US tariffs or AI: which is the biggest risk for S&P 500?

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In this episode, Kyle is joined by Julian Bishop, manager of Brunner Ord (LSE:BUT) Investment Trust, to discuss US tariffs, including whether stock markets have become complacent to the risk following a strong spell of performance over the past six months or so.

While US tariffs played a big part in significant stock market falls earlier this year, Bishop points out that artificial intelligence (AI) now poses the biggest risk to markets and expresses concerns over how tech-heavy the S&P 500 index has become.

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Kyle Caldwell, funds and investment education editor at interactive investor: Hello, and welcome to On The Money, a weekly look at how to make the most out of your savings and investments.

In this episode, the topic is US tariffs. There’s been no shortage of column inches devoted to US tariffs in 2025. In terms of financial markets, US tariffs were a big reason behind the sell-off early this year for both US and global stock markets. Over the past couple of months, we’ve seen a recovery play out.

The jury is now out regarding whether stock markets have become complacent to the risks of US tariffs and the threat that they pose for various industries and sectors.

Joining me to give his expert view is Julian Bishop, manager of Brunner Investment Trust, which he describes as “a global portfolio with a twist”, and that twist is that it holds around 30% in UK shares.

So, Julian, you were recently in the US and attended a couple of conferences. You met around 50 different companies. What is the mood music on the ground in terms of the impact that US tariffs are having on various companies?

Julian Bishop, manager of Brunner: I think uncertainty is the name of the game. A lot of Trump’s pronouncements, they change by the day. So, in that context, it’s very hard for companies to plan. So, even if there are tariffs, it makes sense to re-shore things. At the moment, people are still pretty reluctant to do so, I think.

So, you look at, PMIs (purchasing managers’ indices), which is like leading indicator surveys of business people and what their plans are. The US generally has PMIs below 50, which means that industrial activity is still actually contracting. So, at the moment - and let’s put AI to one side and data centre construction to one side, that’s an area that’s booming - things are still pretty lacklustre. Tariffs are part of that.

Trump’s style isn’t really conducive to making long-term investment decisions. One interesting thing I read recently is that the carmaker Hyundai, which is Korean, and they’ve just opened a new car factory in the States, a huge, huge car factory down in Georgia, but that was green-lit. They made the decision to open that during Trump’s first term. It takes years to build large-scale manufacturing plants.

So, to the extent that tariffs may induce businesses to make investments in the States in lieu of importing things, the lead time for doing so is many, many years. So, generally in the States, the mood is everything’s a little bit flat on the industrial side. The big exception is AI and data centres, where there’s a vast amount of investment going in, leading some people to think there’s a bit of a bubble because the returns on those investments are very unclear.

Then on the consumer side, the consumer’s generally pretty good. So, if you look at consumer expenditure, that’s still pretty strong. That’s very skewed to sort of middle-class, upper-income consumers. The booming stock market helps them with a wealth effect. Lower-income consumers are struggling a little bit.

If you look at Trump’s policies, generally they’re pretty regressive. If you look at the impact of the One Big Beautiful Bill, for example, that he introduced, which is his sort of key piece of legislation, that’s tax cuts for corporations, tax cuts for middle classes, upper-income consumers, but actually withdrawals quite a lot of benefits for poorer people.

So, SNAP [Supplemental Nutrition Assistance Program], which is food stamps essentially, they’re being cut. There’s cuts to Medicaid, which is healthcare for the poor. By and large, probably as ever, it’s not a great time to be poor in America, but the middle classes and the upper-income consumer’s spending. That’s responsible for a lot of employment, so far employment remains pretty good too.

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Kyle Caldwell: Tariffs drive up the cost of imported goods, and in addition, there are retaliatory measures from some of the affected nations. Some commentators have [said] the tariffs are going to be a driver of the sticky inflation outlook that we’ve got at the moment. Do you agree that tariffs are proving inflationary? And are we already starting to see certain businesses push up the price of their costs and ultimately pass that on to the end consumer?

Julian Bishop: I think that will happen. They are government tariffs, but they are a tax right? They’re a tax on imported goods. And, generally, when you see taxes applied, ultimately, they tend to end up getting passed through to the consumer.

