Tech, Tariffs, and Turbulence: Insights from the CIO

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Nancy Rooney

Good morning, good afternoon or good evening. Thank you for joining me today, Richard.

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Richard Madigan

Pleasure.

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Nancy Rooney

Great to see you. Yes. Yes. So we are certainly in interesting times.

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Richard Madigan

Which brings something.

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Nancy Rooney

Which brings us together today. I'd like to anchor our conversation a lot around the global economy, and and I really want to pause on the word global. And I think, you know, what we have seen so far this year, fiscally, politically is just how global our supply chains are, right? And certainly our markets are. Yep. And as the CIO of our client portfolios, you have to balance all of that.

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Nancy Rooney

Yep. and you made a big decision earlier this year after being overweight equities, overweight, extended credit sort of pulled that risk in. So so let's begin there. Let's talk about kind of how you're seeing the macro and what made you want to pull risk in.

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Richard Madigan

So the macro is the right place to start Nancy. And think back to you know, third quarter into fourth quarter last year. and by the way, continuing into this year, the hard data's incredibly resilient. So growth is strong. And stable. We're watching inflation trend lower. We're watching earnings and the strength and resilience of that same I would say for relative balance sheets.

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Richard Madigan

That's why we were overweight risk last year. we actually began pulling back that overweight in the fourth quarter. But it wasn't a function of anything shifting in the macro scope. It was simply a function of valuations. We thought that equity markets in particular had gotten to a level they were just a little bit ahead of themselves. I think they're taking profits.

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Richard Madigan

What if you want to call it that? Yes. But I think just the prudence of didn't feel that we were being paid that extra little bit for taking more risk. So we pulled that back. in terms of positioning, we changed coming into this year when tariff talk started picking up. And I think that drove a large part for me of wanting to pull back a little bit further on risk, because without the commensurate valuation dynamic offering, what I thought was fair compensation for the risks and risks on the margin from a macro perspective, rising.

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Richard Madigan

we wanted to pause and pull back on that. So I think it was just prudent risk taking.

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Nancy Rooney

Right. And so if I were to look forward, rate you, you've talked a bit about the tariffs and the uncertainty of all of that. You know, as I think about, that sort of risk and, and valuations, it makes me does pause. It makes me pause a little on just the concept that some people have hit on around a recession.

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Nancy Rooney

And it sounds like from your comments, though, you don't think we're headed into a recession.

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Richard Madigan

I mean, the biggest dynamic or challenge, I think, to anyone looking forward right now is we don't know where we're going to land on tariffs. So uncertainty is a little bit higher. I think there's greater concern, rising concern of a mix between stagflation and potentially recession. But to answer your question directly no that's not my base case in any given year, I'd put a 15% chance probability of recession.

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Richard Madigan

If you pushed me, I'd probably say today, looking out a year, I'd put that number at 35% and then maybe add to it 10%, 15% of sub trend. But positive growth, which is why we're fully invested in terms of the equity positions that we hold. But we're not overweight, right?

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Nancy Rooney

That's what I was going to ask you. You're still at a full equity. We. Yeah. Just pulling back on the overweight.

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Richard Madigan

Constructive the cautious.

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Nancy Rooney

Right. I think that's a good theme actually for this. but I want to spend a minute on the U.S.. And I think with regard to you've talked about the valuation dynamic, but certainly what's given rise in all this volatility is just is this period of U.S. exceptionalism over. Right. And and is this the type of so is this the time to start really thinking about outside the U.S.?

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Richard Madigan

I don't believe the exceptionalism dynamic is over. It creates a great narrative. And so I think there's an awful lot of incendiary pundit punditry out there around that. but we're less exceptional, and I'm going to anchor that I think much more again, on the valuation dynamic. It's not a negative observation for me in terms of the corporate sector, at large, there are pockets that are pressured.

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Richard Madigan

There are pockets that are not, but that exceptional dynamic led by tech, really, I think continues to be the driver, for the resilience of the economy. By the way, it had financials in there as well. so those two pieces, just as solid anchors to me, make me feel good about that relative outlook, exceptionalism going forward.

