Market Commentary

• We view the tariff threats so far as bargaining chips the U.S. president is using to encourage agreement from the leaders of various countries
• Bringing more manufacturing back to the U.S., particularly from China and Mexico, is a goal but will take time

As this report is being written (Monday, February 3), there has already been a change in the tariffs that the new administration announced on Saturday that were due to go into effect on Monday evening. In short order, Mexico’s President Claudia Scheinbaum and Canada’s Prime Minister Justin Trudeau both appear to have quickly agreed to at least discuss some of President Trump’s demands as the U.S. tariffs promised over the weekend have now been delayed for a month. We view the tariff threats so far as bargaining chips the U.S. president is using to encourage agreement from the leaders of various countries. That appears, at least for now, to be the case with Mexico and Canada. Recall that in late January Colombia’s president quickly backed off his decision not to allow U.S. planes carrying Colombian deportees to land in the country when the U.S. administration threatened tariffs on that country’s exports into the U.S. We will see if the Canadian tariffs are implemented or some agreement is made to delay or negate that from happening.

The president’s concerns with China, Mexico, and Canada largely revolve around the large trade deficits all three countries run with the U.S., controlling illegal immigration (particularly from Mexico) into the U.S., and stopping the fentanyl flows into the U.S., mostly across the Mexican border but also, to a much smaller extent, crossing the Canadian border. Bringing more manufacturing back to the U.S., particularly from China and Mexico, is also a goal but will take time. The immigration and drug issues are the ones the administration is looking to for quick progress. And do not forget that Mexico and Canada export 83% and 77%, respectively, of all their exported goods to the U.S. We think it is safe to say the U.S. has leverage in these negotiations.

Let’s make a bottom-line statement here: While there is likely a domestic cost to tariff implementation, the administration is almost certainly going to keep the process gradual and very much transactional in a way that attempts to avoid upsetting the U.S. economy. We also continue to believe that the economic benefits we anticipate from meaningful deregulation and tax cuts, together with the continued strength of the U.S. economy, should outweigh the negative consequences of tariffs and ongoing deportations.

Given that belief, our investment themes remain the same as outlined in our Outlook 2025 report that was published in early December. In terms of asset classes, we believe the implementation of tariffs will push inflation, and bond yields, higher. We continue to suggest that investors take advantage of higher longer-term yields to extend portfolio maturities, funded using cash taken from short-term fixed-income instruments. We see the 10-year U.S. Treasury yield in the 4.5% to 5% range at year-end.

In terms of equities, we are looking for a solid economy to drive record-high earnings for the S&P 500 this year and continue to favor the Industrials, Financials, Energy, and Communication Services sectors. Note that of the top 20 companies in the S&P 500 Industrials sector only a minority have meaningful exposure to supply chains from Mexico. We reiterate our preference for large-cap U.S. equities.

Each asset class has its own risk and return characteristics. The level of risk associated with a particular investment or asset class generally correlates with the level of return the investment or asset class might achieve. Stock markets, especially foreign markets, are volatile. Stock values may fluctuate in response to general economic and market conditions, the prospects of individual companies, and industry sectors. Bonds are subject to market, interest rate, price, credit/default, liquidity, inflation and other risks. Prices tend to be inversely affected by changes in interest rates.

Global Investment Strategy (GIS) is a division of Wells Fargo Investment Institute, Inc. (WFII). WFII is a registered investment adviser and wholly owned subsidiary of Wells Fargo Bank, N.A., a bank affiliate of Wells Fargo & Company.

The information in this report was prepared by Global Investment Strategy. Opinions represent GIS’ opinion as of the date of this report and are for general information purposes only and are not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally. GIS does not undertake to advise you of any change in its opinions or the information contained in this report. Wells Fargo & Company affiliates may issue reports or have opinions that are inconsistent with, and reach different conclusions from, this report.

The information contained herein constitutes general information and is not directed to, designed for, or individually tailored to, any particular investor or potential investor. This report is not intended to be a client-specific suitability or best interest analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon. The material contained herein has been prepared from sources and data we believe to be reliable but we make no guarantee to its accuracy or completeness.

Wells Fargo Advisors is registered with the U.S. Securities and Exchange Commission and the Financial Industry Regulatory Authority, but is not licensed or registered with any financial services regulatory authority outside of the U.S. Non-U.S. residents who maintain U.S.-based financial services account(s) with Wells Fargo Advisors may not be afforded certain protections conferred by legislation and regulations in their country of residence in respect of any investments, investment transactions or communications made with Wells Fargo Advisors.

Wells Fargo Advisors is a trade name used by Wells Fargo Clearing Services, LLC and Wells Fargo Advisors Financial Network, LLC, Members SIPC, separate registered broker-dealers and non-bank affiliates of Wells Fargo & Company.