Thoughts from Themes: Talk Loudly and Carry a Big Tariff

One thing was for certain: win or lose, the citizens of Philadelphia were going to take it to the streets at the end of Super Bowl on Sunday night. Thankfully for the city, it was a celebration. Super Bowl LIX was a night to remember for Philadelphia Eagles fans as they dominated the Kansas City Chiefs with a commanding 40-22 victory, redeeming the loss they suffered to the same Chiefs just two years prior. The game, held at the Caesars Superdome in New Orleans, saw the Eagles secure their second Super Bowl title in franchise history. Eagles quarterback Jalen Hurts had a career affirming game, completed 17 of 22 passes for 221 yards, two passing touchdowns, and rushed for 72 yards and a scored touchdown, to win Super Bowl MVP honors. His performance was a testament to his growth and resilience, having overcome early career doubts.

President Donald Trump became the first sitting president to attend a Super Bowl in person. His presence stood in defiance of the terrorist attached that occurred just a few weeks prior in New Orleans on New Years Eve, and underscored the significance of the event and the unity it brings to the nation. While aboard Air Force One ahead of his appearance at the game, President Trump announced he would institute a 25% tariff on steel and aluminum imports, irrespective of the country of origin. True to his word, the new tariff was implemented on Monday.

All eyes have now turned to the European Union (EU), which is widely anticipated to be the next major target in the escalating trade war that Trump is waging against both adversaries and allies alike. Taking a page out of India’s recent playbook, reports are circulating that the EU may be preparing to slash its own tariffs on US auto imports as a gesture of goodwill in an attempt to avert further escalation. Previous negotiations with Canada and Mexico offer hope that there remains an offramp in the event of last-minute brinkmanship, which has largely held both the markets and broader macroeconomic environment together for now. That said, investors and economists alike continue to watch every new development with bated breath as new trade talks continue to turn on a dime. Nevertheless, since Trump assumed office on January 20th, both the MSCI EAFE (+5.50%) and MSCI ACWI ex-USA (4.67%) indices have since overtaken the S&P 500 (+2.55%) year-to-date, a reflection of the increasing economic uncertainty that may continue to grip American markets for the foreseeable future.*

Targeted Themes Outperforming Broad Benchmarks

An expansive suite of targeted thematic and quality fundamental strategies continue to outperform broad benchmarks year-to-date. Indices tracking artificial intelligence, cloud computing, cybersecurity, robotics, uranium/nuclear infrastructure, global banks, European luxury brands, aerospace/defense, airlines, US infrastructure, cash flow, research and development, monopolies, gold miners, silver miners, and copper miner have all outperformed the Magnificent 7, Nasdaq 100, S&P 500, Russell 2000 indices year-to-date.

These thematic and fundamental strategies have delivered significantly higher upside surprises in their fourth quarter earnings relative to analyst estimates. Coupled with their comparatively lower exposure to megacaps, these thematic and fundamental strategies have had more room to run via smaller cap exposure, contributing to their outperformance over the aforementioned market benchmarks.

While they certainly contributed positively to their performance last year, this year has illustrated how the momentum of the Magnificent 7 and megacaps within broad benchmarks like the S&P 500 and the Nasdaq 100 can cut both ways. Given their relatively high allocations on a cap-weighted basis, many megacap names like Apple, Microsoft, and Nvidia have all weighed down broad benchmarks given their negative performance year-to-date.

All Quiet on the Fed Front

Federal Reserve Chair Jerome Powell reiterated that the central bank is in no hurry to lower rates during his testimony to Congress this week and cautioned that inflation risks remain to the upside. Following the Federal Reserve’s meeting on 18 September when it announced its first rate cut, markets had priced multiple 25 bps cuts and a federal funds rate of 2.85% by 10 December 2025. Now, markets are pricing fewer than two 25 bps cuts and a federal funds rate of 3.97% by 10 December 2025. Via a significantly slower pace of rate cuts, interest rates are now once again expected to stay higher for longer than previously anticipated. While Chair Powell refrained from endorsing or denouncing any US trade policies, the potential inflationary effects of higher tariffs and an escalating trade war loom large should they come to fruition.

Investment Themes

The Eagles win over the Chiefs Sunday in their second Super Bowl matchup in three years is an example of how “old scores do not win new games.” Investors have not rewarded results in the way the reward future guidance. ARM Holdings and AMD reported big beats to the top and bottom lines, but shares dropped when they reported weaker than expected guidance. It’s a sign that investors are nervous about how far the AI runway will continue before it comes to a complete halt. However, the tell may be less in their guidance and more in the spend of the hyper scalers that continue to report strong capex in hardware and data centers. Meta, Microsoft, Amazon, Apple, Alphabet, ServiceNow, and many others have maintained and even increased their investment projections in AI chips and hardware, which is a great sign for chip makers and future revenue. Perhaps the surprises to the upside in subsequent quarters will be the necessary proof point for investors, should they come to fruition.

MicroStrategy has officially rebranded itself as “Strategy.” This change reflects the company's new focus on Bitcoin and its evolution into the world's first and largest Bitcoin Treasury Company. The new logo includes a stylized "B" to signify their Bitcoin strategy, and the primary brand color is now orange, representing energy, intelligence, and Bitcoin.

Coinbase (COIN) is heading into earnings with skepticism from some analysts that believe that the crypto trade is a bit exhausted and will not revive again until some form of legislation or executive order provides a catalyst for BTC and other cryptos, including the widely speculative meme coins. The key is volume of transactions and what management expects for future regulation and growth.

Robinhood (HOOD): The share price has outperformed its peers even though it missed revenue expectations last quarter, mostly around the animal spirits created by the new administration in Washington DC and the thought of more risk-on markets for companies and crypto. HOOD has surged more than 40% YTD, so investors will want to see that trading volumes have increased, and international expansion plans are adding to the bottom line if there is a next leg up in the share price.

Uncertainty makes for a jittery investor as earnings day approaches, even for the most speculative. Investors in Super Micro Computer (SMCI) showed a bit of risk-off the morning of their earnings call Tuesday, perhaps nervous that the accounting woes that plagued them late last year are still a factor. Any negative surprises regarding its delayed SEC filing and potential delisting from the Nasdaq will certainly cause a massive disruption in the share price. On the opposite side, positive updates and clarity could provide a short squeeze and send the shares higher.

Major US Economic Reports & Federal Reserve System Speakers (Times in EST)

WEDNESDAY, FEB. 12

8:30 am Consumer price index

8:30 am CPI year over year

8:30 am Core CPI

8:30 am Core CPI year over year

10:00 am Fed Chairman Jerome Powell testifies to Congress

2:00 pm Atlanta Fed President Bostic speaks

2:00 pm Monthly U.S. federal budget

5:05 pm Fed Governor Christopher Waller speaks

THURSDAY, FEB. 13

8:30 am Initial jobless claims

8:30 am Producer price index

8:30 am Core PPI

8:30 am PPI year over year

8:30 am Core PPI year over year

FRIDAY, FEB. 14

8:30 am Import price index

8:30 am Import price index minus fuel

8:30 am U.S. retail sales

8:30 am Retail sales minus autos

9:15 am Industrial production

9:15 am Capacity utilization

10:00 am Business inventories

3:00 pm Dallas Fed President Lorie Logan speaks

Source: MarketWatch.com, US Economic Calendar

Disclosures:

*Source: Bloomberg as of 7 February 2025

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