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Richard Madigan

And if it spreads to Europe and the broader economy, I think it already is. But again, let me, you know, bifurcate what got us to the moment of that relative exceptionalism outside of the US. those markets have lagged for a decade, right? And so what we've watched is a repricing of relative valuations as the US has come down that they've been paying up playing catch up on the margin.

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Richard Madigan

And that's incredibly healthy. Like to me that that shows a dynamic, healthy global market reallocating capital to where it perceives in certain instances, perhaps a safe harbor, but in other instances just a valuation gap that it wanted to close. and that that's obviously what we've seen in Europe this year.

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Nancy Rooney

So that is what I did want to ask you about Europe. And they have meaningfully outperformed the US this year. And it sounds like what you're saying is that's a little bit more of a rebalance trade. But what about things that are going on in Europe structurally? Like we are seeing, you know, some record announcements in terms of spending coming out of Germany and and that has the potential, you know, to sort of yeah, it to be to amplify what about a potential overweight to a place like Europe?

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Richard Madigan

we're not currently, but it's a very de minimis, underweight. And it's really a function of portfolio construction because the things that we're owning in Europe tend to have higher beta. So we have favored global financials, which has has been a smart place to be allocating capital. And we continue to believe that's the case.

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Nancy Rooney

Especially as you say, if the ECB continues to lower rates.

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Richard Madigan

Correct. so so that dynamic to me I feel good about it. So when I think about the ultimate amount of risk, it may look like a pronounced underweight. It's not but when I beta adjust the amount of beta for where we're taking it, I kind of feel we're neutral ish in that allocation. I think the biggest challenge for everyone selling the narrative of Europe's cheap and to lean in goes back to the conversation.

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Richard Madigan

We had on the valuation gap between the US and in my opinion, that's now been closed. So the easy money, if there is and there never is, I think has been, you know, quickly repriced into markets and that's fine around it. Where we go from here I think depends on some of the observations you made in fiscal spending and defense spending where Europe is pivoting.

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Richard Madigan

But those are very slow burn multipliers. So that isn't money that's going to be spent. to paratroop it into and and spend quickly. It's going to take time. It'll ameliorate, I think, Europe not being pulled into recession and assuming the US isn't. I think the pause on all of this and a bit of the narrative that I challenge is the US is in trouble and going to recession, but everyone else is going to be fine.

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Richard Madigan

If we truly watch the US economy in recession, we are going to take everybody along with us for the ride.

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Nancy Rooney

And so Europe is less about just a broad base of trade of Europe, but more thinking about what are those areas like financials that potentially could do well in this type of environment. Correct. Yeah. And they certainly have different drivers of European markets than we do in the US, which tends to be so growth and tech driven.

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Richard Madigan

And by the way, it's why we're global investors. I'm happy we can invest in both.

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Nancy Rooney

Yeah. So so let's bring it back to talk a little bit. Right. So so that has been the driver for a long time. And and you've been overweight right. You've been overweight. Cloud. You have a number of positions to to really focus on I and I know we're still just going through earnings right now. But do you think we get back to where we were from a valuation perspective.

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Nancy Rooney

Right. Which is expensive. Right. And or has the CapEx picture become so murky with all of the tariffs and putting things on hold that we don't see those valuations? Again?

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Richard Madigan

It's a smile politely, as I said, this is part of the conversation where I say past performance is no guarantee of future performance. But I will say for the valuation levels we were holding at the high part in Big Tech, the market was very comfortable with them, but it was comfortable for the right reasons. We were watching earnings being delivered on strong capital expenditure, investment, innovation.

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Richard Madigan

I tied to that, hyperscalers tied to that. we've played all of those segments and you pointed out we've had large overweight to tech, I'm going to say for five years. But it's been longer than that. But it's been very specific on the innovation component and the earnings dynamic, both of which I think continue. Right. The CapEx question's a little bit more challenging because I think it's not unique to tech.

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Richard Madigan

We're going to watch all corporations globally right now. If you were sitting in a C-suite, you were playing my caution dynamic. So you're going to keep spending. But you're going to target the things that are strategically important and keep putting money into that. You're likely to slow hiring. You're likely to slow investment. You probably at some point pull back a little bit on buybacks until there's greater clarity on where we land with tariffs, what the broad implication is around the recession theme.

