GLOBAL EQUITY BULLETS | Wednesday, 26 February 2025

European Equities outperformance: More Than a Bounce? 

How reporting season is going: Halfway through the Q4 earnings season, Stoxx 600 Q4 EPS growth is running at 3% y/y comfortably above the -1% growth that consensus expected at this stage, with financials and healthcare delivering the main upside surprise. Ex-financials, Stoxx 600 Q4 earnings growth is tracking at -1%, though this is above consensus of -4%.

Most of the beat came from cyclicals and consumer discretionary, putting revenues on track for the first growth in almost 2 years.

European earnings growth expectations for 2025: After a mere 1.4% in 2024, consensus expects European EPS growth of 8% in 2025. While the pace of upward revisions has since moderated, 2025 EPS has been revised up for four consecutive weeks now, lending support to the rally in European equities

 

A taxing history: How tariffs went from funding America to wrecking trade

On February 1, 2025, President Donald Trump announced the imposition of 25% tariffs on imports from Canada and Mexico (except energy products from Canada, which will be taxed at 10 percent), along with a 10% tariff on imports from China. On February 3, 2025, the Trump administration decided to postpone for 30 days the implementation of the tariffs on Canada and Mexico. The imposition of these tariffs would be one of the largest increases in trade taxes in US history.

The graph below illustrates the percentage of US government revenue derived from tariffs over the past two centuries. Up until the early 20th century, tariffs were a primary source of federal income, often accounting for over 80% of total government revenue.

Hence, for a long time, the US mostly taxed foreign countries instead of its people. However, this reliance began to decline sharply in the early 1900s, coinciding with the introduction of the federal income tax in 1913 (via the 16th Amendment) and the expansion of other revenue sources such as corporate and payroll taxes.

A significant increase in tariff revenue occurred in the 1930s, largely due to the Smoot-Hawley Tariff Act (1930). This law raised US tariffs to historic levels in an attempt to protect American industries during the Great Depression. However, it backfired—other countries retaliated with their own tariffs, leading to a collapse in international trade. As imports fell, tariff revenue plummeted, exacerbating the economic downturn. This failure contributed to a long-term shift away from protectionist policies in the US.

By the mid-20th century, tariffs had become an insignificant component of federal revenue, remaining below 5% for the past several decades. This transition reflects a broader shift in economic policy, with the US increasingly favouring free trade agreements and globalization, reducing tariff barriers in favour of economic growth and consumer affordability.

To put into context, Canada & Mexico account for 29% of U.S. imports while China accounts for 14% of U.S. imports. The tariffs would raise the average U.S. tariff on all imports from 2.4% to 10.5%—the highest level since World War II.

It is true that today the US runs persistent budget deficits and carries an increasingly high national debt, exceeding $34 trillion in 2024. With government spending outpacing revenue, some policymakers argue for higher tariffs as a way to generate additional income and protect domestic industries. However, history suggests that tariffs alone cannot sustain government finances in a modern, globalized economy. Moreover, raising tariffs can lead to trade wars, higher consumer prices, and retaliatory measures from trading partners, which could slow economic growth. If fully implemented, they would signal a significant shift in U.S. economic and trade policy.

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The $330B Data Centre Gold Rush: Big Tech’s AI Bet and the Power Struggle Ahead

Data center spending has seen significant growth in recent years and looking ahead to 2025 major tech companies are planning massive investments. Microsoft, Amazon, Google and Meta are planning to increase their spending by roughly $100 billion compared to 2024, totaling approximately $330 billion for the year.

Most investments are in the US, particularly in states like Virginia, Texas, and Ohio, reinforcing America’s dominance in AI and cloud, while China faces chip sanctions and EU investments remain bureaucratically constrained.

Concerns about energy consumption are emerging, as data centers are projected to consume increasing amounts of electricity—potentially up to 9% of U.S. power by 2030—prompting investments in energy and efficiency measures. Since the launch of ChatGPT in November 2022 spending has clearly accelerated, but it’s worth noting that the 3-year CAGR has basically never been below 10% in recent years, signaling that Data Center investments appear to be structural.

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Algebris Investments’ Financial Equity and Global Equity Teams