What tariff path will Trump take? … Luke expects tariff drama to pass quickly … how big the reversion rally could be … the AI stocks Luke, Louis, and Eric like today
Wednesday brings “Liberation Day.”
This is what President Trump is calling April 2, the day he plans to unveil his master reciprocal tariff plan, or “the big one.”
From Trump:
This is the beginning of Liberation Day in America.
We’re going to charge countries for doing business in our country and taking our jobs, taking our wealth, taking a lot of things that they’ve been taking over the years.
They’ve taken so much out of our country, friend and foe. And, frankly, friend has been oftentimes much worse than foe.
According to a White House memo, the new tariffs will be tailored for each U.S. trading partner. The aim is to counteract the tariffs imposed on American goods as well as other factors that may disadvantage U.S. manufacturers (such as regulations, value-added taxes (VATs), and weak intellectual property protections).
Since Trump announced these tariffs, there’s been tremendous speculation…
Is the tough talk primarily negotiating leverage? If not, how severe might the tariffs be? Is Trump willing to throw the economy and stock market under the bus to achieve his tariff goals?
Last week, our hypergrowth/technology expert Luke Lango, editor of Innovation Investor, highlighted the three most likely ways that tariffs could manifest:
- Trump could match other countries’ tariff rates by closing the tariff rate differentials
- He could slap them with new tariffs equal to their respective VAT rates
- He could go after non-tariff measures – things like sanitary standards, quotas, licensing obligations, and more – with new tariffs
What’s the likelihood of each avenue, and what could it mean for our economy?
Here’s Luke:
The first option – matching tariff rates – seems very likely and won’t do a ton of damage. It will increase the average tariff rate by 1-2 points, barely hit GDP growth, and barely raise inflation.
The second option – attacking the VATs – seems probable and would do a lot more damage. It would increase the average tariff rate by a little more than 10 points, would hit GDP by almost 2 points, and would raise inflation by about a point.
The third option – going after non-tariff measures – seems unlikely but would inflict serious pain. It would increase the average tariff rate by nearly 30 points, would hit GDP by 4 points, and would spike inflation by 2-3 points.
In that scenario, the global economy would plunge into a recession.
But if only options 1 and 2 are enacted – and they are temporary – then the economy could avoid a recession. That’s why [this] week – and the few weeks thereafter – are so important.
Why Luke believes the tariff drama will resolve soon
Luke believes the White House is clearly ready and willing to play “hard ball” in this global trade war.
Trump appears unaffected by his detractors, as well as the growing forecasts of an economic slowdown that would fall directly at his feet.
But Luke urges investors not to get caught up in the pessimism. He forecasts a different outcome:
Despite all the intense and hostile rhetoric out there right now, everyone will rush to the negotiating table to quickly strike new trade deals in April.
Within the first two weeks of April, we expect most countries to reach an agreement with the U.S. that results in the repeal or prolonged delay of most tariffs.
Consequently, we believe that most of these tariffs won’t last more than a few weeks and that by late April, most of this tariff drama will be in the rearview mirror.
Once the tariff drama moves into the rearview mirror, recession fears will abate, consumer confidence will rebound, economic activity will restrengthen, and the stock market will soar.
Luke admits that Trump could prove him wrong. If so, and a significant trade war rears its ugly head, then investors would need to adopt a defensive posture.
But for now, Luke gives the benefit of the doubt to cooler heads prevailing.
How to play a short-term tariff storm
If you read Luke regularly, you know the answer…
Buy leading AI/technology stocks that have taken a beating since mid-February.
To make his case, Luke points us to the Bloomberg Artificial Intelligence Aggregate Equal Weight Total Return Index, calling it “the best comprehensive measure of AI stocks in the market.”
It includes a wide array of AI stocks, from little players like Astera Labs (ALAB) and Celestica (CLS) to big players like Nvidia (NVDA) and Microsoft (MSFT).
Luke writes that, last week, it hit “major bottom” levels.
