Jeremy Siegel, Wharton emeritus professor of finance and senior economist at WisdomTree, discusses how markets are reacting to global instability, the looming July 9 tariff deadline, and the Federal Reserve’s stance on interest rates, while highlighting how artificial intelligence could help offset economic challenges.
Transcript
Big Market Uncertainties
Dan Loney: The markets do not like uncertainty, and we have seen a lot of that play out in recent months, especially on the global front. What are your thoughts on how Wall Street has reacted?
Jeremy Siegel: There are a number of things going on. The final chapter in the [conflict between] Iran and Israel has certainly not been written, and we don’t know whether it’ll ever be completely written, as we see oil [prices] drop down to pre-Israeli strike low levels.
The risk of a spike in oil prices seems to have gone way down — certainly in the short run. The market likes the prospects that some peace or reconciliation can happen in the Mideast. So that is a positive development.
The big [uncertainty] is on the tariff front. We are approaching the July 9 deadline for potential reimposition of the so-called Liberation Day tariffs. The market doesn’t think it’s going to happen. The market thinks that any country that will start at least presenting some plan will be given an extension.
The market has also decided that it could live with a 10% general tax and a 30% tax on China. It doesn’t like it. It prefers not to have it. I wouldn’t say [that is true of the] 50% [tariff] on aluminum and some on cars. [The market] doesn’t like those, but it could live with them.
Loney: Is the 10% already baked in at this point?
Siegel: I think the 10% is baked in. It would be really very surprising to me — although not impossible — that that minimum will last at least through the Trump administration, which is about three-plus [more] years. Now, if inflation becomes [higher], and if people are convinced the tariffs are bad, he may have to adjust that. He may have to wait until the midterms, a year from November, to do that. But pretty much right now, I think the 10% is baked in.
Why is the stock market within a hair’s breadth of all-time highs? Because it thinks that despite the hurdle of the tariffs, it can overcome much of the harm that’s done. Maybe not all, but much of it. There’s the old saying, “Necessity is mother of invention.” Or, I would say, adversity is the mother of invention.
The market sees a more serious usage of AI. We all know about the AI firms, and all the promise and the hype. The truth is that most firms have not used it anywhere near to the extent they could to cut costs. Now they’re going to be forced to, just like what happened with podcasts and Zoom calls during COVID. Zoom existed before COVID, but no one used it. Then [people were] forced to use it, and now we use it, and we use it extensively.
There are many other things that force you into positions which you find might be useful. [For instance, employees may be told], ‘You either need to be more productive, or we have to lay you off because with these higher prices, our margins are being squeezed, and we have to work everywhere we can to restore the margins.’ That is what I believe is in the minds of investors as to why [they assume that] profits may not be damaged as much as Wall Street originally thought. Inflation and GDP [growth] may not be as bad as they thought.
Now, I don’t like tariffs. They are really like a sales tax. A 10% sales tax is almost like a value-added tax of 10%, but just on imported goods. I particularly don’t like 50% tariffs. They just protect inefficient industries. It’s not a good economic idea.
Nonetheless, the potential of AI to lower costs is such that the market is looking beyond that, and then to an extension of the Trump tax cuts and a lighter regulatory touch.
What Should the Fed Do?
Loney: How important then is the second half of this year to understanding what will happen with the economy? And, with the Fed chair holding [interest rates] for now, will we see rate cuts in the second half of the year because he wants to see the impact from the tariffs? It feels like the next six months could give us a little bit more knowledge to understand what we might see play out as we go into 2026 as well.
Siegel: Yes, absolutely. First of all, most of the goods are still being sold out of the inventories that were bought pre-tariff. But in the third quarter, those inventories will be down. So [companies] must make efficiency gains or raise prices. In many cases, they’ve got to raise prices. You can’t have efficiency gains of 25% or 50%. We’ll have to see how the economy responds.
It’s my firm belief that the Fed should not raise [rates] because of tariffs and the inflation that they cause. It’s like saying, if the government decided on a national sales tax of 10% and eliminated the income tax or reduced it, should that mean that the Fed should tighten policy just because we know that the prices of consumer goods will go up even though there’ll be more income for consumers to buy those goods? The answer is no.
You should only really tighten when inflation is caused by too much demand. And I don’t see that coming. So, I’m in the camp of definitely loosening [monetary policy]. I don’t know if they will.
We have several Fed speakers that are now even talking about a July cut. I think that Powell is on the fence. We still have four or five weeks of data before that happens. We will look at it to see signs of slowdown. There already has been a slowdown. GDP [growth] was minus [0.5%] in the first quarter…. The trend is potentially down in the third quarter when all this excess buying and pre-buying and selling out of inventories washes out, and we’ll see the true effect.
I do think the Fed will be lowering rates. The question is, will they do it in time to prevent a real slowdown? I don’t think there will be a recession from this, but if [the tariff] stays at 10%, there will be a slowdown, but then you look ahead to 2026. It there are no more tariffs, and if other productivity factors come into play, it could still be a good year for stocks.