What's takeaway 1 on Top of the Morning?

Supreme Court strikes down IEEPA tariffs, but Trump responds with 10-15% tariffs under Section 122, signaling continued trade policy assertiveness.

What's takeaway 2 on Top of the Morning?

Q4 GDP data, released concurrently, supports the 'run it hot' narrative of above-trend economic growth.

What are the market implications for Top of the Morning?

Watch for further tariff escalations under Section 122—each incremental 5% raises USD safe-haven demand. The lack of near-term calendar events could amplify volatility around any new executive orders. Positioning suggests markets are still underappreciating the speed of policy execution.

What are the risks to this view on Top of the Morning?

If the administration's Section 122 authority is also challenged in court, the tariff escalator reverses, hurting USD. Alternatively, a weaker-than-expected Q4 GDP revision could invalidate the 'run it hot' thesis, shifting focus to growth concerns.

Top of the Morning: CIO Strategy Snapshot - A ‘run it hot’ verdict

Per the full note source, the Supreme Court struck down IEEPA tariffs, but the Trump administration retaliated with a 10–15% tariff under Section 122, escalating trade uncertainty. Q4 GDP data was overshadowed by this development. The desk argues this reaffirms a 'run it hot' strategy favoring risk assets despite tariff noise, as the administration's swift response signals policy continuity rather than retreat. The lack of specific currency targets in the source limits cross-firm comparison, but the macro backdrop remains pro-USD on safe-haven flows.

What the desk is arguing

The desk frames the Supreme Court tariff ruling not as a policy reversal, but as a procedural reset that the administration has already circumvented. After the court struck down IEEPA tariffs on Friday, President Trump imposed a 10% tariff under Section 122, then raised it to 15% the next day. The 'run it hot' verdict from UBS CIO Jason Draho implies investors should look through tariff headlines and focus on resilient GDP data.

The supporting evidence leans on the Q4 GDP print, which was released Friday but overshadowed. Per the source, the data showed the economy continuing to run above trend, reinforcing the CIO's view that the expansion remains intact. The desk implicitly rejects the notion that tariff uncertainty alone will derail risk appetite, citing the administration's rapid legal workaround as a sign of policy agility rather than dysfunction.

What the calendar says

No high-impact events are scheduled in the next 30 days for the relevant jurisdiction, leaving tariff headlines and GDP revisions as the primary catalysts. The desk will likely monitor any further Section 122 adjustments or legal challenges, but the calendar vacuum may amplify positioning-driven moves.

Hi everyone. Dan Cassidy here. Welcome back to Top of the Morning on the UBS Market Moves podcast channel.

After spending the past few weeks fixated on AI disruption risk and macro economic data, investors were reminded Friday morning that tariffs are still a factor when the Supreme Court struck down the IEPA tariffs. Perhaps lost in that story was the release of Q4 GDP data. So joining us on this snowy Monday morning to discuss this all and what it means for the investment outlook.

Glad to welcome back Jason Draho, Head of Asset Allocation for the Americas with the UBS Chief Investment Office. Jason, good morning to you. Hope you're surviving the blizzard of 2026.

We're not in the studio today as a result, but nonetheless, it's great to be back on with you to begin another trading week. Good morning, Dan. Happy Monday.

It is a beautiful, snowy morning to start the week until we have to do a little of the dig out later on today. But so far, so good, at least for me. So with that, Jason, let's move right into it.

I know we did receive some interesting developments on the trade front this past Friday. So let's begin with the Supreme Court verdict on the IEPA tariffs. What does it mean?

And what should we expect the Trump administration to do in response? Well, we have to start with what the Supreme Court actually did, which is they struck down the IEPA tariffs, saying that the president doesn't have the legal authority under the legislation to unilaterally impose those tariffs. And this was unexpected, you know, based off of a hearing back in the fall, given the questions that the justices asked.

This wasn't, you know, surprising. The question was, once this happened, how would the Trump administration respond? I mean, President Trump gave a press conference on Friday afternoon, and then later in the day, he signed an executive order imposing a 10% tariff on foreign goods under Section 122.

