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Digital payments have been around for a while – whether it’s swiping a debit card, using Apple Pay, or sending money through apps like Venmo or Zelle. But behind the scenes, all of those transactions are layered on top of the traditional banking system. Stablecoins might change that.

Stablecoins operate outside of the traditional payment system offering a fundamentally different way to move money.

Think of a stablecoin like a digital dollar that can be sent anywhere in the world instantly, even on weekends or after hours, without waiting for a bank to approve the transfer. They’re designed to keep a stable value, commonly tied 1:1 to the U.S. dollar, and move across blockchain networks instead of having to go through a bank. For most American consumers using Venmo or Zelle, the immediate impact of stablecoins may appear minimal. But the implications for stablecoins in the world of investments are far broader.

Looking at stablecoins now is important because the U.S. Senate recently passed the GENIUS Act. The Guiding and Establishing National Innovation for U.S. Stablecoins (GENIUS) Act still needs to get approved by the House of Representatives, assuming they don’t try to pass their own version, but it’s a big win for President Trump and crypto advocates more broadly. Clear federal rules and regulations for issuing stablecoins will massively boost credibility and allow America’s largest enterprises to participate and pursue technological innovations that could improve customer retention, reduce costs, and streamline processes and payments.

The Simple Allure Of Stablecoins

Boiled down, stablecoins are simple digital assets pegged to traditional fiat currencies. Think of them as a blend between bitcoin and US dollars. They are designed to combine the speed and transparency of blockchain technology with the price stability of an asset like US dollars. The first major stablecoin from Tether launched in 2014 with a simple premise: hold one dollar in reserves for every token issued. It soon became indispensable to crypto traders who needed a stable medium of exchange for buying and selling different cryptocurrencies that didn’t support funding with US dollars.

But stablecoins faced a gut-wrenching test in 2022 with the collapse of TerraUSD (UST), a stablecoin designed to maintain its peg through complex incentives rather than being backed by US dollar reserves. When confidence wavered and investors sold off, its value plummeted to zero – erasing over $40 billion in wealth and drawing the attention of regulators. It quickly became clear that these so-called stablecoins weren’t as stable as they sounded.

The GENIUS Act now marks a clear signal that stablecoins are here to stay as it lays the foundation for how they can operate within the U.S. financial system. At the heart of the bill is a requirement that all stablecoins be fully backed by cash or short-term U.S. Treasuries on a 1:1 basis. This ensures that for every stablecoin token issued, there is a corresponding dollar in safe, liquid assets. The bill also mandates monthly reserve disclosures and annual independent audits to ensure transparency. Simply put, the GENIUS Act is here to make sure that stablecoins that look like digital dollars end up behaving like a digital dollars.

Stablecoins are also primed for a moment in the spotlight because of the technological advancements we’ve made over the past few decades. The computing power required to operate a stablecoin operation used to be significant, but today’s technology is built different. Everyone has a smartphone and a digital banking app, and the data centers loaded with Nvidia or AMD chips can easily handle the computing requirements.

Stablecoin Implications for Banks and the Treasury Market

Pegging stablecoins 1:1 to US dollars means the Treasury market just added a new purchaser – the stablecoin issuer. If these issuers grow like we expect them to grow, they could become a meaningful source of demand for treasuries, helping to offset a reduction in demand for treasuries from foreign central banks. A 1 – 1 ratio for a source of liquidity is exceptionally demanding. The impact on treasury flows are already proving significant – Tether, the largest stablecoin issuer in the world right now, owns more Treasuries than Germany.

However, these stablecoin issuers don’t exist completely outside the current financial system. Rather, stablecoin issuers will need to work closely with US banks as they’ll need a custodian of their reserve assets. The inference here is that this doesn’t change who is actually buying and holding the US Treasuries, the big banks in this case, but rather, this shifts the underlying deposit bases of the banks. Large deposit sizes can be good for banks, but the concentration of deposits with a few customers – the stablecoin issuers – can actually make the banks fragile. From a bank liquidity perspective, retail capital is a much more stable source of funding, typically FDIC insured, and less likely to be transferred out. Stablecoin assets are going to be concentrated, and unfortunately could be vulnerable to being withdrawn.

If stablecoins start to offer a yield, they could drive even more significant demand. Money markets and high yield savings accounts often come with liquidity provisions and restrictions. Highly liquid and transferable stablecoins may start to supplant some of the base building blocks and revenue drivers of the existing financial system. Banks recognize the risk to their business models – many technology oriented banks are exploring issuing their own stablecoins to stay ahead of the curve. For example, Fiserv Inc. (FI) has indicated it plans to launch its own stablecoin and platform for its 3,000+ smaller sized bank clients.