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Richard Madigan

but the underlying current is one where I think most C-suite executives, just like most investors, seem more positive in the broad dynamic globally, the negative right now.

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Nancy Rooney

And it does feel like it's a pause as opposed to a retreat.

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Richard Madigan

I agree with that right now, and we'll see what happens. I think in the next quarter. I hope we get a little bit better clarity and information on what people should actually be pricing or more importantly, not pricing in to risk.

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Nancy Rooney

We have seen, more especially the sort of mega-cap start to talk about their supply chains. Right. And they have to. Yep. And you've seen people start to pivot away from China, as a result of some of these announcements, on the tariff side. And it makes me think a little bit about if I'm not going to produce it in China, where else am I going to go?

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Nancy Rooney

And potentially then does that give a lift to emerging markets? And you have quite a background in emerging markets.

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Richard Madigan

The scars to prove it.

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Nancy Rooney

Yeah. And from time to time you have held it in portfolios. And so how do you think about that as a potential opportunity. Carefully. Yeah.

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Richard Madigan

Ian has been fascinating to me this year because it reflects a lot of the dynamism that we've seen in Europe as well. you're watching in the US front loading of imports ahead of tariffs when when people got a sense of how assertive the tariff approach is currently from the white House, they hit all go and tried to get as much in as quickly as they could.

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Richard Madigan

And I can put, you know, hardware manufacturers I can put tech in there. I can I can keep expanding it, by the way. I can put agriculture as well. So Europe certainly benefited from that. So in emerging markets and Asian emerging markets. So that's really been the driver in terms of the bump that we've seen. So Em has outperformed the US year to date.

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Richard Madigan

It's underperformed the US on a one year on a three year on a five year on a ten year basis. So there are moments where leaning into those markets.

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Nancy Rooney

Which is not what portfolio construction would have told you.

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Richard Madigan

It's also not the narrative out in the market.

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Nancy Rooney

That's right.

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Richard Madigan

But it's that the lack of dynamism and growth, anemic growth, challenging, domestic markets that just never offered the opportunity on the upside in sustainable, consistent earnings growth. And I'm speaking holistically for emerging markets, which is unfair because there are all sorts of idiosyncratic opportunities in specific countries, in specific companies, which we've taken advantage of. I mean, I always kind of pause laughing, calling Taiwan or South Korea in emerging market, right?

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Richard Madigan

I don't view them as that, but we've certainly had investments and continue to hold them there.

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Nancy Rooney

What about the debt side of things like how do you think about emerging markets, especially for global investors?

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Richard Madigan

We own it. We owned more of it last year. So we've been pulling it back for the reasons we've talked about in terms of broad, risk taking right now. But it's been a wonderful risk. Diversifier for the credit, positions that we hold in the US, also in pan-European credit markets. So that diversification of risk has actually helped smooth the ride and balance out some of the underlying volatility.

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Richard Madigan

And I'm looking at yields that are still incredibly attractive. So to me I can put a very high probability if I have an informed view on default risk for what I own, on how much of that yield I will be able to put in with the carry to our portfolios for total return.

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Nancy Rooney

So you're not so you're not worried about default. And it's an it's basically a carry trade.

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Richard Madigan

I was going to tell you I'm always worried about default, but not for the things that we happen to own in the portfolios okay.

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Nancy Rooney

But it's a carry trade.

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Richard Madigan

Yes.

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Nancy Rooney

Absolutely. Okay. So it wouldn't be a fulsome conversation if we didn't talk about the fed okay. So we I do that. but the fed appears to be on hold for the time being. And and I think we came into the year with a lot of people expecting a whole series of cuts.

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Richard Madigan

Yes.

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Nancy Rooney

And some of that has been pared back. But do you think cuts are still off the table for this year?

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Richard Madigan

it's a it's a really hard question for how you ask that. Do I think they're off the table for now? Absolutely. If I was sitting at the fed, there is no first mover advantage raising rates or cutting rates right now. And they're really in a tough spot because they're watching or had been watching steady trend growth moving toward trend growth, inflation gradually moving down, not as quickly as they had signaled they wanted.

