Are Tariffs Really To Blame?

Analyzing the markets with Richie Naso, a Wall Street veteran of over 40 years and former member of the NYSE.

• DJIA 52-wk: +6.10% | YTD: +6.90% | Wkly: -2.73%
• S&P 500 52-wk: +12.68% | YTD: +11.41% | Wkly: -2.43%
• NASDAQ 52-wk: +21.05% | YTD: +14.98% | Wkly: -2.53%
• Utilities Select Sector SPDR ETF 52-wk: +14.82% | YTD: +19.17% | Wkly: +1.45%

Market Performance

• On Friday, Oct 10, the markets plunged after President Trump threatened to significantly raise tariffs on Chinese imports, which rattled risk sentiment. AP News
• The S&P 500 fell ~2.7% that day (its worst single-day drop since April). AP News
• The Dow dropped ~1.9%, and the Nasdaq declined ~3.6%. Reuters
• For the week overall, all major indices finished in the red:
• S&P 500: down ~2.4% Investopedia
• Dow: down ~2.7% AP news
• Nasdaq: down ~2.5% AP News
• Russell 2000 (small caps): down ~3.3% AP News

Prior to the Friday drop, the week had started on a more positive note, especially Monday, when AI / tech optimism drove gains. BlackRock

Key Drivers & Themes

1. Tariff / Trade Escalation Fears

The sharp reversal on Friday was triggered by renewed threats of a 100% tariff increase on Chinese goods and export controls from the U.S. side. Barron's

Investors viewed the move as increasing geopolitical risk and threatening global supply chains, especially in tech. AP News

2. AI / Tech Optimism Early in the Week

At the start of the week, enthusiasm persisted around AI and semiconductor exposure:

• AMD jumped significantly after a deal with OpenAI, which boosted sentiment in the chip / AI space. BlackRock
• The tech sector had been carrying much of the recent market upside, so when trade risk hit, it was one of the first areas to crack. Business Insider

3. Persistent Uncertainty from Government Shutdown

Although the government shutdown began earlier, its effects continued to loom:

• The shutdown delays release of key economic data (jobs, trade data), forcing markets to lean on private / alternative indicators. Stordahl Capital Management
• Bond markets showed signs of worry, with Treasury yields drifting lower as investors sought safer assets. MarketWatch

4. Valuation & Sentiment Risk

• Prior to Friday’s drop, markets were running hot at all-time highs, making them more vulnerable to shock events. Reuters
• The sharp tariff threat acted as a catalyst for profit-taking in richly valued names. Barron's
• The drop in yields also indicates a caution shift; risk assets were repriced downward in response to growing macro and policy uncertainty.

Gold’s Rally Reflects the U.S. Deficit. Neither Is Ending Soon.

The current boom in artificial-intelligence stocks has provoked more than a bit of déjà vu for those who lived through the dot-com bubble that burst around the turn of the 21st century.

But what is especially striking is the contrast between the current economy and that of the 1990s—a contrast most evident in the divergent performance of gold, which soured back then and is soaring now. Both moves correspond to the wildly different fiscal situations facing the U.S. in these two eras.

The yellow metal GC00 +0.88% surged past the $4,000-an-ounce mark on Wednesday, a more than 50% vault since the beginning of the year. Gold has been moving up in a fairly straight line since breaking decisively above the $2,000 mark for the first time in early 2024.

That is a dramatic contrast with the 1990s, when gold fell from over $400 an ounce at the beginning of the decade to a low near $250 by 1999. Meanwhile, U.S. stocks enjoyed a giddy ascent, with the S&P 500 SPX -2.71% index increasing fivefold to its peak of more than 1,500 by March 2000. Then, gold truly seemed a barbarous relic, as John Maynard Keynes famously dubbed it, even more than greenbacks stuffed in a mattress.

You wouldn’t know from the headlines of the past week about bullion’s record, but it’s barely at a new high after inflation. In real terms, gold only recently topped its peak above $800 reached in the frenzied ascent of January 1980 (adjusted by the consumer price index, using the latest reading, for August).

