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good morning. Procter & Gamble announced strong financial results yesterday, with sales up 3%. Important milestone: For the first time since 2019, price increases did not contribute to sales growth. At least in consumer goods, the war on inflation feels like a victory. For more wins, email robert.armstrong@ft.com and Aiden.reiter@ft.com.
Magnificent Seven
The Magnificent Seven tech stocks haven’t had a great month (yesterday aside, they had a good day). Below is the performance of the Bloomberg Mag7 Index compared to the performance of other US large-cap stocks. Big Tech has been underperforming since Christmas.

MagSeven is such a large part of the U.S. stock market that a change in their fortunes would mean a change in the character of the market as a whole. So what’s going on here? It would be very welcome if 2025, and the Trump administration, delivered the boost in U.S. stock market returns that portfolio managers have long desired.
When we see a change in stock market trends, the first question to ask is whether changes in the interest rate environment have anything to do with it. In this case, the answer to that question becomes interesting. Below is Mag Seven’s relative performance going back to January 2024, plotted against the 10-year Treasury yield.
Since the middle of last year, the correlation between the rate and Mag7 has been rough but noteworthy. Flat or declining interest rates coincide with the decline in the performance of large technology companies, while rising interest rates outpace their performance. Of course, this could be a coincidence, but it’s also possible that there’s a third factor at play that affects both series. It is true that there is not always a positive relationship between interest rates and Big Tech’s performance. In fact, the exact opposite relationship has long been touted, with lower interest rates supporting big tech companies.
However, there is a decent explanation of what’s going on here. Rising interest rates reflect concerns about inflationary pressures, thus implying tightening of monetary policy and thus slower growth. And as the economy slows, investors want to own companies that don’t rely on economic growth to grow revenue and profits. Big tech companies fit the bill. In other words, Mag7 has become a flight-to-safety trade.
Reinforcing this interpretation, the sectors that outperform while MagSeven underperforms are cyclical sectors. Over the past month, the main industries were energy, materials, industrials and finance. The prospect that President Trump’s tax cuts and deregulation will boost the U.S. economy, but crucially, it won’t suffer from inflation, is a bummer for all four parties. The worst-performing industries over the past month also fit into this theory. Consumer staples and food stocks, which are investment targets for recessions, have performed badly.
A few weeks ago, we described the market as being “on edge, with uncertainty the dominant theme.” However, that interpretation is no longer convincing as cyclical stocks continue to outperform Mag7. Expectations for growth are taking hold.
I’ll explain this (questionably sound) theory in more detail tomorrow.
Oh, Canada, and love, Mexico
Late Monday, President Donald Trump announced that he would impose flat 25% tariffs on Mexico and Canada by February 1. America’s neighbors are the United States’ largest bilateral trading partners. So one might expect this threat to spook markets, either by hurting certain companies or by raising inflation expectations. However, the stock market did not move.
The only notable market reaction was currency. The Canadian dollar and Mexican peso rebounded Monday afternoon, but tariffs did not appear to be on the agenda for the first day. However, it first fell sharply on Tuesday and has been climbing ever since.
There is a lively debate about whether President Trump’s tariffs will lead to inflation across the U.S. economy, with some good points on both sides and some evidence of inflation concerns in the bond market. Unhedged is withholding judgment on this for now. The scope of the tariffs and how other countries (in this case Canada and Mexico) will retaliate remains to be seen.
But it will certainly have a noticeable impact on certain areas of the economy, such as inflation. First, keep in mind that America’s neighbors are our largest trading partners.
Tariffs will not be a major drag on U.S. economic growth. Our colleague Chris Giles recently pointed out that the United States is a fairly closed economy compared to developed countries. Merchandise trade in the United States is just 19 percent of GDP, compared to 30 percent in the EU and 53 percent in Canada. And compared to the enormous size of the U.S. economy, exports to Canada and Mexico are small, each accounting for just over 1% of GDP.
Tariffs would cause even greater economic damage to Canada and Mexico. Stephen Brown of Capital Economics points out that exports of Canadian products to the United States are equivalent to 20% of Canada’s GDP, and that a 25% tariff could cause GDP to fall by “about 3%, potentially triggering a recession.” There is a gender,” he said. Say. The impact on Mexico’s economy is also significant, with exports to the United States accounting for 25% of Mexico’s GDP. “The hit to Mexico’s economy is likely to be severe, potentially reducing GDP growth by up to 2 percentage points,” said Andres Abadia of Pantheon Macroeconomics.
But some U.S. businesses and industries will be disrupted. The United States relies heavily on Canada and Mexico in key sectors, particularly energy and minerals, automobiles, timber, and agriculture.
The U.S. gets more than half of its oil imports from Canada, and a higher trade wall would quickly calm the oil market. Other markets are facing more severe corrections. The United States has a large timber industry and exports much of its food, but home builders, retailers, nuclear power companies and manufacturers are reshaping their supply chains, especially under the threat of tariffs on other countries. It will take time to do so. U.S. automakers are also moving much of their manufacturing to Mexico. Reinvesting in U.S. factories and finding other parts suppliers will also take time. While I would refrain from calling the impact on prices an all-out inflation, a temporary price shock from the 25% tariff seems certain.
Shares of the largest home builders, automakers and grocery chains were little moved on the news. Commodities such as oil and uranium are falling. This may be evidence that markets have already priced in the tariffs or are remaining in wait-and-see mode. However, if President Trump follows through on his threats, we predict the impact will extend beyond currency markets.
(writer)
A book I read often
far from home.
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