Weekly Investment Update (04/25/2025)

Interpreting each new trade headline in isolation is challenging. The endgame of President Trump’s trade policy remains unclear, and investors are well served to resist the urge to place too much emphasis on each incremental development. However, an important theme has emerged: de-escalation. This week, the Trump administration softened its stance on three key fronts — trade (specifically with China), the Federal Reserve (confirming that Powell will not be fired), and DOGE (with Musk expected to step back in the coming months).

Financial markets are often driven more by the rate of change than by absolute conditions. Moving from very bad, to bad, to merely okay can serve as a powerful catalyst — especially after a nearly 20% market sell-off. Looking ahead, we believe that, while some economic damage has already been done, the market’s worst fears are unlikely to materialize as political limits to Trump’s policies become more evident.

Finally, investors should not lose sight of the powerful secular trends that will drive markets well beyond the current trade-related noise. For example, Nvidia confirmed this week that demand for its products remains robust — even raising its 2026 estimates. The AI theme is very much alive and well, even if temporarily overshadowed by near-term volatility.

U.S. and China: Trade War Continues Amid Tariff Uncertainty

What is happening: China's economy has recently experienced a mix of resilience and mounting pressure amid escalating trade tensions with the U.S. Last week, China reported first-quarter GDP growth of 5.4% year-on-year (yoy), surpassing consensus estimates of 5.2%. On a more detailed level, industrial production and exports outperformed expectations, likely driven by firms rushing shipments in anticipation of higher U.S. tariffs. For example, smartphone, automobile, and steel output all increased more than 7% yoy in March.

Domestic retail sales also accelerated, reflecting the impact of recent government stimulus measures. Home appliance sales rose 35% yoy in March, supported by government programs that offer buyers up to 20% rebates on new machines.

While recent economic data have been encouraging, U.S. import tariffs are expected to negatively impact growth for the remainder of the year. The Peterson Institute estimates that the weighted average tariff on Chinese goods is now 125%, but actual rates can vary widely across products. For instance, tariffs range from 0% on children’s picture books to 245% on electric cars. The 245% reflects 145% of additional increases on top of the 100% tariff on Chinese EVs implemented during the Biden administration. In retaliation, China has imposed tariffs of up to 125% on American goods and further restricted exports of critical minerals, such as seven different types of heavy rare earth elements (REEs).

Why it matters: Broadly, the U.S.- China trade war has entrenched economic fragmentation and has been reshaping global supply chains.

For the U.S., extremely high tariffs on Chinese goods are likely to simultaneously increase inflation and lower corporate profit margins in the near term and become a major drag on economic growth. On the positive side, U.S. trade policies have incentivized domestic manufacturing and increased global awareness of the national security risks associated with concentrating production capabilities in China. A great example is China’s latest export ban on heavy REEs, which are used in advanced weapons systems ranging from F-35 fighter jets to Virginia-class attack submarines. Currently China has a near-complete monopoly on heavy REE processing, and American and allied countries are now ramping up production with the goal of achieving self-sufficiency by 2027.

For China, the trade war has accelerated its push for technological self-sufficiency and reduced reliance on Western suppliers. However, U.S. tariffs are occurring at an inopportune time — the country is already struggling with a declining property sector and low consumer confidence. American tariffs are estimated to slow China’s GDP growth to the 3.5% to 4.0% range, well below the central government’s 5% target. A substantial de-escalation in the trade war appears unlikely in the near term, but some recent developments have been encouraging and reflect a big improvement in relations compared to just a week ago. On Tuesday, President Trump suggested that tariffs on Chinese goods could be greatly reduced if a deal can be reached. Meanwhile, Chinese importers reported that tariffs on some American semiconductor chips have been temporarily reduced to zero.

While there are segments of the Chinese equity market with promising long-term prospects, such as the technology sector, geopolitical risk has become a structural factor in capital allocation decisions and remains a significant overhang. Bessemer’s portfolios remain underweight Chinese equities overall while opportunistically investing in companies with attractive long-term growth potential and compelling valuations.

Elevated Uncertainty Poses Risks, but Long-Term Tailwinds Remain for U.S. Markets

What is happening: Although markets remain highly sensitive to new policy developments, volatility subsided this week amid incrementally positive news regarding trade policy and more certainty around Federal Reserve independence.

Despite the relatively calm week, persistent uncertainty has raised concerns about a possible erosion of the strategic advantages that have long underpinned U.S. markets. Several recent policy proposals, such as broad-based tariffs and the freezing of federal research grants, have raised questions around the reliability of U.S. assets and the future of “U.S. exceptionalism.”

Why it matters: While the current environment is marked by uncertainty, several secular tailwinds continue to support the U.S.’s leading role in the global financial system. The strength of the U.S. economy begins with its human capital, measured by the experience and skill of its labor force. The U.S. has the highest average education level as measured in years of schooling and is home to 17 of the world’s top 30 universities. Human capital is a main driver of productivity growth in the U.S., and since 2014, U.S. workers have increased productivity by 17%, compared to just a 5% gain in the eurozone. The strength of the U.S. economy is also facilitated by its capital markets. The U.S. is home to nine of the 10 largest companies measured by dollar market capitalization, and North America accounts for 61% of venture capital funds, a further catalyst for productivity growth.

While there is growing concern over the dollar’s reserve currency status and ongoing efforts to de-dollarize, the dollar continues to underpin the global financial system. It accounts for roughly half of all cross-border lending and is involved in nearly 88% of foreign exchange transactions. Although BRICS countries (Brazil, Russia, India, China, and South Africa) have proposed a joint currency to challenge the dollar, deep economic and political differences among the group make meaningful coordination highly unlikely. In the absence of a viable alternative, the U.S. dollar is likely to continue to dominate transactions globally for the foreseeable future.

Bessemer portfolios maintain an overweight to U.S. equities, though overall exposure has been reduced from 77% at the beginning of the year to 69% currently.