So, by this criterion, the metal has only recently reassumed its status as a store of value. But from its 1990s nadir, gold has actually outpaced stocks in this century. Put differently, the S&P 500, measured against gold, is almost 70% lower than its peak 25 years ago, according to Morgan Stanley strategist Michael Wilson. To be sure that’s from gold’s deeply depressed levels and equities’ dot-com bubble peak.

But it doesn’t seem coincidental that gold’s reversal of fortune in this century has followed global central banks’ preference for the metal over U.S. Treasury securities for their reserves. Much has been made of the sanctions on Russia after its 2022 invasion of Ukraine, but Rosenberg Research points out that the process was under way long before.

A research report from the advisory firm this past week detailed the history of central-bank selling of gold, which peaked in the 1990s, and its accumulation in the past 20 years. The rekindled interest in gold reflected profound changes in both geopolitical and economic circumstances.

In the 1990s, gold fell as the U.S. budget moved from a steep deficit, peaking at 4.7% of gross domestic product in 1992, to a surplus beginning of 1998. The tax increases under President Bill Clinton and the spending cuts enacted later by the Republican Congress helped to turn the red ink to black. The fall of the Berlin Wall led to the peace dividend that cut military spending to 3% of GDP from 5% at the beginning of the decade.

“This was a time of real wage growth, high productivity, balanced budgets (i.e., smaller government), and a better affordability backdrop for everyday needs like housing, healthcare, education, food, and energy—largely the opposite of the past 15 to 20 years,” Morgan Stanley’s Wilson pointedly observes.

And after two major overseas wars, the 2008-09 financial crisis, subsequent sluggish growth, and a pandemic, the U.S. budget swung from surplus at the turn of the century to deficits previously seen only in wartime. The Committee for a Responsible Federal Budget last year apportioned 37% of the blame for the rise in debt relative to GDP since 2001 to major tax cuts, 33% to major spending, and 28% to recession responses. And even well into a recovery, the deficit was still $1.8 trillion in fiscal 2025 ended on Sept. 30, according to congressional budget data.

For gold, the turnaround occurred in 2010 as central banks became net buyers for the first time in decades, according to Rosenberg. Along with the U.S. fiscal deterioration, the firm noted that it’s hardly a coincidence that gold has increased fourfold since 2008-09, when the Federal Reserve under Ben Bernanke instituted quantitative easing. That is the polite term for the central bank’s massive purchase of bonds, the modern method of printing money.

The effect was summed up this past week by Ken Griffin, the billionaire head of Citadel, who expressed concern that gold was being viewed as a safer asset than the dollar. “We’re seeing substantial asset inflation away from the dollar, as people are looking for ways to effectively de-dollarize, or derisk their portfolios vis-à-vis U.S. sovereign risk,” he said in an interview with Bloomberg.

Gold has surged past $4,000 an ounce without a recession or a crisis in private equity or credit, things that would spur the Fed to flood the financial system once again, Rosenberg says.

Treasury Secretary Scott Bessent bragged this past week that the fiscal 2025 budget deficit-to-GDP ratio had a 5[%] number instead of 6[%] last year, even though such a shortfall once was associated only with deep economic downturns or wars.

The message from gold is that if the U.S. is still spewing red ink so profusely when the economy has full employment and inflation still is running above the Fed’s 2% target, what will happen when times get tough? And, especially, if the central bank becomes an appendage of the administration?

For the moment, there is a FOMO (fear of missing out) element to gold’s rally. But the fundamentals that have driven it this far remain firmly in place.

Biotech Stocks Have Struggled Since 2021. Why They’re Coming Back.

Something unusual is happening to biotech stocks: They’re going up. A drug-pricing deal between Pfizer PFE -1.82% and the White House and a spate of deals have sent the SPDR S&P Biotech XBI -1.44% exchange-traded fund up 9.5% since Sept. 25—16.6% on the year.

Biotech hit the doldrums nearly five years ago. The stocks ran up in 2020, the first year of the pandemic, on low interest rates and a biopharma investor focus. That bubble popped in February 2021, and the SPDR Biotech fell by more than 50% by June. Too many biotechs of questionable quality went public during the pandemic, leaving specialist cash tied up in dead-end names. And higher interest rates reduced speculative bets.

