
Market Factors: How tariffs can sink the Magnificent Seven and U.S. markets for a decade

This week’s first Market Factors outlines why inflation pressure would be so damaging to U.S. stocks, and later describes an upcoming smartphone killer device from former Apple design chief Jony Ive. The diversion covers a new study showing that people who grew up poor are treated as more trustworthy, and we’ll look ahead to important data announcements for the coming week.
Trader Patrick King works the floor at the New York Stock Exchange, Thursday, May 12, 2022, in New York.John Minchillo/The Associated Press
Stocks
U.S. equities highly sensitive to rising rates
Apollo Global Management chief economist Torsten Slok observed Friday that the Magnificent Seven group of stocks were fueled by low interest rates. For evidence, his Exhibit A was that these companies stopped hiring as soon as rates started to climb.
The observation might seem banal at first glance because all stocks benefit from lower interest rates but it has important ramifications. The Mag Seven stocks are particularly sensitive to higher interest rates because they are growth stocks and thus long duration – the bulk of portfolio returns comes later as higher profit growth compounds investment gains. Dividend stocks, for instance, are short duration because the regular payouts puts more of the investment returns in portfolios sooner.
Mr. Slok believes tariffs, deglobalization and demographics are all inflationary and will put continual upwards pressure on interest rates. I would add concerns regarding U.S. federal finances, which are being blamed for sending the 30-year U.S. bond yield to an 18-year high.
The Magnificent Seven stocks are still 30 per cent of the S&P 500’s market capitalization and they will continue to drive the broader benchmark’s returns. Mr. Slok’s argument implies that the longer inflation pressure remains, the lower the returns for the seven stocks, and by extension the broader U.S. equity market, will be.
Valuation levels in the U.S. market aren’t ridiculous like 1999 but they are high relative to history. BofA Securities chief U.S. quantitative strategist Savita Subramanian’s work suggests that valuations imply that a decade of mediocre returns will begin at some point in the coming years (even if she also believes that higher valuations are justified in part by the improved profitability of modern businesses, but let’s not get sidetracked).
So where are we left? Continued inflation pressure and higher interest rates will limit U.S. equity returns and suggest that a longer period of weaker returns has begun. Domestic stocks will look more attractive by contrast.
Open AI CEO Sam Altman looks on during a US Senate Commerce Committee hearing on artifical intelligence (AI) on Capitol Hill in Washington, DC, on May 8, 2025.BRENDAN SMIALOWSKI/AFP/Getty Images
Stocks
Another new gadget interests me
I’m interested in the new AI consumer device being developed by Jobs-era Apple design chief Jony Ive and OpenAI’s Sam Altman, even if I think the probability of it becoming a smartphone killer are in the single digits. Mr. Altman is reaching to create “the largest disruption to tech hardware since the 2007 launch of the iPhone.”
Asia-based tech industry insider Ming-Chi Kuo combed his sources in search of details on the device, which is expected to enter production in 2027. The device will be sensitive to its surroundings with cameras and microphones but have no screen. It will look a bit like an iPod Shuffle and is designed to be worn around the neck.
I thought Alexa and voice commands were going to take over the world a decade ago – I’m still waiting for a voice-controlled Excel – so maybe take my interest with a grain of salt. Still, I’m curious.
Diversions
Lower income households and trustworthiness
A new study published in the Journal of Personality and Social Psychology found that people trust those who grew up with less money over those that did. The study was detailed on the phys.org website.
The study featured 1,900 participants and multiple experiments. One trial involved participants gauging the trustworthiness of fictional profiles. Another involved a raffle where the subjects had to choose a trustee to hold the tickets.
The clear conclusion is that on average, people believe that those growing up in lower income households are more moral and trustworthy.
The essentials
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Globe Investor highlights
Hydro One is a hot stock. Too hot, argues David Berman. Meanwhile, David tries to answer the burning question, why even bother investing in telecom stocks?
Brian Belski, the chief investment strategist from BMO, thinks the days of TSX outperformance are over
Tim Shufelt reports on how Donald Trump triggered an exodus of foreign money from Canadian stocks
This Number Cruncher went looking for dependable dividend stocks that helped the CPP bolster its returns
Ken Fisher explains what’s behind the yield curve’s quiet re-steepening and the investment opportunities it presents
John Heinzl on the power dividend benefit nobody talks about
Tom Bradley looks at reasons why a stock might not perform as hoped
What’s up next
Domestic quarterly GDP for April will be released on May 30, the last major data point before the Bank of Canada makes its decision on interest rates, and economists expect a 0.1 per cent month over month expansion. Next Monday will see the release of the S&P Global Canada manufacturing PMI survey for May.
For earnings it’s all banks, all the time. Bank of Nova Scotia reports on Tuesday (average forecast is $1.556 per share on a pro forma) followed by National Bank ($2.402) and Bank of Montreal ($2.535) on Wednesday. On Thursday, CIBC ($1.885) and Royal Bank (3.196) announce profits.
In the U.S., a preliminary look at durable goods orders for April will be released on Tuesday where economists expect a sharp 8.7 per cent month-over-month decline. A loss of 0.3 per cent month over month is expected when annualized GDP for the first quarter is out on Thursday. Personal Income (0.3 per cent month over month gain for April predicted) and Personal Spending (0.2 per cent) will be reported Friday. ISM manufacturing and ISM manufacturing new orders will be released next Monday.
Nvidia Corp. headlines U.S. earnings reporting when it comes out on Wednesday (US$0.88 per share expected) along with Salesforce Inc. (US$2.549). Costco Wholesale Corp (US$4.238) profits will be announced on Thursday as will Dell Technologies Inc. (US$1.685).
See our full economic and earnings calendar here (You can bookmark the page – it gets updated weekly)