So, the simple maths of it is that, at the moment, tariffs are sort of levelling out at about 16% on imported goods. So, that’s the highest they’ve been since, like, 1930 or whatever. And importer, 10% of GDP, probably 15% of consumer expenditure. If you do the basic maths of it, it implies that prices should go up 2-2.5% if those were fully passed through. So far, we’ve not seen anything like that.

So far, people have diverted their buying to lower-tariff areas. They pre-bought ahead of the tariffs being implemented. Exporting companies into the US have swallowed some, importing companies have swallowed some. So, most people think of that 2-2.5% that probably has to be passed through, probably only about 0.5% has hit so far.

And that’s pushed up inflation to sort of high twos. So, inflation in the US, it’s in that 2.7% to 2.8% range. If you assume that these tariffs are generally passed through over the course of three, four years, you’re talking about another three or four years with inflation probably up in the high twos, which, of course, is considerably above target. So, the Fed generally likes to see inflation around 2%, as the Bank of England does over here.

So, you’re talking about another three, possibly four, years with inflation above target. So, you’re right. We’re talking about stickiness. We’ve already seen three or four years with inflation above target. Accumulative inflation over the last several years has been really, really high in the States. That undermines the value of currency and the value of bonds.

It’s quite profound in its impact. The longer this happens, of course, it makes US monetary policy less credible. So, we’ve seen a bit of a flight out of the dollar over the last year or so as people look at the finances of the United States and start to question their sustainability.

We’ve talked here about tariffs and inflation, but the US is a pretty indebted economy, right? It’s got debt to GDP at about a 100%, that’s the highest since World War Two. Very persistent budget deficit in the United States, it’s not just a UK thing this, it’s also the States. I think people are looking at the finances of the United States and thinking, ‘Oh, they’re in a pickle here, a persistent budget deficit, high debt to GDP.’

The temptation in those circumstances is to allow inflation to become a bit more pronounced because, effectively, you monetise your debt, the value of your debt in real terms comes down. But, generally, if you’re fearful that the managers of an economy are content to let inflation creep in and undermine the value of bonds, the value of currency, etc. Probably a good argument for equities, by the way, because equities exist in the nominal world.

One of our holdings, for example, is Tesco (LSE:TSCO). If there’s inflation, then Tesco’s revenues go up because food is more costly. So, their dividends, etc, are protected in real terms by that effect in a way that debt assets aren’t.

Kyle Caldwell: How, as a fund manager do you navigate the risk of US tariffs, and have you made any changes to the portfolio as a result of tariffs?

Julian Bishop: Not as substantial as you might think. A lot of the best-quality equities, a lot of companies that we hold, they aren’t really involved with the import in a significant way of physical goods into the United States.

So, our biggest holding, for example, is Microsoft Corp (NASDAQ:MSFT) with software, so that’s not really impacted. We have a big holding in Visa Inc Class A (NYSE:V), which is a payment network, so it’s a good example of a company that is inflation protected in a way because they process payments, and if the value of the payments goes up 5%, their revenues go up 5% because they take a small percentage fee on everything that they process when you spend anything on a card. So, in reality, we haven’t really done that much.

These things tend to get digested by the market pretty quickly where they’re obvious as well. We would tend to assume that where things are imported, those taxes are passed through to the consumer ultimately, therefore protecting the company that is impacted.

We did buy one company in South Korea. So, I mentioned Hyundai earlier. At the very much value end of our portfolio, we bought shares in Kia, the Korean carmaker. It’s actually partly owned by Hyundai, part of the same group.

But that equity was decimated in the run up to these tariffs being announced, because they will be dramatically affected by tariffs on South Korean autos. So, a lot of car companies operating in the US will import from overseas, and Kia has a big market in the US.

You can do the maths of it pretty straightforwardly. If the tariff is this and their import price is this and their volumes are this, the impact will be x billion dollars.

So, there’s a lot of fear that Kia’s profits would be down, which they will be because of tariffs, but we took that as an opportunity to buy what we think is, in the context of a very tough industry, a very good carmaker, at really knocked-down valuations.

That was the one thing that we have done where I would say that tariffs were very partially responsible for the decision that we made.

