in the June quarter.
We meanwhile are very likely to get another 0.25% cut in November which could help sentiment further. Banks were cutting lending rates into the RBNZ announcement last week with the big banks taking one and two-year rates towards 4.49%. We are likely to get more mortgage rate cuts coming through in the coming weeks, and with the prospect of rates heading towards 4.25%.
Deposit rates are meanwhile under 4%, and this is also seeing funds flow into the equity market, and into property names. Stocks such as Stride and Kiwi Property had good weeks.
This week we have card spending and food inflation numbers in NZ. There are also meetings for PGG Wrightson and Genesis Energy. This morning, Precinct Properties has announced a $310 million equity raise to help fund a pipeline of growth opportunities. The company plans to commence a $201 million 638-bed purpose-built student accommodation development at 256 Queen Street, Auckland.
Fletcher Building on the other hand has updated that activity is still under pressure, with further trading volume declines on the quarter, continued market falls and historically low sales volumes. The company said the principal drivers for the softer performance were continued weak demand across key markets and heightened competitive activity, particularly in New Zealand. Fletchers is now aiming for a further $100 million in cost cuts.