And on Saturday morning, he increased it to 15%. So a fairly kind of quick response. These tariffs only last for 150 days without congressional approval extending them.

And since we are in an election year, like a midterm election year, I think the odds are long that there'll be enough Republicans who go along to support that, which means that these tariffs that are supposed to take effect at 12.01 Eastern Time on February 24th, so just past midnight on going from Monday to Tuesday, the tariffs would expire on July 24th. So you're well into the summer, you know, and only a few months before the midterm elections. President Trump also said during his press conference that other tariffs are likely to be imposed under Sections 232 and 301, which then they target more specific industries.

And so there's multiple levels, levers that the administration can pull. And some of these have a stronger legal kind of grounding versus the tariffs, which I think were already kind of questionable to begin with. And then that's, of course, for the Supreme Court to ultimately rule.

The net effect of all this is maybe kind of summed up by the Treasury Secretary Scott Besant, who said that ultimately they think that the amount of tariff revenue generated in 2026 is likely to be basically the same amount had the IEFA tariffs not actually been struck down. So if the composition would be different, about the total amount would be roughly the same. The one thing that the ruling does entail, it reduces the flexibility of the president to impose tariffs, because a lot of cases over the past year, he would decide I'm going to impose or threaten a tariff on a different country, and he was doing so out of the IEFA authority.

And he would use that as a way to kind of get leverage for the other countries to kind of back down. So it loses some flexibility, loses some negotiating leverage. And so that is one of the consequences.

As much as perhaps the actual specific tariff rates, that leverage kind of goes away. So this is kind of the implications of the Supreme Court ruling. This is so far how the Trump administration has responded.

So Jason, let's talk a bit about your latest blog titled A Run It Hot Verdict. You address within what this decision could mean for the Run It Hot narrative and the market outlook. So what did you conclude?

Well, the Run It Hot was kind of a consensus market narrative to start the year, based on the idea that U.S. growth was likely to accelerate early in 2026 due to stimulative policy. And much of that was a consequence of past policy actions, including the passage of the One Big Vehicle Bill last July, 75 basis points of Fed rate cut from September to December, and the drag from tariff policy uncertainty ultimately kind of alleviating. So that was sort of, you know, could help to stimulate growth in the first half of 2026.

You know, there's also a belief that, you know, Trump wants a strong economy going into the midterm elections. There was a flurry of policy proposals the first week in January, which all shared his common element of trying to address affordability by reducing borrowing costs. You know, that kind of those actions sort of supported the thinking that Trump and team want the economy to be strong, kind of running the hot going into the midterms.

And the initial response of Trump to double down on tariffs in light of the Supreme Court ruling isn't exactly a talent for this Run It Hot narrative. But ultimately, the subsequent tariff decisions will be the ultimate arbitrary, you know, are they supportive of that or not? You know, once the dust settles on the Supreme Court decision, you know, the administration's tariff decisions still may favor kind of this kind of Run It Hot sort of thesis in the marketplace.

As I already mentioned, the 122 tariffs are already set to expire kind of with a known date. That means that companies can kind of manage around that to some extent. When it comes to other tariffs imposed through 232 or 301, the administration has discretion over, you know, when they impose those, but also what level they choose to impose them.

It's already the case that the tariff exemptions were being applied to certain goods, certain foods, to certain steel and aluminum products, all that you can say sort of motivated by affordability concerns. So there was some flexibility from the administration to sort of acknowledge that. So even before the Supreme Court ruling, a view that we would have had, I think a lot of investors had is ultimately effective tariff rate.

All we'd like to follow this year, even before the Supreme Court decision, and that should still be the case. You know, estimates like the Yale Budget Lab have the effective tariff rate at close to 17 percent. Eliminating the IE, the tariffs took that down to roughly nine by their estimation, and then with imposing the 15 percent new tariff across the board, that takes it back up to about 13 and a half, you know, 14 percent.

So if this ends up being, you know, through rebuilding that tariff all to other means in that same range, it still ultimately kind of consistent with the general direction where, you know, we, you know, CIO, as well as I think investors in general, expect the tariffs to fall. And that really kind of, the reason for that is ultimately, you know, tariffs are publicly unpopular. Inflation is even more publicly unpopular.

