Tariffs, DOGE and Shutdowns Be Damned…the Beat Goes On!

October 2025

 

The stock market has been on a wild ride in 2025. It feels as though we are in the fourth year of the Trump administration, not just the tenth month. The pace of news is unprecedented, as Trump wields the power of his office and the media differently to any previous president.

In November 2024, markets rose as investors hoped that Republican leadership would bring tax cuts and deregulation. Then came the tariffs and DOGE, sending investors into a panic. Having seemingly avoided worst-case scenarios, the market has turned to the excitement surrounding artificial intelligence, which has unleashed historically unprecedented technology spending.

INTEREST RATES AND INFLATION

The markets received a further positive shock when the U.S. Federal Reserve finally lowered interest rates in September for the first time since the increases that followed the pandemic. Even the prospect of a U.S. government shutdown has done little to unnerve investors, with numerous equity indices around the world hitting new highs.

So why is the market strong despite all these concerns? To begin with, as the old saying goes, “Don’t fight the Fed.” Falling interest rates have propped up stock prices, with capital shifting from bonds to equities, which offer the potential for higher growth and wealth creation. Data also indicates that inflation is slowing, enabling central bankers to prioritize the labour market and protect consumers.

THE IMPACT OF AI

The current boom in artificial intelligence (AI) spending is fuelling investor excitement that we are in the early stages of a technological revolution. It is worth spending some time considering this issue, as there are real opportunities in AI. However, investors must also ponder the risks, and discipline is crucial at market moments like these.

AI is emerging as a defining economic and market force, drawing comparisons with past technological revolutions, such as the railroads in the 19th century and the Internet boom in the 1990s. The scale of current investment is extraordinary. Major technology firms, including well-known companies such as Microsoft and Meta, are investing hundreds of billions in AI infrastructure, including data centres, chips and power systems. This situation is creating meaningful stimulus for the broader economy.

The surge in capital spending is already boosting productivity and growth, and it seems likely to continue to do so in the years ahead. As AI becomes integrated into daily business operations—from customer service and compliance to medical diagnostics and automation—it has the potential to drive sustained acceleration in efficiency (i.e., profit margins) and innovation across industries. The resulting productivity gains could reshape the economic landscape over the coming decade.

However, history reminds us that such transformative periods often bring exuberance and eventual correction. The railroad, electrification, and dot-com eras all delivered lasting progress, but were also characterized by speculative excess. Given the sheer scale of AI investment, potentially amounting to several trillion dollars, not all companies will earn sufficient returns to justify their investments. On the other hand, can they afford to be left behind? This dilemma is fuelling an “arms race” of sorts, creating opportunities for suppliers of everything, from semiconductor chips to power.

THE INVESTORS’ PERSPECTIVE

As this new technological age unfolds, discernment and balance will be essential for investors. Many of Pembroke’s equity strategies are exposed to the boom in AI spending, but the investment team is maintaining healthy diversification across industry sectors. We are resisting the temptation to transform our strategies into “AI strategies,” despite investor enthusiasm for this theme. Furthermore, our holdings exposed to AI spending have strong balance sheets and were profitable and growing even before AI emerged, as well as having sustainable competitive advantages in their market segments.

It is also clear that the market has deemed some companies, and even entire sectors, to be at risk as a result of the “AI promise.” Pembroke is carefully navigating this challenge, acknowledging that disruption to certain business models is likely, but also recognizing that some companies are being labelled as “AI losers” when they could very well benefit from AI efficiencies. As always, solid balance sheets are paramount to give management teams the time and flexibility needed to adapt to change.

Pembroke recommends that clients approach this new era with discipline. Exposure to AI is reasonable and even necessary, but it should not replace a balanced and measured approach to portfolio construction.

 

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