So, we bought some shares in Kia, very down and out, knowing that the tariffs were coming, hoping that they would be negotiated down and hoping that, with time, the price of cars in the United States will go up because about half of all cars in the United States are imported.

So, if everyone’s going to end up gradually passing those increases through, the price of cars will go up, and hopefully, some of that tariff impact will be offset.

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Kyle Caldwell: Of course, Kia wasn’t the only stock that was negatively impacted by the prospect of tariffs. Early this year, there was a pick-up in stock market volatility, and that was primarily due to concerns over US tariffs. Now, we’ve got the benefit of hindsight, we’re five months on from that. We’re recording this podcast on 16 October and both global and US stock markets have made a strong recovery since Liberation Day.

Is there a danger that markets are now becoming too complacent to the risk of tariffs? I mean, that was a primary cause of the sell-off earlier this year. Have markets recovered potentially too quickly?

Julian Bishop:Possibly. Always very hard to say market-level things like that. The tariffs have not caused a huge spike in inflation, And, actually, the consumer remains pretty strong in the United States. So, those are the worst-case scenarios that were being bandied around at that time, and I think it’s fair to say that they have not come to fruition.

Since those old Liberation Day tariffs were announced back in April, a lot of the stock market recovery has been related to tech and AI, in particular. This huge amount of excitement about the hundreds of billions of dollars that are being spent on AI infrastructure, and that’s been a big driver of markets since then.

It’s quite funny if you look at what’s driving markets in the last six months is forms of tech on the one hand, but also things like banks, which have done really well. So, very different types of investments, but both are cyclical. They’ve really driven markets.

There’s been lots of things that haven’t been working. It’s not been a multidimensional market, it’s been quite narrowly driven. I’d say if there is complacency, or an area to worry about, it’s probably more about AI. What will the returns on those investments be? Because there’s an awful lot of stock market wealth hanging on that story, on that narrative.

Kyle Caldwell: How much exposure does Brunner have to AI? I know you have Microsoft as your top holding, and you’ve got some exposure to Alphabet Inc Class A (NASDAQ:GOOGL) and Amazon.com Inc (NASDAQ:AMZN). Do you have other AI exposure beyond those three names?

Julian Bishop:Yeah, it’s hard to avoid in a way. You mentioned three names there that to a certain extent play into AI, but then I’ll generally regard [them as] huge beneficiaries. Maybe Microsoft because it can deploy Copilot. It’s got a partial ownership of OpenAI, and it will host AI activities in its Azure cloud business.

So, there’s that part of it, but the real excitement has been in physical infrastructure. So, silicon, semiconductors, plus all the electrical equipment that’s necessary to plug it all together.

Our big weights there are Taiwan Semiconductor Manufacturing Co Ltd ADR (NYSE:TSM), which is a trillion dollar market cap company now, and it is what’s called a semiconductor foundry. So effectively, it manufactures semiconductors on behalf of companies like NVIDIA Corp (NASDAQ:NVDA), which makes graphics processing units (GPUs) for AI, and companies like Broadcom Inc (NASDAQ:AVGO), which manufacture application-specific integrated circuits(ASICs) used in AI, and companies like Advanced Micro Devices Inc (NASDAQ:AMD). So, AMD is the sort of second player in GPUs. It has had a bit of a second wind recently.

We took a view reasonably early on that although NVIDIA is a big beneficiary of AI expenditure because it makes most of the semiconductors that are used for AI applications, if that market was to fragment slightly, if there were to be many producers of AI semiconductors, whatever happens Taiwan Semi would be making them, and that’s basically been the case.

Taiwan Semi makes, to all intents and purposes, a 100% of NVIDIA’s chips, 100% of Broadcom’s, a 100% of AMD’s. They are the only company on the planet that can manufacture logic chips of that sophistication, and semiconductors are extraordinary.

Taiwan Semi also make every chip that goes into your Apple Inc (NASDAQ:AAPL) iPhone, for example, and the chip in an iPhone now has about 30 billion transistors, on and off switches in an area about an inch square. So, you’re talking about wires, if you like, that are literally a few atoms across, and the technology involved in manufacturing those is exceptional.