As you can see below, it crashed to lows not seen since late-2022.
Source: Bloomberg
Back to Luke:
[The AI Index] is trading at its cheapest valuation since the AI Boom got started in late 2022 (21X forward earnings).
It has dropped to its ultimate technical support level (the 250-day moving average) which it has largely preserved throughout the whole AI Boom.
So long as the economy sidesteps a recession, this should be the bottom of AI stocks before they rally big into the summer.
How much could these stocks rally?
Luke writes that after that late-2022 low, AI stocks have largely traded between 24X and 30X forward earnings, with an average forward earnings multiple of 26X.
Since the index now trades at 21X forward earnings, a return to 26X forward earnings would mean a 20% – 25% gain from here.
Don’t forget to factor in strong earnings
In recent Digests, we’ve highlighted that sentiment is the primary driver of a stock’s price in the short-term. According to Morgan Stanley Research, for durations of one year or less, sentiment is responsible for nearly 50% of a stock’s movement.
However, in the long-run, earnings are the true driver. The longer the duration, the greater the link between earnings and price. For example, according to that same Morgan Stanley Research, after 10 years, earnings account for 74% of a stock’s movement while sentiment drives just 5% of it.
Luke points out that AI earnings forecasts are continuing to climb despite the sentiment-driven selloff – creating a tailwind.
Back to Luke:
While AI stocks have crashed over the past few months and are now trading at essentially two-year low valuation levels, profit estimates on those same AI stocks have continued to push higher.
This could help drive a stock rally even further.
But this also sets up a critical binary that we’ve highlighted in recent Digests…
The binary – resulting in a stock market boom or bust – boils down to how this tariff drama resolves… which will drive the outcome of today’s battle between bullish earnings versus bearish sentiment.
Here’s how Luke describes the binary, along with his forecast for its resolve:
AI stocks remain fundamentally strong. They are dropping due to fear of what may happen to those earnings estimates if the trade war heats up and the global economy slows.
But… if the trade war doesn’t heat up… and the economy doesn’t slow… then those earnings estimates will only keep pushing higher… and the current valuation discount will make no sense…
So, AI stocks should rebound strongly.
Last week, Luke, along with Louis Navellier and Eric Fry, provided a roadmap for how to invest in AI
The presentation was especially timely given the discounted entry prices on top-tier AI stocks we’re seeing today due to negative market sentiment.
At the event, our three experts discussed the emerging divide between the “haves” and “have nots” in the market and in our society. One of the most influential factors behind this growing divide is wealth generated from cutting-edge technology and artificial intelligence, something our experts have coined, “The Technochasm.”
This isn’t the first time that Luke, Louis, and Eric have urged investors to recognize the Technochasm and invest accordingly.
Here’s Luke:
We called the Technochasm in 2020. So, believe us when we tell you that this is a chasm that companies and individuals either leap across or fall into. There is no middle ground.
Those who listened to us in 2020 banked ~1,350% from Freeport-McMoRan Inc. (FCX) in 11 months, ~1,000% from Nvidia (NVDA), and upward of 1,200% from Fulgent Genetics Inc. (FLGT) in under two years.
Peanuts, maybe, compared to what’s ahead.
For investors, this creates a once-in-a-generation opportunity.
In their presentation last week, Luke, Louis, and Eric detailed three critical steps you must take now to stay on the right side of this growing tech divide.
They also explained how a trillion-dollar flood of money could soon surge into AI, thanks to moves by President Donald Trump. And they spotlighted some of the stocks poised to dominate the Technochasm.
If you missed it, we encourage you to check out a free replay right here.
Coming full circle…
Everything we’ve discussed today points us back to Wednesday and “Liberation Day.”
Will we be liberated from tariff fears and the recent market correction?
Or will heavy-handed tariffs panic Wall Street, causing the market to continue “liberating” us from all the gains we’ve enjoyed in recent years?
We’ll find out.
Have a good evening,
Jeff Remsburg