Now structural problems may be clearing. A shutdown wave freed specialist capital worries about administration drug-price plans are easing, and interest-rate cuts could move investors toward riskier sectors. Plus, Big Pharma needs new drugs as the likes of Pfizer and Merck MERK +0.72% contend with patent cliffs, a recipe for M&A. Deals are tough to predict, writes Mizuho Healthcare equity strategist Jared Holz, but “the adversarial political climate potentially easing a bit should be more helpful than not.”

“Investors are naturally jittery, since prior rallies haven’t been sustained,” note Cantor Fitzgerald‘s Josh Schimmer and Eric Schmidt. “But we’re also in uncharted territory with a sector that is increasingly profitable. Maybe this time it’s for real?”.

Utility Stocks Aren’t Just for Safety Anymore. This One Has Strong Growth Prospects.

Key Points

About This Summary

• Utilities Select Sector SPDR ETF is up 20% this year, outperforming the S&P 500’s 15% rise.
• Utilities are benefiting from increased energy demand for data centers, linking them to the AI trade.
• Analysts expect utility earnings to grow by nearly 9% annually over the next two years, up from 4.2%.

Utility stocks can do no wrong right now—and more gains could be on the way.

It’s not just that utilities are having a great year, though they are. The Utilities Select Sector SPDR exchange-traded fund is up 20% this year, outperforming the S&P 500’s 15% rise. It’s how they’re going about it. Utilities are typically thought of as defensive stocks, offering downside protection when markets sell off due to their steady-Eddie businesses and attractive dividends.

They’ve lived up to that reputation this year. Out of the 80 down days for the S&P 500 in 2025, which has seen the index drop an average of 0.82% for the day, utilities have averaged a decline of 0.26%, and finished higher on the day 35 times.

But utilities aren’t just for safety anymore. Thanks to the demand for energy to power artificial-intelligence data centers, the group has become linked to the AI trade, whether it’s nuclear utilities, such as Constellation Energy and Vistra, which have deals with the big hyperscalers to provide energy, or more traditional utilities, including Virginia’s Dominion Energy and California’s PG&E, which supplies power for Microsoft’s San Jose data center. That means it’s been providing offense too—utilities are the second-best-performing sector this year, behind only technology—even as other defensives lag, including consumer staples, real estate, and healthcare.

The dual nature of utilities was on display in what has been a back-and-forth week so far. On Monday, the group rose 1%, nearly as much as the Roundhill Magnificent Seven ETF’s 1.4%. That was followed by a 0.5% rise on Tuesday, even though the Magnificent Seven ETF fell 1.1% on concerns that recently struck AI deals wouldn’t be profitable for Big Tech companies. Then it was back to offense on Wednesday, when utilities were the third-best-performing sector on a big day for the AI trade.

Expect that trend to continue for at least the rest of the year. The group trades at just under 19 times 12-month forward earnings, more than four points lower than the S&P 500’s 23 times, one of the steeper discounts to the index over the past three years. But utilities are far from the slow-growth sector that they have historically been. Analysts expect earnings to grow by nearly 9% a year over the next two years, based on annual earnings-per-share growth for the ETF, according to FactSet, up from 4.2% annually for the 10 years ended in 2024.

The faster growth reflects demand from data centers, electric vehicles, and other sources, as well as the buildout of clean energy, which allows them to increase the number of plants that they use to serve—and charge—consumers.

Takeaways & Watch Points Heading Into Next Week

• With official economic data delayed by the shutdown, focus will shift further to private sector indicators (ADP employment, jobless claims, PMI, etc.).
• Markets will be especially sensitive to any new trade or tariff-related headlines, especially between U.S. and China.
• Tech / growth sectors may remain volatile — they’ve led upward moves and will likely lead downward ones too.
• Watch whether this Friday’s slide evolves into a broader correction or remains a sharp pullback in a generally bullish trend.
• Treasury yields and credit spreads will be meaningful to track, as they often reflect sentiment about growth, risk, and liquidity.

For the most part, pundits are blaming Friday’s collapse on the escalation of tariffs. I’m not so sure. Proceed with caution.

— Richie

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