A Rapid Rebound

NVIDIA batted cleanup in the Q1 earnings reporting season, capping off what has been a surprisingly strong quarter overall: Revenue came in at just over $44 billion, which was approximately $800 million ahead of consensus in spite of $2.5 billion in lost sales of H20 chips from the China embargo. Their forward guidance noted that next quarter’s revenue would come in light against Street expectations — given about $8 billion in lost China business — versus a consensus of just under $48 billion before the China ban.

Of note was the Blackwell GPU ramp, with Blackwell contributing nearly 70% of datacenter revenues this quarter. Blackwell now represents the fastest GPU ramp in the company's history. Further, management highlighted continued momentum in structural AI demand drivers, which will help offset China headwinds — particularly in terms of exponential growth in reasoning AI. AI continues to be an extremely strong theme, and continues to drive extremely strong results, across many large cap technology stocks.

The U.S. Court of International Trade struck down tariffs imposed under the International Emergency Economic Powers Act (IEEPA): These include the 10% baseline tariff, the 20% incremental tariff on China, and the 25% tariff on non-USMCA compliant imports from Mexico and Canada. However, the Federal appeals court granted a temporary reprieve for the administration. Ultimately, this issue will likely go to the Supreme Court, though this could be a long, drawn-out process.

In the meantime, the White House is seeking to shift the legal authorization for tariffs. The administration is also continuing to focus on non-trade barriers — evident in Section 899 of the proposed “One Big Beautiful Bill Act,” which would allow the U.S. to increase tax rates for individuals and companies from countries with discriminatory tax policies, including a digital services tax. The uncertainty around the future of trade policy will continue to drive market volatility across both equity and bond markets.

The One Big Beautiful Bill Act of 2025 seeks to extend the tax cuts enacted during President Trump’s first term, introduces new tax breaks — such as no taxes on tips or overtime — and boosts spending for defense and border security. The fiscal package suggests a boost to economic growth that should pick up next year and in 2027 as the tax cuts take full effect. The moderately expansive fiscal bill reinforces our view that a deep contraction is unlikely, though the growth tailwinds in earlier years will likely not be enough to offset the headwinds from tariffs and lower immigration.

The fiscal package has some offsets from cuts to green energy incentives and healthcare subsidies, though it is projected to add over $3 trillion to the national debt. Persistent deficits and high debt levels for an economy operating near its potential may limit the Federal Reserve’s ability to cut rates and stimulate the economy. However, keeping monetary policy too tight may be difficult to sustain, suggesting that inflation may linger near 3% for a longer period. As such, investors may demand higher yields to compensate for the ongoing inflation risks and fiscal uncertainty.

An environment of higher government borrowing and higher interest rates tends to compress equity valuations, but the effect is felt more among interest-rate-sensitive sectors such as real estate and utilities, as well as companies that rely heavily on debt markets to drive their growth. In contrast, companies with business models less reliant on debt capitalization, such as technology firms, may be more insulated. Moreover, companies in the financial sector and value stocks in general should benefit from an upward sloping yield curve. While there will certainly be variance in the fortunes of specific companies and sectors from rising debt and greater fiscal risk, we can generally expect that investors will command a higher premium to hold risk.