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Richard Madigan

But I don't think ever to the degree that it was going to hold them back from continuing to ease. And they've now had this tariff dynamic introduced to the equation where, like everyone else in the world, my bad running joke, anyone who tells you they know what's going to happen next doesn't. For the moment that's the case. So they don't know.

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Richard Madigan

And when you don't know, you shouldn't rush to action. When you actually don't know what you think you're responding to because you're doing something in anticipation of an outlook you don't know. do I think they'll move back toward easing? I hope so, the market certainly wants it. Markets are pushing them forcefully to do that. but I think right now it's a fed that's on hold.

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Richard Madigan

And it gets a lot more interesting to use your word from the start of this discussion for them in the second half of this year, I think it gets a great deal more challenging.

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Nancy Rooney

Yeah. But for those clients who are very concerned, you don't see the potential of a default or in US.

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Richard Madigan

No, not at all. Yes, I will say I'm concerned about term structure, what happens to interest rates, because that is going to be informed by tariffs, by inflation and by growth. If I had to pick the one thing again, if I was sitting at the fed that I'd be watching it's labor markets, what's happening to employment? And if employment is still strong and resilient, you'll tolerate weaker growth for a while.

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Richard Madigan

And you may tolerate inflation in its current range or a little bit higher. but like I said, third quarter I think it gets a lot more complicated, but also a little bit more clear for them and where we're going to land.

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Nancy Rooney

I hope there's a lot that has been said this year that people are looking at with regard to hard data, soft data.

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Richard Madigan

Yep.

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Nancy Rooney

And it sounds like the labor market is one of those hard data things that's key for you. And it's.

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Richard Madigan

Incredibly resilient. Yeah like that may start to break. It hasn't.

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Nancy Rooney

Yeah. So in a way, you know as I'm listening to you, I almost feel relieved that you said economy is strong enough, at this point that the fed doesn't feel like they need to cut. Right. I don't know that I view that, like I view that positively.

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Richard Madigan

It's funny. It's why we're fully risk right now. If I had a more negative view, we'd be under a risk. Yeah.

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Nancy Rooney

So maybe the the derivative question of that is, do you think that the market feels confident in the fed because that is a very important indicator rate and their ability to kind of navigate or toggle between the environment where inflation continues to heat up because of tariffs, with also the potential of a slowdown in growth. Because we've talked about some of that CapEx potentially coming in.

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Richard Madigan

It was going to kid you, the market's always frustrated with the fed because all it wants is rate cuts to be able to fuel growth, to be able to few risk assets. So that's that's something that's always going to be ever present. confidence in the fed. Absolutely. And there's a big difference between frustration and confidence. If the if the market was not confidence in the fed, we'd watch so much greater volatility than we've seen.

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Richard Madigan

And we've seen a lot of volatility in the bond market and in the dollar. The one thing I think that we've watched play out over the last few weeks has been the potential challenge to fed independence, and that that is critical path critical to investors continuing to feel that confidence in the fed. And that seems to have righted itself and markets have calmed down.

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Nancy Rooney

Yes, I agree, I agree. So so you brought up the dollar. Yeah. And we should talk about it. Right. It has certainly come under pressure these last couple of months. while that's not unusual, we haven't seen it for more than a decade and we've seen the volatility.

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Richard Madigan

But, yeah but keep.

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Nancy Rooney

Going back there. Yeah. So, so so the dollar has come under pressure. And so if I am a global investor.

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Richard Madigan

Yes.

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Nancy Rooney

How do I think about the impact that the dollar has had on my portfolio.

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Richard Madigan

For that last decade. You're grateful for it. It has done nothing but help you again in fits and starts because markets are by nature volatile. but it's been a huge beneficiary of it. A couple of things, just to kind of frame the discussion, though, if you were to look at DXY. So I'm going to get a little geeky and I always try not to but trade weighted dollar against developed market currencies.

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Richard Madigan

And it's predominantly weighted in the euro which is this year where we seen most of the pressure in the pain against the dollar. So you put those in context. If you look back over a ten year period, we've basically round tripped right to about the average level. The dollar's been trading out against that basket. Again lots of volatility around it.