Still Lots to Unravel for Merchants

Clarity around regulation opens the door for consumer brands to issue stablecoins with confidence, knowing they are operating under a recognized legal framework. This is especially true in the world of payments. Every merchant you can think of will be looking at stablecoins as a way to decrease their transaction fees and optimize their working capital. Faster settlement and lower transaction costs, especially when sending cross-border payments to suppliers or employees, could save companies like Walmart and Amazon billions of dollars each year.

Two likely avenues for merchants are that they either become issuers of their own stablecoins or allow payments using stablecoins issued by a third party like the big banks, Circle (CRCL), or Tether.

Today’s process for completing a credit card transaction requires a payment gateway to route credit card information, a card network like Visa or Mastercard to authorize the transaction, and the issuing and acquiring banks working together to send the funds. Interchange and processing fees can eat up into the merchant’s bottom line, and the extra day or two for settlement is a thorn in the sides of CFOs trying to manage cash inflows and outflows.

From a capital efficiency perspective, wholesalers and retailers have to explore how a new medium of exchange that works instantly and offers absolute transparency, like stablecoins, can bring down costs when it comes to receiving payments, paying employees and suppliers, and purchasing inventory. Instant settlement on the blockchain for payments and cutting out clearinghouses and other intermediaries is a massive undertaking. It’s no surprise that Visa and Mastercard are also pursuing innovations in the stablecoin space.

Additionally, issuing branded stablecoins opens the door for enhanced loyalty programs and stronger customer retention. Because stablecoin issuers are not obligated to pay out interest they earn on reserves, this can enable merchants to essentially self-fund discounts and customer rewards. An Amazon or Walmart stablecoin could create an entirely new customer experience!

International Stablecoin Demand Will Be Significant

While the use case for U.S. consumers comes from driving efficiencies, enabling international access to stablecoins and in turn the stability of U.S. dollars, is an equally large opportunity. This is important both in terms of sending money abroad, and with regards to localized spending. Sending money internationally can take days and incur fees as high as 5–10%, but stablecoins can execute the same transaction in minutes at a fraction of the cost, using public blockchain rails to route payments. This payment route is especially meaningful in developing countries, where access to U.S. dollars can serve as a hedge against local currency volatility and isn’t necessarily easy to obtain.

Addressing local currency volatility is a huge opportunity for stablecoins. With just a smartphone and an internet connection, individuals in emerging economies can hold dollar-denominated savings without having to open a bank account in the United States. They can sidestep the fees from locally domiciled banks and easily access a stable vehicle that holds its value for the long term. This is especially important for international freelancers working for American domiciled consulting or technology companies, and for immigrants sending money back to their home country to support their families.

What Else Can Stablecoins Do?

One of the more revolutionary ideas enabled by stablecoins has been programmable money. Through smart contracts, users can build financial logic into payments – delayed transfers, conditional payments, or micropayments sent by the second. These features are basically impossible to replicate in the traditional banking system, but a company like Coinbase (COIN) enables smart contract interactions directly through its wallet and app.

Importantly, the traditional payment networks, like Visa (V) and Mastercard (MA) have their sights set on finding a way to adapt with stablecoins. The benefits of these payment rails for merchants when it comes to security and settling customer disputes is still extremely valuable. Visa and Mastercard can essentially allow a customer and their digital wallet provider to pay using a stablecoin or other digital currency, but still have the merchant receive fiat currency at the end of the day. Companies like Paxos and Anchorage sit right in the middle of the exchange to custody the stablecoins and then allow Visa to send a fiat currency payment. Don’t count these corporate behemoths out – their scale and influence on the payments industry is immense.

Stablecoins For The Future

While stablecoins have entered the limelight as of late, it’s worth pointing out that we’re still in the very early stages of their adoption. The current market value of all stablecoins out there is about $250 billion – a mere speck when compared to the almost $40 trillion supply of US dollars. Becoming the new digital plumbing of our financial system is no easy feat and every stablecoin is going up against payment network giants that have built our payment infrastructure from the ground up.

If broader adoption picks up, investors should keep tabs on how stablecoins impact banks and the Treasury market. As big brands and traditional payment networks attempt to coexist with stablecoins, remember that the first attempt likely won’t be the best, and it surely won’t be the last. Even if stablecoins don’t make it mainstream, the technology is here to stay.