So, Taiwan Semi has been a big beneficiary of this huge boom in AI semiconductor production.

There’s a key supplier to Taiwan Semi, which is a Dutch company called ASML Holding NV (EURONEXT:ASML), which makes lithography tools. These are huge machines that cost a couple of $100 million each and they are absolutely key in the manufacturing of the most advanced semiconductors.

So, we’ve had those two big semiconductor plays, but then it worms its way into other things. There’s a company called Amphenol Corp Class A (NYSE:APH). It’s an American company that makes connectors that are used when you plug in all these servers into a data centre. They’ve seen a huge boom in demand.

We’ve got a French company called Schneider Electric SE (EURONEXT:SU) that makes electrical equipment that’s used in data centres, so even though we haven’t had shares in NVIDIA, we’ve had plenty of names that have benefited from this big boom in AI expenditure. The question we’re asking ourselves now is, can this continue?

Because the amounts that are being spent, literally hundreds of billions of dollars a year, need to see a return. There’s a very active debate, which is a good thing, in markets about whether the revenues will be there, and whether the sales will be there to justify this amount of expenditure.

Because the key leading company in AI, which is OpenAI - the parent of ChatGPT, at the moment they’ve only got revenues of about 13 billion, which is a big number, but in the great scheme of things, that is not enough to justify the hundreds of billions that are being spent.

So, companies like OpenAI need to see a very rapid increase in their revenues to ensure that this boom in expenditure can continue because otherwise, without revenues, without profits, you simply cannot be spending at the pace that companies are spending money at the moment to build AI infrastructure.

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Kyle Caldwell: I know you’ve also got some concerns about how concentrated the S&P 500 index has become. I read a recent comment in which you said that index is now more akin to a high-risk concentrated technology fund.

While it’s obviously pretty much impossible to predict the future direction of stock markets, are you concerned over the next couple of years for the US’ premier stock market, given how concentrated it has now become?

Julian Bishop:Yeah, I tend to try and think probabilistically about the way the future might pan out rather than modelling single scenarios. It’s absolutely possible, I think, that the S&P has a much tougher time over the next 10 years.

The reason I said that it was more akin to a high-risk concentrated tech fund is because it’s the S&P 500, it’s 500 companies, but they’re weighted according to their market capitalisation, so the value of the company.

There are several companies now in the States with values of $3 trillion-plus. I think NVIDIA now is $4 trillion, which is worth way more than the entire UK stock market, for example.

You just look at the numbers, the top 10 stocks in the S&P now are about 40% of its value. So, if you’re buying an index fund, you think you’re getting a little bit of everything, sort of low risk. But, actually, the top 10 companies in the S&P are now 40% of its value, they are almost all tech companies, a lot of which are very tied into AI.

That’s far more concentrated than the Brunner Investment Trust, for example. Generally, we would prefer to invest with exposure to a lot of regions, themes, sectors, a lot of uncorrelated risks because we think that’s a healthy way to invest, you want diversification. You could say that the S&P 500 no longer really has that.

So, you’ve got these top 10 companies, 40% of the value of the S&P 500, some incredible companies among them, but they are mostly fairly dependent on tech expenditure continuing to be really strong.

At the moment, certainly on the more cyclical side, we’re seeing this huge spike in expenditure, which not only has to be sustained, but has to grow further for those valuations to be justified. So, time will tell. Predicting the future is very hard, but it’s implicit in what we have to do.

If AI does not live up to the hype, I think personally the S&P will have a tough time just because it is so weighted to those big tech and AI names. There’s lots of other businesses in the S&P that will continue to flourish, and I’m sure they will, but some of those larger ones could struggle.

Kyle Caldwell: In the global index, the US is a heavy weighting as well. To the MSCI World Index, it’s around 72% to the US at the moment. Brunner invests globally - I think you have around 40% to the US. Your benchmark is 70% to a global index and 30% to a UK index. Does that 40% put you at an underweight to the US, and has it been a longstanding underweight?

Julian Bishop:Brunner Investment Trust is a global trust with a twist, which is that it’s 70% global, but also 30% UK.

