Capital Economics Slashes S&P 500 Forecast as AI Hype Fizzles The stock market is in free fall, and forecasts are following suit. After the S&P 500 plunged 4.8%—its worst day since the COVID crash—analysts are rapidly revising their expectations. The latest cut comes from Capital Economics, where chief market economist John Higgins has slashed his bullish 2025 target from 7,000 to 5,500. What changed? A toxic combo: rising recession risks from Trump’s new tariffs and a cooling AI trade. Higgins had been banking on two key drivers for his previous call—moderate economic growth and relentless investor appetite for AI-powered gains, especially in big tech and chip stocks. But now, both pillars are wobbling. “Even before the tariff news, we expected a slowdown,” Higgins said. “Post-announcement, we still don’t forecast a recession—but the risk is clearly higher.” He also points to potential drags from stalled tax policy, persistent inflation, and fewer Fed rate cuts than previously hoped. But the real surprise? His growing concern about China’s emerging challenge to U.S. dominance in AI. Higgins notes that Chinese players like DeepSeek could disrupt the market by monetizing AI with cheaper, older tech—putting U.S. big tech earnings in jeopardy. If there’s an AI bubble, he suggests, it might be in the earnings projections, not just the lofty valuations. “Analysts haven’t moved to cut EPS forecasts for U.S. tech—but that could be coming,” he warned. Nvidia, the AI poster child, is already down nearly 33% from its highs. Higgins isn’t ruling out a rebound but says it likely won’t come until macro conditions improve and U.S. firms prove resilient against global threats. With his new 5,500 target for 2025, Higgins is pricing in a forward P/E of around 18 based on current EPS estimates of $305—though that too may shift. He now sees a slower recovery ahead: 6,000 in 2026, and 6,500 in 2027.

Apple Faces Tariff Uncertainty but Has a History of Exemptions Apple’s strong brand loyalty, high profit margins, and past success in securing tariff exemptions may help it weather the latest trade challenges. On Wednesday, President Donald Trump announced a new 34% tariff on Chinese goods—on top of an existing 20% tariff—sending shockwaves through the tech sector. Wedbush analyst Daniel Ives called the move “worse than the worst-case scenario” and described the tariff hike as “a jaw dropper.” Apple Inc. (AAPL) was among the hardest-hit stocks, falling 7.1% in after-hours trading. If those losses extend into Thursday’s session, it would mark Apple’s steepest single-day drop since September 3, 2020, when shares fell 8.0%. Despite investor concerns, Apple was granted tariff exemptions during Trump’s first term, raising speculation about whether the company can secure similar relief this time. Ives remains optimistic. “It’s a very nervous announcement for Apple given its China exposure,” he told MarketWatch. However, he believes iPhones and other Apple products will likely be exempt again. “Investors will sell first and ask questions later, but we saw this play out in Trump 1.0,” he added. Apple’s sharp stock decline underscores two key challenges. First, while the company has diversified its supply chain—expanding production to Vietnam—Trump also announced a 46% tariff on Vietnamese goods, limiting Apple’s ability to sidestep the impact. Second, in today’s economic climate, raising prices to offset tariffs could hurt demand and squeeze profitability. Still, some analysts believe the selloff is overdone. “Even without an exemption, Apple may not be as affected as people fear,” said Angelo Zino, a technology analyst at CFRA, who maintains a buy rating on the stock. “Over the last six years, Apple’s gross margins have grown from about 38% to 47%, giving them room to absorb some of the costs.” Apple could also distribute the burden across its supply chain. And if prices rise, the company is betting that its strong customer retention and ecosystem of services—accounting for 21% of total revenue—will help mitigate the impact. “For now, the White House says it isn’t making deals,” Ives wrote. “But we believe negotiations and workarounds will emerge in the coming months as companies and countries adjust to this new tariff environment.” Apple did not immediately respond to MarketWatch’s request for comment. When asked about tariffs during its January earnings call, CEO Tim Cook said the company was “monitoring the situation” but had no further comment. Zino remains confident in Apple’s ability to navigate the uncertainty. “We trust Apple’s leadership more than most in the tech industry.”