The U.S. healthcare system is the best in the world for complex care. We have the most innovative drug companies, the best medical devices, and incredible doctors and surgeons.

The U.S. healthcare system is also the most expensive system in the world.

One key component of the medical system that has long been a point of contention is drug prices. U.S. drug prices are extraordinarily high compared to the rest of the world. The exact same medication that’s sold in the United States is often sold overseas for a fraction of the cost. This pricing disparity has long been a point of consumer dissatisfaction, but elevated inflation and recent executive actions are putting the topic of drug prices back under the microscope.

The history of drug prices in the U.S. and the way in which they’ve risen could be a much longer essay than the article we are writing here – but there are a few key points that are worth discussing. In particular, we want to call out how the industry has shifted over time to pull pricing power away from the drug companies and to put the power in the hands of insurance companies. The shift involves obvious conflicts of interest, but there are also significant nods to potential efficiency gains and economies of scale. The issue is nuanced and it’s difficult to pinpoint what the right balance is to ensure we have access to the best medicine, at reasonable prices, without stifling innovation.

From Healthcare Cost-Saver to Market-Maker

If there’s any single culprit behind high drug prices, it has to be pharmacy benefit managers (PBMs). For decades, PBMs have quietly amassed power in the U.S. healthcare system. They are the penultimate corporate middlemen – negotiating prices, controlling formularies, and ultimately determining what shows up on your insurance plan’s covered drug list.

Their influence on drug prices has grown substantially as their parent companies continue to acquire and vertically integrate specialty pharmacies, provider networks, and rebate aggregators into their business models. If you don’t know what any of those things mean or how they interact, don’t be discouraged. The opacity of the business model is one of the key components that allows PBMs and their parent companies to generate profits and keep drug prices moving higher.

So, what is a pharmacy benefit manager? Decades ago, as employer-sponsored health insurance grew to be more complex, insurers needed help managing drug benefits. Patients needed access to a growing number of drugs, and insurance companies needed to know which ones to cover. PBMs emerged to fill this administrative gap, acting as intermediaries to process claims, negotiate pharmacy contracts, and provide “formularies” – lists of drugs that would be covered under an insurance plan. The job of a PBM, on paper, is to help health insurance plans manage the cost and utilization of prescription drugs. Simple enough in theory – the PBM sits in the middle between doctors prescribing the drugs, pharmacies distributing the drugs, and the insurance companies who are paying for the drugs. Put simply, they were making sure everyone is on the same page.

Over time, the economics evolved. PBMs began to consolidate, preaching that bigger scale meant more negotiating power with the drug companies to lower list prices, which in turn meant better deals for the insurance companies and for the end patient. Unfortunately, increased bargaining power also leads to potential conflicts of interest and more opportunities for PBMs to drive profits towards their own bottom lines. Drug companies know that they’re going to have to pay the PBMs to get their drugs approved and put on formulary lists. Without being on a formulary list, that drug isn’t going to be covered by insurance, which means nobody is going to use the drug. That’s where the shenanigans start.

Drug companies actually end up being incentivized to increase drug prices, knowing they’re going to have to give rebates and concessions to the PBMs. This rebate system ultimately ends up being the biggest conflict of interest, and the biggest hurdle to affordable drug prices. PBMs are supposed to put drugs on formularies because they’re effective for patients, not because they’re getting big rebates from the drug companies. But you can easily see where the PBM might start to leverage their situation to make a profit. The higher the list price of the drug, the bigger the rebate, and the more potential earnings for PBMs. The PBM has all the leverage, and crucially, end patients aren’t really part of the savings equation.

And, as if that wasn’t messy enough, the PBM’s potential conflicts of interest get even messier when the PBM isn’t an independent company.

Does Healthcare Care For Your Health?

Over the years, there’s been intense consolidation within the PBM market, with the three major players – CVS, UnitedHealth, and Cigna – now controlling more than 80% of it. Notice anything about those three companies? All three of them aren’t really known as being PBMs. They’re all actually insurance companies. That’s right, the companies who determine what medications are covered or not covered are the same companies who are paying for the medication. If United Health goes to a drug company and says, “pay us a bigger rebate” and we’ll make sure that your drug is on the list of approved drugs for our patients, it’s hard to see a scenario where the drug company says no.