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Richard Madigan

I think the pain this year has been just how quickly that hit. Yeah it was very erratic. It was very painful and unwinding. But that rhymes with what we spoke about earlier on technology. Right. And the crowding in of foreign money into U.S. markets. So that's repricing. It's leaving. It's going back to home in reference currencies. So it's not surprising that we're seeing that.

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Richard Madigan

I think it's just been the violence of some of those moves that have really caught the market's attention from the dollar. More broadly. The interesting question is the reserve currency.

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Nancy Rooney

Piece of.

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Richard Madigan

It. Right. And I think the dollar remains a reserve currency. If you look, depending on who's math and reference data that you look at, the dollar is 85 to 90% of every foreign exchange trade done. And I want to say it's something like 60% of reserves held by other central banks. So the dollar isn't going away. There's no obvious substitute for it.

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Richard Madigan

and so the reserve currency challenge to it, I just don't buy. It's been a slow, steady pull up, pulling away from the dollar as a reserve currency. But that's been going on for 50 years. And I'm going to argue it's healthy because it reflects a better balance and dynamism across the global economy. which is ultimately good for everyone.

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Nancy Rooney

Yeah. And would potentially be good for U.S. companies as well. Correct? Yes. So so I guess the question is, does the dollar continue to head lower here? And I'm glad to hear you say that it stays the world's reserve currency because I think that's stabilizing. Yes. but what about over the near term in terms of the dollar.

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Richard Madigan

Was going to hit you if you no one can tell me, I'd love to know. And I've got a rush to make a couple of quick trades. near-term, it's really hard to answer. And I know that's not satisfying for anyone to hear, but it's hard to answer because I don't know what happens about the crowding in of foreign investment to the US.

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Richard Madigan

And if it continues to leave at the pace that we've been seeing, because that could be the driver on this. That's an issue that's an emotional dynamic and reaction to it. And there's no judgment in that statement. But I can't price that part of it. I'll go back to some of the things that you would ask me about the fed.

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Richard Madigan

So with the fed on hold and likely to remain on hold for a while and let's take the counterpoints, the Bank of England and the European Central Bank cutting interest rates because they're worried and more worried about growth in the near term. And maintaining the dynamism in that economy. They don't want to see sub trend growth in a recession.

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Richard Madigan

I think that dynamic becomes a lot more challenging for people to figure out. But the math means that interest rates in the US likely stay where they are. Interest rates outside of the US come down as that interest rate differential increases in the US markets favor. That should stymie outflows.

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Nancy Rooney

Bring free money.

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Richard Madigan

Yeah, yeah. So that should be I think the thing over the course of the next quarter that can provide some relief. But path dependent on tariffs.

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Nancy Rooney

Sure, sure. And and tariffs which lead to that U.S. exceptionalism potentially. Right. Continuing.

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Richard Madigan

Yes. Less so.

Nancy Rooney

But yes yes that's fair. That's fair.

what I hear from clients is concern over what's been going on in market. Yes. And I think understanding that you are constructive and you're watching and I think that's probably, you know, as, as you said before, you're cautious.

But I think we still have a lot to learn.

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Richard Madigan

I'll add one, Nancy. And we didn't talk about it in tech, but you know, so great. Better buyer, better seller.

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Nancy Rooney

Right.

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Richard Madigan

The team is spending time looking at things to buy. The team is not spending time looking at things to sell.

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Nancy Rooney

Yeah. And it's and it's continuing to look at places like tech. It's continuing to look at places like financials and Europe. and you're open minded certainly to emerging markets. But the opportunity isn't there yet. Correct. and we feel good about the Fed's ability to kind of navigate some of this complexity.

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Richard Madigan

They have an impossible job. They're doing it. Well.

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Nancy Rooney

I would agree. I'm glad we have them. Thank you Richard. Thank you. And for any further questions please feel free to reach out to your JP Morgan team. Thank you very much for joining us today.

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Thank you for joining us. Prior to making financial or investment decisions, you should speak with a qualified professional in your JP Morgan team. This concludes today's webcast. You may now disconnect.