So, it’s really good because in the US you have these high-flying tech stocks, valuations tend to be quite high. It’s sort of a ‘jam tomorrow’ market, I would say. Whereas the UK is older economy, less glamorous, probably less growth, but loads and loads of cash flow, loads of dividends. So, it’s a bit more of a ‘jam today’ market. So, that’s a source of diversification in itself.

The way it works out is in our benchmark with that 70/30 split, about half is the United States. At the moment, we’re at about 45%, so a little bit underweight, but not hugely so in the context of that benchmark.

The US is the place you have to go to for most tech investments. There is nothing like those West Coast, Silicon Valley companies anywhere else in the world. There’s a couple of global world-class tech companies. We own two of them, Taiwan Semi and ASML. But by and large, the best in class, high-quality tech names are to be found in the US, so we have exposure there.

We have Alphabet, which is the parent of Google. We have Microsoft, etc. But quite often we find that if you’re looking at sectors that are more comparable globally, you have to pay a pretty big premium to be in the US…in a way to us that doesn’t quite make sense.

If you look at anything like consumer staples, utilities, banks, grocers or energy names, you’ll almost always pay more in the US than you would in the UK or in Europe. So, for all the sectors like that, when we’re making our decisions, we tend to skew slightly towards the UK or Europe over the US.

For example, we invest in Tesco at the moment, a leading grocer in the UK and in a really good competitive position now. Got about a 6-7% free cash flow yield, so it chucks off lots of cash that it returns to shareholders via dividends and buybacks. That’s a pretty nice financial algorithm, we think. Not cyclical, good market position, lots of cash flow.

That’s the sort of thing that we would look for. But in the States, its closest proxy would probably be Walmart Inc (NYSE:WMT). It’s a leading grocer over there, a big dominant retail player. Trades at a multiple in the high 30s compared to 15-16 for Tesco.

So, to the extent that growth is comparable, their competitive position is comparable, you would have to pay twice as much per dollar of profit for a stake in Walmart than you would in Tesco. So, we just very simply say that we think this one makes a lot more sense, and we’ll plump for that.

Quite often when we’re looking around at businesses where you can compare across the Atlantic, it seems like the European variant is quite often cheaper and often for no real good reason that we can ascertain, and we’ll plump for the European variant, which means on balance, we’re a little bit underweight in the US.

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Kyle Caldwell: I’d like to end where we began. You were recently in the States, and you met lots of companies. Did that spark any new ideas? Have you initiated any new positions?

Julian Bishop: Our average holding period is five years, so we don’t actually change that much that often. I’d say one that I would point to, our most recent acquisition in the States, was a company called Federal Signal Corp (NYSE:FSS).

To the extent that AI is dominating headlines and people are wondering what the impact of AI will be on a whole raft of industries and uncertainty is rife, we plan for something very much rooted in the physical world.

Federal Signal make specialised industrial vehicles, which is effectively a collection of businesses that takes lorries and adapts them for very specific uses. For example, they make street sweepers and sewage cleaners.

So, if you have to blast out a fatberg, you’d use one of their machines, and they make the equipment that’s used to paint lines on the roads. So, very much rooted in the physical world. Great industrials business. Little niches, very profitable, good innovation that makes life easier for municipalities and governments and so on and so forth. So, we took a position in that.

We travel quite a bit. I was in the States in June, Japan in September, and we’re always travelling, trying to find new ideas. We have quite a high rejection rate on the trust, so we’re always looking at new things, seeing if they’re better than anything we own already.

We turn over a lot of stones, kiss a lot of frogs, and I think the most recent investment we made was Federal Signal in the States. So, the very unglamorous world of sewage vacuums and cleaners, which is slightly different to the world of AI, which is dominating the headlines.

Kyle Caldwell: So, that’s it for our latest On the Money podcast episode. Thank you for listening. If you enjoyed it, please do follow the show in your podcast app. If you get a chance, please do leave a rating or a review in your preferred podcast app too. We love to hear from you.

You can get in touch by emailing OTM@ii.co.uk. And in the meantime, you can find more information and practical pointers on how to get the most out of your investments on the interactive investor website, which is ii.co.uk. I’ll hopefully see you again next week.