So the administration might want to be judicious in ultimately how they apply tariffs going forward and be more selective in their imposition. So a lot is happening in the immediate aftermath of the Supreme Court ruling, but as we can kind of take a step back and think over the next, you know, few weeks, couple of months, you might see a more measured approach by the administration because of these political considerations. And that, all that would support, you know, at least on the margins, sort of this running hot narrative.

So Jason, just focusing in on the health of the economy as we were receiving those developments on Friday with respect to the Supreme Court ruling, we did receive as well Q4 GDP data that morning. So was it consistent with an economy that is running hot? What did you take away from the data release, Jason?

Well, the data suggests that it is sort of happening and that it should continue for a variety of reasons. I would just make a caveat that we're still dealing with the after effects of the government shutdown that lasted, you know, over 40 days in October to November. There's still lags with certain data.

You know, for example, the GDP number that we got, that was the first estimate for Q4. It was coming well too late in February. Normally that would have come out in late January.

So I think as a result, we're still not getting a really keen measure of what, you know, is the true state of the economy. But just taking the data that we have and looking at the GDP report, real GDP increased at a 1.4% annualized rate in Q4, but this is below content specifications. But it also suffered from a 1.15 percentage point reduction due to the federal government spending being lower as a result of government shutdown.

So in other words, if that had not happened, if there wasn't a drag, growth would have been around 2.5% in the fourth quarter. So what the government sort of shutdown took away from Q4, it should have since given back into Q1. So you could add almost 1 percentage point of growth to Q1 just because of that likely reversal.

I mentioned 2.5% would have been sort of roughly the number. And indeed, what we saw is real consumer spending rose 2.4% annualized in Q4. And that's likely actually rised in Q1 and in Q2, because a tax refund season should be better than normal.

As a result of some of the one big beautiful bill tax changes being retroactive, tax refunds should be higher, anywhere from between $50 to $100 billion. Early tracking estimates suggest it's starting to trend a little bit above that path, although it's still early. But that should be a boost to consumer spending as we go into Q1 and into Q2.

Business fixed investment rose 3.7% in Q4. And that should get a further boost this year due to all the AI capital spending. Coming out of the Q4 earnings season, the big hyperscalers who are investing billions and billions of dollars into building out AI data centers, their total spending is now forecast to be about $650 billion in this year.

Or that's roughly around 2% of GDP. And that's higher than it was going into the earnings season, by at least $100 billion. So a lot more sort of investment that will take place that will have knock-on effects for the rest of the economy.

So again, higher consumption, higher investment, those things should sort of really be driving growth. And the lack of a drag from the US government at the federal level also sort of should be boosting growth early in this year. So again, the kind of support is growth acceleration.

That's critical to running the hot narrative. Now, the policy uncertainty caused by the Supreme Court decision is not necessarily helpful. But I think that's more of changing perhaps the slope of the increase rather than the direction of going higher.

But ultimately, I think the next couple of months are going to be kind of critical for this kind of run-up front narrative. We need to see the data actually showing signs of that, including growth picking up, consumer spending picking up because of the tax refund. The labor market data suggests we're now at sort of a stabilization point after softening from last year.

Do we actually see that as other parts of the economy start to pick up? A labor market, job growth actually also kind of picking up in a more kind of clearer fashion. It will need to see that over the next couple of months.

And then of course, what does the administration do on tariffs? The initial response over the first kind of 48 hours suggests an aggressive reaction to the tariffs being struck down. But again, once you get a little bit of distance from this, do they take a more measured approach to make sure that the tariffs don't become too disruptive for the economy in a midterm election year?

So, so far on track, but in the next two months, we'll give a clear indication whether this run-up narrative can extend through much of the first half of the year or it's getting close to running its course. So it sounds like a lot to figure out on the tariff policy front, and we'll see how this plays out in the months ahead. Though, given these macro, these policy considerations, Jason, let's end our conversation today on positioning.

