AI’s $600 Billion Question, Trump 2.0, and What It All Means
Takeaways from JP Morgan Asset Management’s “2025 Eye on the Market Outlook”
If you haven’t read this brilliant report by Michael Cembalest yet, don’t worry; I’ve got you covered with some quick insights...
AI’s $600 Billion Question
First off, let’s talk AI. The report highlights a big question: How will tech giants make back the massive amounts they’re spending on AI infrastructure?
Think about it, these companies are investing huge sums in things like GPUs, which could be 50% or even up to 70% of a new data center’s cost. To put it in perspective, these companies need to make an extra $400 billion each year in AI-related revenue to maintain their profit margins because of these infrastructure costs. If free cash flow margins were used as the benchmark, it would still be a significant $350 billion per year.
- Why should we care? Well, these massive outlays immediately impact free cash flow margins. Though these costs are accounted for over time via depreciation, analysts expect this elevated spending to continue for several years. Some even say it’s the price of staying competitive.
- Is there a return on this massive investment? The report notes that while early AI applications are impressive (like Goldman’s claim that AI can complete 95% of an S-1 filing in minutes, compared to the two weeks it takes for 6 human analysts), there is still some uncertainty about whether these applications will generate enough revenue to justify the heavy capital spending.
The Inauguruption: Trump 2.0’s Executive Orders
Now, let’s shift gears to the political landscape with the “Inauguruption”, a term the report uses to describe the flurry of executive orders from Trump 2.0. This version of Trump’s policies is described as a mix of different American political ideologies.
- American First Policies: These policies bring potential benefits on the supply side, but also carry the risk of inflation. It seems like there is little room for error during a period of elevated US equity multiples.
- Manifest Destiny: There is mention of expanding America’s influence, including potentially retaking control of the Panama Canal, making Canada the 51st state, purchasing Greenland from Denmark, and planting an American flag on Mars. The concern is that Chinese firms now have significant control of the Panama Canal.
- Nixon’s Enemies List: There’s a nod to Nixon’s famous “enemies list,” showcasing the combative nature of this administration.
- McKinley Tariffs: The report draws a comparison to McKinley’s high tariffs that led to political backlash and loss of majority.
Immigration and Deportation
The Trump administration plans to deport roughly 1 million undocumented workers per year, which could cost around $88 billion per year to implement.
- Why the change? These policies are a reaction to what the report describes as a surge of uncontrolled immigration under the Biden administration.
- Potential Impact: There could be a potential decline in real GDP, and the labour market may tighten. However, the administration has stated it’s in favour of legal immigration, which could be increased as necessary.
Energy and Infrastructure
There’s an attempt to streamline permits for pipelines, but projects are often challenged. The pace of oil, gas, and transmission line projects has significantly slowed down.
- What is on the agenda? Trump also seeks an end to leasing for wind farms on public lands and a pause on spending from infrastructure and energy bills.
- EVs? While the administration is looking to terminate the “electric vehicle mandate,” it is not clear if they can rescind the EV subsidy as it was part of prior legislation. However, a goal is to increase domestic energy production, which seems achievable.
International Taxation and Trade
There is an intention to resist rules that allow other countries to collect taxes from US companies on income earned in the US.
On tariffs, the report notes a possible increase on imports from Mexico and Canada, and expects an increase in tariffs from China and EU auto imports as well.
- Reciprocity: There is also a point made about a lack of tariff reciprocity in recent years.
- Impact: Economists generally believe that tariffs may reduce US manufacturing jobs, disproportionately impacting red states.
“Drain the Swamp” and Deregulation
Lastly, the report mentions executive orders aimed at “draining the swamp,” including a hiring freeze and a pause on new regulations. The report also states that it is hard to dismantle the regulatory system.
- Regulatory Hurdles: The notice-and-comment rulemaking process could take 6 to 12 months, and courts often challenge new rules.
So..
there you have it — a whirlwind tour through some of the key topics in the 2025 Market Outlook. It’s a mix of challenges and opportunities, and it’ll be fascinating to watch how it all unfolds.
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