Tracking the flow of money tied to a single drug transaction can be incredibly complex, given the many interrelated players. Take, for example, a patient buying insulin at the pharmacy. The pharmacy first purchased the insulin in bulk from a wholesaler, who bought it from the manufacturer. Before the pharmacy can even sell the drug to an insured patient, it has to be approved for coverage – placed on the formulary – by the PBM. The PBM is probably only putting the drug on the formulary if they’re going to get some rebates from the drug manufacturer. The patient also likely needs to have a prescription for their drug, which means they needed to talk to their doctor – someone preapproved as being in network by the insurance plan.

The patient not only pays premiums on their insurance, but then also has to pay a co-pay at the pharmacy when it’s time to buy the drug. Given that the pharmacy might be owned by one of the large insurance companies, the co-pay is likely a source of profit for the insurance company as well, either directly or indirectly. If that all sounds confusing, it’s because it is! The integration of so many players under one umbrella creates enormous complexity.

Of course, the vertical integration of insurance with PBMs and physician groups could also provide scale-based efficiencies. It’s natural for these companies to combine like this. Scale brings benefits when you’re trying to make sure patients have access to different kinds of doctors, and scale is a huge factor in reducing the cost and risk associated with insurance pools. And theoretically, larger groups should have more bargaining power to demand price cuts from the drug companies.

Unfortunately for the insurance companies though, the vertical integration has made it hard for them to redirect the blame for rising costs towards anyone else.

Trump Targets Lower Drug Prices

In an effort to lower drug prices in the U.S., President Trump recently issued an executive order promoting the Most Favored Nation (MFN) pricing model. This policy aims to align what Americans pay for certain medications with the lowest price paid by other developed countries. The move faced immediate pushback from both drug manufacturers and the parent companies of PBMs, who stand to lose significantly if list prices are slashed. Remember, the rebates the PBMs get are generally going to be higher if the list price for the drug is higher.

In our opinion, the move to shake up drug pricing is misguided. The current practice of localized pricing works to find an equilibrium between maximizing access to the drug while also maximizing the drug maker’s ability to generate a profit. Artificially lowering drug prices in the United States by benchmarking to international prices simply ensures that the rest of the world has less access to our drugs, while accessibility for Americans is unlikely to change for the better. That’s because drug accessibility here in the US is a function of not only price, but also of formulary design and insurance coverage for the medication. Lower list prices could end up meaning smaller rebates and reduced incentives for insurance companies to provide some sort of drug coverage.

Forcing drug makers to offer their drugs at lower prices may also stifle innovation. While nobody likes paying high prices, companies need to be able to generate a return on their investment in order for a project to be viable. Keeping that incentive system in place is important.

Fortunately, the executive order left room for negotiation; price targets for the U.S. market remain undecided. However, the implications are clear. People are fed up with the high cost of healthcare and politicians looking to garner favor with their voter bases are going to keep on looking for opportunities to attack the space. The opaque profit model and conflicts of interest inherent in the current business structure are easy political targets.

PBMs vs. Healthcare Regulation

PBMs have long profited from the arbitrage between inflated list prices and manufacturer rebates. If MFN-style reforms take hold, PBMs may see their margins compress and rely more on flat administrative fees rather than back-end rebate deals. Increasing bipartisan scrutiny and pressure to lower drug prices generally threaten the opacity of their business model, potentially sparking further consolidation as legacy PBMs scramble to defend market share and margins. Meanwhile, newer market entrants offering direct-to-consumer delivery – effectively bypassing PBMs – could align with the current administration’s embedded directive to facilitate direct-to-consumer purchasing programs at MFN prices.

Expect some form of rebate pass-throughs or the elimination of spread pricing to try to make it into a bill, both of which would dent margins, but would be substantial undertakings. The rise of rebate aggregators, entities often owned by large PBMs that negotiate rebates on behalf of multiple clients, significantly complicates regulatory efforts to trace rebate flows and the logistics of pass-throughs. PBMs, for their part, maintain that these entities and rebates in general help to lower insurance premiums and fund broader plan benefits, but Americans have grown increasingly skeptical that these benefits ever reach them.

For large insurers owning PBMs – like CVS (Caremark), Cigna (Express Scripts), and UnitedHealth (OptumRx) – reform could trigger a shift in profit centers toward more stable revenue sources such as medical services, specialty pharmacy, or basic insurance premiums. But reducing intermediary involvement might also force PBMs to spin off their pharmacy operations entirely. The conflicts of interest clearly run deep in a system where the middleman influences which drugs are covered by insurance while simultaneously owning the pharmacies dispensing those same drugs.