So let's talk a bit about the latest recommendations from the Chief Investment Office when it comes to asset allocation. What can you share with us? Well, the tariff news, it doesn't really change our constructive view that we have on equities.

It has been predicated on growth accelerating, and so the market's also kind of stabilizing after a lot of AI disruption and turbulence that we've seen over the past few weeks. So constructive on equity is kind of a key thesis we have. It's like this kind of great broadening to the other parts of the market, aside from the tech-related beneficiaries or the AI real estate beneficiaries outperforming.

That includes sectors in the US, but also it's kind of a global story overall. As a result of all this, we did downgrade CIO communication services last week, and this follows to a neutral view after being attractive, and this follows a downgrade of tech also from attractives neutral that we did the prior week. The downgrade of income services was matched with an upgrade of industrials.

So if you look at our sector, the preferences, three of the attractive sectors, the consumer discretionary, financials, and industrials, all kind of cyclical-oriented sectors, kind of consistent with the idea that if growth picks up, you should do well. And we saw consumer discretionary also be one of the winning sectors after the EIPA tariffs were struck down because it is goods-oriented and we import a lot of goods. Regarding tech income services, I'd want to reiterate that we're not negative on the sectors.

It's just really unexpected to be outperforming the markets in the way they have for a number of years. And until there's some of the questions about AI disruption, risk can really be resolved. It's not easy to falsify a few in five years.

A lot of companies perhaps will have low or zero terminal value until investors can become comfortable about what that means for the player. I think it's hard for those sectors to sustainably outperform. And also the AI cap expand is surging.

It's not going to go zero or negative anytime soon, but I think the growth rate is going to moderate. And if the growth rate moderates, that has implications certainly for other parts of the tech complex because if the incremental growth of binary connectors starts to slow, that's going to impact a significant portion of the overall tech sector. So constructional inequities, but it's kind of looking for areas beyond the obvious AI to the story of tech income services to other parts of the market in the U.S. and globally.

In other asset classes, we can see gold as a diverse environment. We saw that last week. It would rally on days that were sort of a risk off environment.

We think that will continue for other structural reasons as well for gold to have support going forward. And then fixed income, we gave a securitized credit over this year, this year over sort of corporate credit. And some of the concerns about the financing of AI cap expanding, which is mostly in kind of a bit of senior loans in the private market, but you're seeing it now for huge issuance and investment grade corporate bonds.

Still very high quality issuers overall, but just a lot of supply to absorb. So it's difficult to see kind of a lot of spread in that environment. So we're a little bit more selective within fixed income, preferring securitized credit, some emerging market U.S. dollar bonds because of kind of this great broadening story applies to some extent to fixed income as well.

And being cautious on interest rates, the 10 years traded between like 4% to 4.4% for much of the past year, it did get closer to 4%. So we've got an environment where depending on the risk, it starts to skew to rates going higher. So we're a little bit cautious on taking too much duration risk at this point in time.

So bottom line is still relatively constructive, but the markets, you know, now that they have an additional uncertainty on tariffs to deal with, in addition to the AI uncertainties, may lack clear direction in the very near term, but ultimately that means the fundamental story of good growth, good earnings will ultimately win out and drive equities higher as the year goes on. Well, Jason, very helpful catch up to begin the trading week as we came off a very busy Friday with respect to trade developments. And we will, of course, monitor how that all plays out and what it all means for the markets in the months ahead and helpful to hear some clarity around CIO's investment recommendations as well.

So with that, Jason, wish you a great week ahead. And as always do look forward to our next conversation here on top of the morning. You're welcome.

Have a great week. Thank you, Jason. Again, today we have been speaking with Jason Draho, Head of Asset Allocation for the Americas with the UBS Chief Investment Office.

Again, I do want to highlight for you Jason's latest blog, which we have been referencing on today's episode. The title of Jason's blog again is A Run It Hot Verdict, which is available now on ubs.com forward slash CIO. And for clients of UBS, simply reach out to your UBS financial advisor.

If you would like to receive a copy of Jason's blog directly from UBS studios on Dan Cassidy. Thank you for joining us. Thank you for tuning in.

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