The Canada-U.S. trade war has begun. What’s next?

Market recap

• This week kicked off with a dramatic sell-off driven by DeepSeek’s low-cost AI model, though the pain was mostly contained to big names in the A.I. and semiconductor spaces, especially in the U.S.
• As the days went on, much of those losses had recovered, with the TSX hitting a record close at one point. A late-week ramp-up in tariff threats drove another sell-off, though the broad response to that possibility has been relatively muted so far.
• When all was said and done, North American equities were mixed on the week. The Dow and TSX managed to eke out gains but the S&P 500 and NASDAQ were down at least 1%. The TSX benefitted from the shift away from U.S. Tech stocks, with that sector jumping 6.4% and its S&P 500 equivalent dragging by almost 5%.

Tariffs

On Saturday, Donald Trump followed through on his promise to enact tariffs on some of America’s closest trading partners, including 25% tariffs on Canada and Mexico (with a lower 10% tariff on Canadian energy) and a 10% tariff on China. Within hours, Canada announced retaliatory tariffs on certain American goods, including wine and beer, fruits and vegetables, clothes, sporting goods, and furniture.¹ While we are not surprised that tariffs were imposed, we are surprised that no deal was able to be struck to limit the tariffs and/or push the discussion out further. As I have mentioned in the past, we think these tariffs are Trump’s way of setting the tone to the world that he means business when it comes to trade, and that not even America’s greatest ally is exempt. Hopefully, Canada will be able to get to the bargaining table quickly and provide Trump with actions on immigration and drugs that will convince him to remove or, more likely, reduce the tariffs. That said, Canada has already retaliated—as they should—and tensions have definitely increased dramatically. Canada is not in this alone, as the 25% tariff on Mexican goods means that they are in a similar position. If there is a minor surprise to be found in Trump’s announcement, it’s that China—the United States’ primary geopolitical rival—only got hit with a 10% tariff. Going forward, we expect some downside for both Canadian equities and the Canadian dollar.

Bottom Line: We expected Trump to implement some new tariffs, though perhaps not this early. Our hope is that negotiation can reduce the risk of a prolonged and costly trade war. Until then: stay strong, Canada!

A.I.

Since its launch in app stores in early January, DeepSeek—the new Chinese artificial intelligence (A.I.) model—has sent shockwaves through markets, causing steep stock declines for U.S.-based Technology leaders like Nvidia. This has prompted some investors to wonder if long-term valuations in the Tech space could be affected. To start, it is worth emphasizing that the A.I. story has not gone away—if anything, DeepSeek demonstrates that firms around the world are now competing to do it better and faster. What this bombshell has highlighted is that there could be a more cost-efficient way to do A.I. than previously believed. In our view, it is unlikely that DeepSeek was able to train its model for $6 million as claimed, and ChatGPT operator OpenAI is currently investigating whether Chinese A.I. companies are using its data in an unauthorized way. But it is possible they really did do portions of it cheaper, and either way, there may be other efficiencies to be found going forward. We think that’s why the market’s initial reaction was so negative—to this point, companies like Nvidia have achieved lofty valuations based on their unrivaled dominance in the space, and if that’s no longer the case, those premiums must be adjusted. Going forward, companies that are closely tied to the A.I. theme may take a moment to pause and consider whether there’s a better and more cost-efficient way to do business rather than spending the hundreds of millions that had been viewed as the cost of entry. That could mean lower profit margins for companies like Nvidia going forward. However, it is worth noting that companies like Meta and others have highlighted that they are not changing their A.I. spend this year, so the adjustment may be gradual. It is still early, but it does warrant some caution.

Bottom Line: A.I is still very much in demand, but we expect to see some pressure on Tech valuations until greater clarity is found.

Interest Rates

It’s been a busy week for the U.S. Federal Reserve (Fed) despite its decision to hold interest rates steady. In a statement after the announcement, the Fed emphasized that inflation “remains somewhat elevated” and indicated that it will continue to monitor the economic situation.² Meanwhile, President Donald Trump took the unusual step of directly criticizing the Fed and Chair Jerome Powell for not easing rates.³ While Trump’s appeals to the Fed are more forceful than previous presidents’, we do not believe that the Fed’s independence is in jeopardy. In fact, we think the Fed’s remarks indicate that they are in no rush to do anything. We do not expect a rate cut at the Fed’s next meeting in mid-March, but we do still believe that rate cuts will happen down the road as long as inflation doesn’t spike and stay elevated. With employment numbers still fairly strong, we think it’s prudent for the Fed to see how Trump’s tariffs (including retaliatory tariffs) play out before making a firm decision—that way, they’ll be able to more accurately predict the inflation trajectory. In our view, the scenario the Fed is trying to avoid is lowering rates too quickly and then having to re-raise them if inflation rebounds. If it turns out that more stimulus is needed, they can always resort to a 50-basis-point cut.

Bottom Line: Despite Trump’s pleas, there is no urgent need for the Fed to slash interest rates—though we do expect cuts later in the year.

Earnings

Companies are continuing to announce their Q4 earnings, and so far, the results look good. Among the market leaders reporting last week were Meta and Tesla, which saw their stocks rise based on the quarter and their forward outlook, and Microsoft, which the market punished as margins in some core areas did not meet up with expectations. But in general, the key names are continuing to report good results. Previously, U.S. banks and the major airlines also announced strong numbers, so it isn’t just a Magnificent 7 (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla) story. This is tied to our story that 2025 will be more broad-based than just the Magnificent 7. Interest rates’ downward trend—not only in the United States, but also in Canada and Europe—should provide consumers with some relief, and that should further support strong earnings going forward. In fact, one of the reasons we remained overweight equities in our 2025 Market Outlook is because strong earnings, buoyed by resilient consumers, should help markets continue their upward trajectory. Looking ahead, the DeepSeek news and Nvidia stock slump have ratcheted up interest in the A.I. leader’s February 26 earnings announcement even more, especially since Nvidia CEO Jensen Huang hasn’t yet made any substantial statements on the matter. Nvidia’s announcement will either indicate that companies like DeepSeek do represent a threat, in which case forward guidance could be muted and the sector could tumble further, or state that this is more smoke than fire, which could give its stock a boost. Either way, the overarching message is clear: earnings still matter.

Bottom Line: Q4 earnings have been strong so far, and given the interest rate trajectory and strength of the consumer, we expect that to continue.

Positioning

For more insights on market risks and opportunities, explore our 2025 Investment Outlook Centre.

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Originally Posted February 3, 2025 – The Canada-U.S. trade war has begun. What’s next?

Sources

¹Michael Race, “Canada imposes 25% tariffs in trade war with US,” BBC, February 2, 2025.

²“Federal Reserve issues FOMC statement,” Board of Governors of the Federal Reserve System, January 29, 2025.

³J.J. McCorvey and Steve Kopack, “Trump slams Fed after decision to hold interest rates steady,” NBC News, January 29, 2025.

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