Still, reform momentum is building. Increased transparency could usher PBMs into a new era of accountability and structural change – though whether this benefits patients or merely reshapes profit flows remains to be seen.

Is Healthcare Investable?

Healthcare stocks have had a rough go this year, but the system is still ripe with subsectors set to benefit from continued innovation in artificial intelligence. Playing the politics game and picking the winning PBMs and insurers is likely to leave investors disappointed, but structural tailwinds like AI and an aging population in the US aren’t going away any time soon.

Progress in drug discovery and genetic research has been constrained by trial-and-error methods that are extremely cost-intensive. With AI, we’re entering an era where whole-genome sequencing can be done in hours instead of weeks, and AI models can predict molecular interactions with stunning accuracy. This leap in computational power means we’re not just speeding up what we already do – we’re enabling entirely new approaches to medicine.

As sequencing becomes cheaper and more accessible, the efficacy of drugs only stands to increase. Think about a biotech firm that sequences the DNA of thousands of cancer patients. With AI, it can quickly identify recurring mutations and design drugs that specifically target those genetic flaws, potentially leading to more effective and personalized cancer treatments.

As the traditional PBM model comes under pressure, new pharmacy models emphasizing transparency, affordability, and direct-to-consumer pricing could also gain traction. GoodRx (GDRX) offers cash pay alternatives and coupons that bypass PBMs. Mark Cuban’s Cost Plus Drugs also aims to offer radically transparent pricing by selling drugs at cost plus a flat markup. Even Amazon has entered the arena to offer direct-to-consumer shipments and a direct-pay option that’s potentially cheaper than using insurance. Amazon Pharmacy is expected to be available to over half of the U.S. by the end of 2025.

Ultimately, what was once a sleepy and steady sector of the US economy is starting to become much more dynamic. Drug innovation is accelerating, and established insurer and PBM business models are coming under scrutiny. In a shifting landscape there will be opportunities for savvy investors who look for innovation and can handle volatility and uncertainty.

By: Colin Cheaney, CFA

Like it or not, America’s cheap consumer technology owes its existence to Chinese assembly lines.

Years of state support in China has led to the country’s domination in manufacturing, giving American tech companies cheap access to labor and ultimately assembly of their products. But tariffs have flipped this narrative on its head. As a result, these firms have seen their stock prices drop by over 15% since mid-February peaks.

China’s manufacturing efficiency is just hard to match. With an overwhelmingly large workforce and deep supplier networks, components like screens and batteries can be sourced from nearby facilities, allowing manufacturers to make last-minute changes without delay. Meaning places like Vietnam and India, where some final assembly is already happening due to cheaper labor, are fighting an uphill battle trying to compete.

And although the U.S.-China retaliatory tariffs have been put on pause for now, the uncertainty remains. A pause on tariffs doesn’t implore a company like Apple, which assembles over 90% of its iPhones in China, to uproot its supply chain. That requires massive upfront costs and long-term confidence in trade policy. So, let’s see some handshakes – negotiations can’t last forever.

At some point, consumer tech firms will have to adjust to a new normal, but don’t get used to those cheap earbuds and smartphones. There’s still plenty to get sorted out.

Tariffs May Make Cheap Consumer Electronics A Thing Of The Past

The devices we rely on most — smartphones, laptops, tablets, and other smart accessories — share a common thread that is often invisible to the average consumer: The vast majority of them are manufactured, or at least assembled, in China. This fact, long accepted as a byproduct of globalization, has recently come under renewed scrutiny as U.S.-China trade relations have soured. With the U.S. economy, workforce, and education system increasingly dependent on affordable, high-quality consumer technology, the financial consequences of tariffs are at the forefront of the minds of company executives and investors alike.

President Donald Trump’s revived tariff policies have placed fresh strain on an already sensitive U.S.-China trade relationship. The proposed tariffs, aimed at reshaping American reliance on Chinese manufacturing, would have significant implications for the world’s largest tech companies, many of which are deeply connected to China’s sprawling manufacturing ecosystem. Tariffs on other Southeast Asian countries are a concern as well, as final assembly of goods often happens in places like Vietnam to bypass higher trade costs with the U.S., even though many core components are manufactured in China. Although electronics have so far been spared the full brunt of the 145% retaliatory tariffs on China, the uncertainty hanging over the supply chain will make it increasingly difficult for companies to plan, price, and deliver consumer products at the scale and speed American consumers expect.

