Yardeni: Inflation, tariffs, plus countries accumulating gold as a haven from U.S. sanctions.

S&P 500 to reach 7,000 by year-end. Overweight the Information Technology, Communication Services, Industrials, and Financials sectors.

The major U.S. stock market indexes are up since Election Day, despite recent turbulence caused by DeepSeek and Trump Tariffs 2.0. The former is weighing on the shares of AI companies. However, cloud giants Amazon.com, Microsoft, and Alphabet's Google remain committed to spending record sums this year to build out their AI capacity. Asked last week about the AI cost efficiencies represented by DeepSeek's widely followed advances, Amazon CEO Andy Jassy echoed the sentiments of other tech leaders in saying that he expects the trend to increase overall AI demand.

Trump Tariffs 2.0 hit the U.S. stock market hard on Feb 7. after President Trump said he plans to announce reciprocal tariffs on many countries this week - a major escalation of his offensive to tear up and reshape global trade relationships in America's favor.

We view this as a positive development, given that Trump previously planned to impose a uniform 10%-20% tariff on all U.S. imports. The reciprocal approach leaves plenty of room for the U.S. to negotiate tariff cuts with each of America's trading partners separately. They're Trump's "art of the tariff" deals.

Trump's reciprocal tariff threat also spooked the U.S. bond market last Friday. That's because higher tariffs would cause at least a one-time spike in consumer prices, which might trigger a renewed inflation cycle. Another possible reason for the backup in the bond yield is that the bond "vigilantes" figure that Trump's reciprocal approach to tariffs suggests that he may be abandoning the idea of a uniform tariff aimed at raising revenues.

Here's more:

1. Expected inflation: Exacerbating Friday's stock- and bond-market selloffs was news that the one-year expected inflation rate jumped to 4.3% this month from 3.3% in January, according to the University of Michigan's latest consumer survey. The interviews for the survey concluded on Feb. 4, just days after the Trump administration announced 25% tariffs on Mexico and Canada, which were quickly delayed by 30 days. But Trump slapped an extra 10% duty on Chinese goods, which was met immediately with retaliation by China.

The jump in expected inflation reduces the likelihood that the Fed will be cutting the federal-funds rate again soon. For now, we remain in the none-and-done camp in 2025 regarding Fed rate cuts.

2. Gold: On Friday, the price of an ounce of gold (GC00) soared to another record high on the tariff news. This may be helping to pull the price of copper (HG00) higher, which might also be attributable to increased spending on data centers. We don't think this development reflects an improvement in China's economy.

The price of gold is likely to hit $3,000 soon and perhaps $4,000 in 2026 as the central banks of China continue to accumulate it as a haven from U.S. sanctions. They've been doing so since the U.S. froze the international reserves of Russia when it invaded Ukraine in early 2022.

China's weak economy might explain why China's response to Trump's 10% tariff has been relatively muted so far.

3. Copper: Also raising doubts that copper is signaling an improvement in China's economy is the renewed drop in the Chinese government's 10-year bond yield back down to its recent record low. China's weak economy might explain why China's response to Trump's 10% tariff has been relatively muted so far.

4. Bitcoin: Tariff turmoil is boosting uncertainty and can explain some of the recent strength in the price of gold. Increased risk has recently weighed on the stock market, especially the riskiest segment such as the TQQQ TQQQ. Bitcoin (BTCUSD) has also underperformed gold lately. The former is a risk-on play; the latter is a risk-off haven.

5. Bottom line: We expect the S&P 500 might remain choppy through midyear before resuming its climb in record-high territory to 7,000 by the end of this year. We still favor overweighting the information technology, communication service, industrial and financial sectors. In particular, the financial sectors of the S&P 500 MidCap 400 MID, and SmallCap 600 SML indexes all are likely to outperform all the other sectors as long as Trump Tariff 2.0 turmoil persists.

Ed Yardeni is president of Yardeni Research Inc., a provider of global investment strategy and asset-allocation analyses and recommendations. Eric Wallerstein is Yardeni Research's chief markets strategist. This article is excerpted from Yardeni Research's "Market Call" for Feb. 8, 2025 - "Choppy Waters." Individual investors can read Yardeni Research reports here. Follow Yardeni on LinkedIn and his LinkedIn Blog.