The UK and US stock markets are once again approaching all-time highs. Markets have truly rebounded since Trump shocked the world with his trade policy. However, this rebound concerns me.
These stock markets are trading near all-time highs despite a huge increase in the average effective US tariff, despite worsening geopolitical tensions, and despite sovereign debt concerns.
The big story… tariffs
Personally, I’m not sure investors have truly factored in the full impact of recent tariff increases on corporate earnings.
Over the past year, average effective tariff rates have risen significantly, reaching levels not seen since the late 1930s. Under the Biden Administration, the average effective tariff rate was around 2.5%-2.7%. In May, that figure had risen to almost 20%.
These tariffs have introduced new costs for businesses that rely on international supply chains. However, I just don’t believe we’ve really seen the impact of them yet. After all, ‘Liberation Day’ took place at the beginning of Q2, and we’re still in Q2.
The full earnings impact of these tariffs is expected to become more visible in the second half of 2025, as companies report on their financial results and adjust to the new cost structures.
Where does Michael Burry come in?
Michael Burry, best known for predicting and profiting from the 2008 subprime mortgage crisis — a story retold in The Big Short — sold nearly all positions at Scion Asset Management in the quarter ending 31 March 2025.
This move, alongside concentrated bearish bets through put options — bets that a stock will go down — on major tech and Chinese stocks, seemingly reflected his conviction that the market was sinking.
Burry’s only notable long was Estée Lauder, suggesting a defensive stance. However, 13F filings only show holdings as of 31 March, so his actions after that date remain unknown. As we know, the market slumped in early April but has since recovered.
Defensive choices
Within this context, I’m increasing looking at defensive options. I could look at farming stocks like Pilgrim’s Pride, for example, which could outperform in a downturn.
However, one option closer to home is the National Grid (LSE:NG.). The company recently reported strong financial results for the fiscal year 2025, with statutory and underlying pre-tax profit up 20%.
The company is also investing heavily in its infrastructure, with a capital expenditure plan of £10bn aimed at modernising the energy grid and supporting the transition to renewable energy sources.
This investment is part of a broader strategy to expand its regulated asset base, which is expected to grow by around 10% annually over the next few years. It does, however, introduce additional execution risk. Net debt is already £47.5bn — very sizeable.
It’s also not particularly cheap on face value. The stock trades at 14 times forward earnings, which may be a little demanding when we consider debt is on par with market capitalisation. Nonetheless, the forward dividend looks strong at 4.6%.
The National Grid is not a stock I’d normally watch, but given my concerns about the potential overheating of the market, it’s something I’m adding to my watchlist. It may be worth considering.