China’s Grip On Electronics Manufacturing

The tech world’s dependence on China isn’t breaking news, but it’s often underestimated just how deeply entrenched this relationship has become. Over the last three decades, China has done more than offer cheap labor — it has built a vast, highly specialized manufacturing ecosystem tailored to the demands of modern electronics. Since the 1980s, China’s economic reforms and the creation of Special Economic Zones like Shenzhen — a hub for iPhone manufacturing — have attracted waves of foreign investment. These zones offer tax breaks, modern infrastructure, and regulatory flexibility, making China the go-to destination for labor-intensive manufacturing.

China’s building of a manufacturing base and expanding it to take on increasingly complicated projects is not an accident. Early on, the Chinese government recognized the leverage they could gain on a global scale if they became a manufacturing and export hub. Subsidies and incentives for manufacturers were plentiful, and businesses came in droves to take advantage of cheap supply chains. Today, the government not only supports manufacturing but supports companies across the country more broadly. In fact, 99% of publicly listed Chinese companies receive some form of subsidy each year. The breadth of state support — ranging from tax incentives to subsidized workforce training — gives China a significant upper hand in luring outsourced manufacturing operations. This level of support makes it difficult for other emerging market economies to compete with China, while also giving China’s more advanced companies the extra firepower they need to try to compete with more sophisticated competitors in foreign markets.

China’s manufacturing is also globally dominant because of its logistical efficiency. The country’s factories can source batteries, screens, and sensors from nearby storage facilities and ship finished products globally with minimal lag. This responsiveness allows companies to iterate quickly and launch products on tight schedules. For example, Apple designs its products in California and sources chips from Taiwan but still assembles over 90% of its iPhones in China due to the close proximity of necessary components for final assembly. Chinese manufacturers are flexible and capable of last-minute design tweaks that would cause delays in less coordinated systems.

Replicating China’s infrastructure and supplier network is a massive challenge. Decoupling from China is not something that will be done easily or quickly — if indeed it happens at all. Tariffs would need to be both high and permanent for companies like Apple to seek lasting alternatives to Chinese manufacturing.

Tariffs Threaten Consumer Electronics

President Trump’s goal for tariffs is twofold: to protect American industries from perceived unfair competition and to encourage U.S. companies to rethink their reliance on Chinese supply chains. On paper, the logic appears straightforward: If Chinese-made goods become more expensive, American firms will have no choice but to move production elsewhere.

The reality, however, is far more complex. Tariffs don’t automatically lead to domestic production. In the short term, they tend to raise costs for consumer tech importers, forcing businesses to make tough decisions: absorb the additional expense or pass it on to consumers through higher prices. While absorbing the cost sounds preferable, it often comes at the expense of layoffs and reduced economic output. For companies that thrive on razor-thin margins — especially in the hyper-competitive world of consumer electronics — neither option is attractive.

American households, which have grown accustomed to the relative affordability of smartphones, laptops, and tablets, are likely to feel the pinch first. The same iPhone or Galaxy device you bought last year could see its price jump by hundreds of dollars if tariffs on Chinese imports escalate. However, the extent of that price hike will ultimately depend on the tariff rates placed on countries like Vietnam and India. If the gap between those countries’ rates and China’s is significant — say 10% compared to 60% — then consumer tech companies are more incentivized to move manufacturing out of China and absorb the extra costs associated with relocating.

However, even relocating carries risks. Today’s tariff rates may not be the tariff rates of the future, so it’s difficult to justify significant upfront spending to relocate. The alternative, of course, is to bring manufacturing home. Building a factory in the United States ensures there won’t be any tariffs on final assembly. Unfortunately, manufacturing at home is likely cost-prohibitive. The U.S. has long outsourced final assembly to China in order to focus on other parts of the supply chain like innovation and design. Today’s workforce does not have the skills to do high-precision manufacturing, nor would it be a good allocation of skilled resources. Using survey data from the Cato Institute, the Financial Times reported that while 80% of Americans believed the U.S. would be better off if more people worked in manufacturing, fewer than 30% believed they personally would be better off. This major gap between personal and societal perspectives underscores the reality that the U.S. has evolved into a primarily services-based economy.