International stocks posted their strongest first-quarter outperformance against U.S. stocks on record, according to Dow Jones data. In late 2024, the “American exceptionalism” trade was thriving, with investors pouring money into U.S. stocks following Donald Trump’s election victory in November. However, the first quarter of 2025 has painted a different picture. U.S. stocks have struggled due to the unwinding of artificial intelligence-driven trades and uncertainty surrounding tariffs, while international markets have surged ahead. As of Monday, the S&P 500 (SPX) was on track to trail global stocks—measured by the MSCI All Country World Index ex-U.S. ETF (ACWX)—by nearly 11 percentage points in the first quarter. This would mark the largest first-quarter outperformance by international stocks on record, based on Dow Jones Market Data dating back to 1987. Despite this shift, U.S. stocks have significantly outperformed their international counterparts over the past two decades. Since March 2005, the S&P 500 has risen 370%, compared to less than 65% for the MSCI All Country World Index ex-U.S. ETF, excluding dividends. This suggests that a “catch-up” trade is now underway. “We’re finally seeing some reversion to the mean,” said Ryan Dykmans, chief investment officer at Dunham & Assoc. Investment Counsel, in an interview with MarketWatch. Historical data indicates that when international stocks outperform U.S. equities significantly in the first quarter, they tend to maintain that lead for the rest of the year. Global Market Performance Stock performance has varied globally in the first quarter. The STOXX Europe 600 (SXXP), covering eurozone, U.K., and Swiss stocks, is on track for its best first-quarter outperformance against the U.S. since 2015, according to Dow Jones data. In contrast, Japan’s Nikkei 225 (NIK) has struggled, falling over 10% in local-currency terms, according to FactSet data. Currency Weakness and Foreign Investment Risks For foreign investors in U.S. stocks, 2025 has been particularly challenging. The U.S. dollar has declined alongside equities. As of midday Monday, the ICE U.S. Dollar Index (DXY) had dropped about 4% for the quarter, while the S&P 500 had fallen over 5.5%, per FactSet data. This marks the first time both have fallen simultaneously in a calendar quarter since early 2018. A weaker dollar amplifies losses for foreign investors. Many had avoided hedging their currency exposure due to the dollar’s historical strength. If U.S. stocks continue to lag, international investors may shift funds to Europe or other markets, potentially exacerbating U.S. stock losses in a negative feedback loop. “There was a time when U.S. stocks were primarily owned by domestic investors,” said Hardika Singh, an economic strategist at Fundstrat Global Advisors. However, since the early 2000s, foreign investment in U.S. stocks has grown significantly. According to Federal Reserve data cited by Goldman Sachs, foreign investors held 18% of U.S. equities in late 2024, up from 7% in 2000 and just 2% in 1960. By late 2024, U.S. stocks accounted for 57% of global equity market value, surpassing the peak of the dot-com bubble in 2000. However, their share has since declined to 54%. Singh attributes the recent outperformance of international stocks to a “catch-up” trade rather than a long-term shift. While Trump’s tariff policies introduce uncertainty, their economic impact is expected to be global as trading partners retaliate. Moreover, U.S. companies are still projected to experience stronger earnings growth than their global peers in 2025, reinforcing Fundstrat’s expectation that U.S. stocks will regain leadership before year-end. “It really is to the rest of the world’s advantage that the U.S. continues to do well,” Singh added. On Monday, the S&P 500 rose 0.6%, trimming earlier losses. The Dow Jones Industrial Average (DJIA) gained 417 points, or 1%, reaching 42,001, while the Nasdaq Composite (COMP) fell 0.1% as Big Tech stocks continued to struggle.

Investors Brace for Market Volatility as Trump Plans Sweeping Tariffs U.S. stock futures dipped on Sunday as investors grew anxious over President Donald Trump’s forthcoming reciprocal tariffs, which he signaled would target nearly all countries. The tariffs, aimed at addressing perceived trade imbalances, are expected to be announced this week. “I couldn’t care less if the prices on foreign cars go up; they’re going to buy American cars,” Trump stated in a Saturday interview with NBC News. “We have plenty.” The planned 25% tariffs on foreign-made cars and auto parts are set to take effect on Thursday. Additional tariffs, potentially as high as 20%, could be imposed on a broader range of imports, according to the Wall Street Journal. Market Reactions and Growing Uncertainty At 11 p.m. Eastern on Sunday, Dow Jones Industrial Average futures (YM00) fell around 180 points or 0.4%, while S&P 500 futures (ES00) slipped 0.7% and Nasdaq-100 futures (NQ00) declined 1.2%. Bitcoin (BTCUSD) also lost ground, falling below $82,000. On Friday, the Dow tumbled 1.7%, the S&P 500 dropped 2%, and the Nasdaq Composite sank 2.7%, extending March’s losses. Concerns over tariffs, inflation, and weak economic data have fueled worries of stagflation—a period of low growth and high inflation. Overseas markets mirrored these concerns, with Japan’s Nikkei 225 falling 4%, and stocks in Hong Kong (HSI -1.3%), South Korea (KOSPI -3%), and Australia (ASX 200 -1.74%) also declining. Trump Dismisses Price Hike Concerns Trump denied reports that he advised U.S. automakers against raising prices in response to tariffs. “No, I never said that,” he told NBC News. “I couldn’t care less if they raise prices, because people are going to start buying American-made cars.” A White House aide later clarified that Trump’s comments referred to foreign-made cars. Despite this, economists warn that the tariffs will likely drive up prices, even for domestic vehicles, due to the higher cost of imported parts. Industry Experts Expect Significant Price Increases Morgan Stanley analysts forecast that car prices could rise by 11% to 12% on average as automakers pass on tariff costs to consumers. Bloomberg Intelligence’s Steve Man warned of further strain on already thin profit margins for automakers. “Even if Trump pressures companies to maintain prices, the financial impact will be severe,” Man said. “There’s no avoiding the ripple effects on the industry.” Stephen Innes, managing partner at SPI Asset Management, described the tariffs as a significant threat to global supply chains. “A 25% blanket tariff on imported vehicles isn’t just a trade policy shift; it’s a seismic shock for inflation and supply chains,” he said. A Permanent Trade Policy Shift? Trump suggested that the tariffs will be a long-term measure, unlike previous levies on Mexico and Canada that faced delays. He maintained that the scheduled April 2 deadline is firm unless trading partners offer substantial concessions. “I’m open to negotiations,” Trump said, “but only if they’re willing to give us something of great value.” As investors await further details on the tariffs, market volatility is expected to persist, with implications likely to ripple across industries and global trade.