@theMarket: Stocks Go Nowhere Fast

Equities remained on hold this week but managed to produce gains for the month. Tariff news dominated the tape, while the quarterly earnings results supported the market overall. Thanks to strong earnings from Nvidia and a federal court decision against reciprocal tariffs.

 

It was a Mr. Myagi kind of week as tariffs off, tariffs on ping-ponged through the federal court system while global markets reacted in kind. On Wednesday, a federal trade court blocked some of President Trump's most sweeping tariffs, set to take effect in July. The three-judge panel of the U.S. Court of International Trade placed a temporary hold on some tariffs imposed by utilizing a 1977 law called the International Emergency Economic Powers Act (IEEPA). That lasted less than 24 hours as White House lawyers managed to lift the order for ten days.

 

The president had argued the act gave him the authority to impose reciprocal tariffs worldwide, but the court disagreed. It wrote that Trump's actions  "exceed any authority granted to the president by IEEPA to regulate importation using tariffs." Duties based on other laws remain in force, such as tariffs on steel, aluminum, and autos.

 

Expectations that the ruling would shoot down the tariffs may have been why so many countries have been "negotiating with good faith" and yet were unwilling to sign on the dotted line until the trade court announced their decision. Why agree to anything when the country's legal system declares your actions illegal? It appears foreigners were right to hold out until this week.

 

The U.S. court system is causing increasing problems in the implementation of many of Trump's most important initiatives. Over 328 lawsuits have challenged Trump's use of executive powers. The courts have ruled against him in more than 200 cases so far in his second term. Immigration, deportations, reduction in the size of government, birthright citizenship, transgender military service, DEI programs, and now tariffs.

 

However, the Wall Street consensus is that the trade war is far from over. There are more conventional means at the president's disposal to impose tariffs, although they do not confer the broad powers Trump claims he needs. The more traditional approach would be to utilize provisions of U.S. trade laws, such as Section 232 (tariffs on national security grounds) or Section 301 (unfair trade practices), to impose tariffs.

 

Overall, this legal setback will likely delay and complicate the imposition of tariffs. Appeals take time, as will adjusting trade strategy. Given that tariff revenues figured prominently in the calculations of deficit spending, the delays may also cause trouble within the Republican Congress and its timetable for passing the tax and spending bill.

 

Aside from busting the budget, the "One Big Beautiful Bill Act" also includes a change in the tax treatment for foreign capital in the U.S. under a provision labeled Section 899. The provision states that "discriminatory foreign countries” that impose levies that impact U.S. companies would be charged a new 5 percent tax on their U.S. income. Why should you care?

 

If passed, it would transform the present trade war into a capital war, where U.S. assets, such as plants and equipment, as well as purchases of bonds and stocks owned by foreigners, including foreign governments, would see their income taxes here grow to 20 percent per year. It would certainly hasten the current trend among non-U.S. investors to reduce their holdings in the U.S. How that squares with Trump’s desire to increase foreign investment is a mystery to me.

 

As for the markets, I warned readers last Friday not to take Trump's threat to apply 50 percent tariffs on Europe seriously. The markets sold off, but I wrote, "His track record for implementing such actions in the recent past has been spotty at best." Sure enough, by Sunday afternoon, he backed off. 

 

Again, in a post this Friday morning (is this becoming a Friday thing?), Trump accused China of violating their two-week-old trade agreement. Markets fell once again on the news. It's impossible to predict how long this tantrum will last but traders have now begun to discount the president's on-again, off-again, shoot-from-the-hip outbursts. His tariff tactics have earned him a new moniker making its way across social media — "TACO," which means "Trump Always Chickens Out."

 

Nvidia, the semiconductor leader in AI, delivered a robust set of numbers in its latest quarterly results, which provided support for technology stocks and the broader market. Earnings overall have been surprisingly good. Economic data has been mixed, with both the economy and inflation slowing. GDP declined by 0.3 percent in the first quarter, driven by a surge in imports. The Fed's inflation forecaster, the PCE Index, came in less than expected for April, as I had expected.

 

In any case, markets are extended but working off those overbought conditions through time. It appears that stocks are poised to continue their upward climb, barring any new developments from the White House. The best-case scenario for the S&P 500 Index would be between 6,000 and 6,200 before taking a breather.  

 

Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.