Tariffs Mean Electronic Components Will Cost More, Too

Additionally, what makes the smartphone and PC supply chain so challenging to unwind is its sheer complexity. Tariffs don’t just hit the final product. When imposed broadly, they also affect the flow of raw materials and intermediate goods, which can make even components manufactured outside China more expensive once they enter the Chinese assembly line.

While the final assembly of a device like an iPhone or Dell laptop may take place in China, its individual components are sourced from all over the world. The processor might be designed in California by Apple or Intel but fabricated in Taiwan at TSMC’s massive chip foundries. The display could be produced by South Korea’s Samsung or LG — or increasingly, China’s BOE. Memory chips often come from companies like SK Hynix or Micron, which manufacture across the U.S., South Korea, and Japan.

Even the smallest components — like resistors and capacitors, which are critical to controlling electrical currents in smartphones — often have winding production journeys that cross multiple borders numerous times before final assembly. Once these parts arrive in China, factories integrate them into a finished product, and the complete device is then packaged and shipped out. This intricate, interdependent system keeps costs low, lead times short, and quality high — but it also means any disruption, such as tariffs or sanctions, can cause cascading effects across the industry.

Simply moving final assembly from China doesn’t change the fact that all of the other components needed for final assembly are also being sourced from elsewhere. Unless we move the entirety of the supply chain to the United States, it’s likely that some components will end up facing tariff disruption of some sort.

If Not Made In China, Then Where?

President Trump’s tariffs have also laid bare the fault lines in global electronics production. Companies with deeply embedded Chinese operations face the harshest risks, while those that began diversifying early are positioned to capitalize on the disruption. Countries like Vietnam and India have emerged as alternative production hubs, especially for labor-intensive assembly work. Vietnam has steadily climbed the ranks in smartphone and wearable device manufacturing — particularly for lower-end models — but still doesn’t come close to China’s share of the market. India, on the other hand, has increasingly become a destination for high-end electronics, including iPhones.

Interestingly, in an attempt to sidestep potential tariffs, Apple’s suppliers in India reportedly shipped nearly $2 billion worth of iPhones to the U.S. in March alone — a clear signal of how seriously technology companies are taking the risk of higher costs. It’s worth noting that China’s exports of finished consumer electronics products have exceeded all other countries combined for more than 15 years. China’s share has remained well above 50%, while Vietnam hovers around 10% — a far cry from posing an immediate threat to China’s dominance.

Yet shifting production comes with trade-offs: fewer supplier options, higher costs for some components, and slower turnaround times during periods of high demand. While companies are beginning to rethink their strategies, China’s deep-rooted ecosystem will be difficult to replace entirely, especially for sophisticated products like smartphones and laptops.

Investment Opportunities Amid Tariff Uncertainty

For investors, the U.S.-China tensions present both risk and opportunity. Sharp tariff hikes can spark short-term stock market volatility, but they also open the door for long-term investment themes. American companies that face rising production costs due to tariffs may also benefit from federal subsidies and policy incentives aimed at bringing manufacturing back home — there are two sides to every coin.

Semiconductor companies like Intel (INTC), AMD (AMD), and Micron (MU) are clear examples. These firms not only have less exposure to Chinese assembly but are poised to benefit from government-backed efforts like the CHIPS Act. Intel, despite past operational challenges, has received significant U.S. government backing to expand its domestic manufacturing footprint.

Investors should also consider companies that enable advanced domestic production. Equipment suppliers like Applied Materials (AMAT) and Lam Research (LRCX) stand to benefit from the buildout of domestic semiconductor capacity, as their expertise in fabrication equipment is essential for next-generation chip architecture. Flex Ltd. (FLEX), which offers contract manufacturing outside China, may also benefit from a reorganized supply chain that needs short-term flexibility. Finally, firms specializing in automation and robotics could see a surge in demand, as companies seek to offset higher domestic labor costs with increased factory automation if onshoring comes to fruition.

Future Of Consumer Electronics

As tariff tensions escalate, the future of affordable consumer technology hangs in the air. For decades, affordable devices have been the result of a highly efficient, globally integrated supply chain — one that relies heavily on China’s vast manufacturing infrastructure. Disrupting this system with tariffs introduces friction into everything from production timelines to component sourcing and risks higher costs for consumers.

Investors should keep in mind that replicating China’s scale and expertise in manufacturing is a multi-decade undertaking. The era of cheap, seamless access to the latest technology may be giving way to a new normal — one where national security concerns and political agendas increasingly influence the affordability of consumer technology.

