The conquest of space saw the United States and China compete peacefully to establish their dominance during the Cold War. This competition has boosted economic growth through investment in technological innovation, job creation, infrastructure and industrial expansion, among other things. The investments made in the 1960s also laid the foundations for future economic growth, particularly in the technology sector.

The current geopolitical context is complicated, and the race for artificial intelligence and (free) trade are all manifestations of the tensions between the United States and China. So it’s easy to draw parallels with the space race. But what impact might these races have on the economy and the market?

Moderating inflation and the AI investment cycle, which the US is leading, have indeed helped push equities to new highs in 2023 and 2024. The launch of DeepSeek and the announcements of new customs duties have therefore logically caused a small shockwave on the markets at the start of the year, raising questions about the viability of investment in AI and the risks of a return of inflation that could crimp growth.

Our view on AI clearly remains positive, albeit vigilant, given the increased risk of protectionism. Let’s look at why below.

First, AI-related developments are supporting growth in a number of ways. The increase in demand for new chips, but also the need to store data, protect it and power it are examples of this. It’s true that this has certainly been inflationary, even though we’ve always thought that the adoption of AI will be deflationary in the long term. The arrival of Deepseek may well have anticipated this deflationary phase. Increased competition will force suppliers of existing models to lower their prices, as OpenAI has already done recently. This should lead to more widespread adoption of AI, because it will be more affordable, against a backdrop of dominance between nations in this field.

Admittedly, volatility in AI-related names and stock market indices is likely to persist in the short term as the new balance of power is established. That’s why we are maintaining a downside protection on equities. In the longer term, we believe that AI will remain a structural driver of growth, particularly in the context of the booming technology sector. This is why we remain exposed to this key sector.

Keep calm and carry on

As far as trade is concerned, the Trump administration’s announcements of new tariffs have not only (re)undermined the concept of free trade, but have also put the possibility of rising inflation into the heads of many market players. If this were the case, we think it would certainly be a drop in the ocean compared with the tsunami that was covid.

Trade has never been free. Tariffs have existed since the days of Greece, ancient Rome and the Silk Road caravans, but they have never prevented economies from growing. In 2018, many predicted economic chaos when Trump increased tariffs. What actually happened? Companies and countries have been creative in adapting. Production lines were relocated, companies also absorbed some of the costs and consumers sometimes adapted by turning to other products when prices changed significantly. With each (re)introduction, a network of complex responses is put in place. The relationship between customs duties and inflation is therefore by no means linear.

Then there is the currency effect. The currencies of the countries affected by the increase in customs duties tend to adjust downwards and the dollar tends to strengthen. As a result, Americans can continue to import more products made more attractive by the fall in currencies and the rise in the dollar. In 2018, the DXY, the US dollar index, rose by 4.4%. And finally, during Trump’s first term in office, the trade deficit widened further as Americans continued to import. Although they contribute negatively to GDP when they exceed exports, imports are a sign of a vigorous economy, as is currently the case in the United States. This is one of the reasons why we favour US equities.

Nevertheless, Trump’s announcements and changes in stance are creating uncertainty. And this is unlikely to stop. ChatGPT tells me that Trump has generated an average of three to seven tariff headlines a week in his first term without fundamentally changing the direction of the markets. The dog barks, the caravan passes.

These races for dominance present both opportunities and risks. Cybersecurity is one such opportunity that we are highlighting in our thematic portfolios. On the risk side, the problem could come from markets taking fright over inflation, leading to a rise in bond yields and a fall in technology shares. So let’s think diversification, with exposure to equally-weighted indices like the S&P, for example, and to European sovereign bonds in the short term to capture the monetary easing cycle and cushion the hypothetical impact on growth. Gold, commodities and inflation-linked US Treasuries are other assets that provide diversification, while derivatives-based ‘insurance’ strategies can cushion the impact of potential falls in equities.

Nicolas Sopel is head of macro research & chief strategist Luxembourg at Quintet Private Bank.

This article was originally published in .