By: Colin Cheaney, CFA

Tariffs and the U.S. trade deficit have dominated headlines lately, with both equity and fixed income markets recalibrating based on future growth prospects. And what’s incredible is that market pundits finally agree on one thing for once – tariffs aren’t great for the global economy. For decades, free trade has benefited U.S. consumers and helped lower income countries grow, while allowing the U.S. to focus on investing in high value services and advanced manufacturing.

One important, yet often overlooked, aspect of the trade debate is services. While the United States has a trade deficit on the goods side of the equation, when we focus just on services, we actually run a trade surplus. Keep in mind when we hear the trade deficits referenced by the Trump administration, those generally focus solely on goods. Just because we run a goods deficit with a country, doesn’t necessarily mean we’re getting ripped off. There are two sides to every coin.

Currently, the U.S. workforce revolves around services. Almost 80% of our workforce is employed in the services sector, while the remaining 20% consist of workers in goods-producing industries. Breaking it down even further, less than 10% of Americans work in manufacturing – a massive decline since peaking in the 70s. By prioritizing services-based industries over the years like consulting, banking, logistics, insurance, and travel, we‘ve created new high paying, highly sought after jobs that help keep the U.S. economy churning.

Because most services are delivered digitally or virtually, retaliatory tariffs don’t apply directly and might not hit as hard initially, but the downstream effects resulting from lower confidence from our trading partners aren’t desirable. To target our services exports, foreign countries could tighten licensing requirements and impose bureaucratic hurdles that make it harder for U.S. firms to conduct business overseas.

Nobody knows exactly what the impact of tariffs will be, and the market uncertainty out there is real, but investors can take a little comfort in the fact that the U.S. economy doesn’t rely solely on producing goods – don’t forget about services.

By: Colin Cheaney, CFA

The University of Michigan’s Consumer Sentiment Index (MCSI) is set to be released this Friday, with the preliminary reading having shown about a 10% decline from February. While this index has been known to be a harbinger for consumer spending in the months ahead, investors would be better off to block out the noisy headlines around declining sentiment as of late.

The MCSI is essentially a tool to get an average feel for how Americans view their current financial situation. With over 500 households surveyed each month, the questions asked revolve around if respondents think they’re better or worse off financially compared to a year ago, what they think will happen to interest rates, and if they think prices will go up or down in the year ahead.

Because consumer spending does account for over 65% of GDP in the U.S., it’s helpful to gauge the financial health of Americans, but keep in mind the index is just a formal way of consolidating opinions and our less-than-admirable forecasting skills. Things like political affiliations, media exposure, employment status, and personal debt levels all have an influence on sentiment – and they’re all unique to every one of us.

The index is an opinion, not a fact. While steps are taken to make sure the participants are representative of the U.S. population, everybody’s financial situation is different, so investors shouldn’t try to time the market based on the opinions of only 500 survey respondents.

Feelings on Main Street aren’t always the same on Wall Street. Think about what really matters for future performance of mega cap names like META and AMZN – earnings and cash flows. People might not be too happy about their current financial situation, but that won’t mean they stop scrolling Instagram or cancel their Amazon Prime subscription.

The chart above shows how over the past 10 years the Consumer Sentiment index has actually trended downward, reflecting increased pessimism, while we’ve seen the S&P 500 continue to reach all-time highs. Bottom line – the index is helpful to get a general vibe for how Americans are feeling, but the stock market just doesn’t care.

Nearshoring is reshaping the North American supply chain, driving a reconfiguration of shipping routes as manufacturers relocate closer to where the American consumer shops. While tariff uncertainties continue to influence trade, large retailers and wholesalers remain relatively insulated, functioning as pass-through entities that can absorb rising input costs while maintaining margins. Even when prices rise, people still need to go shopping for their groceries and staples. Even discretionary goods still get purchased when prices rise, though the quantity and type of good may shift. In this hypercompetitive and turbulent environment many businesses are sharpening their focus on customer retention and differentiation.

A key competitive advantage emerging from this shift is the expansion of last-mile delivery and additional consumer services. E-commerce leaders like Amazon have set high expectations with vertically integrated logistics, prompting traditional retailers and wholesalers to enhance their own delivery capabilities. Historically reliant on third-party services for shipments of groceries, home appliances, and other goods, these companies are now investing in last-mile infrastructure to improve speed and efficiency.

As last-mile delivery evolves, businesses that streamline logistics and expand direct-to-consumer services stand to gain market share. For investors, this sector presents a compelling opportunity to support enabling firms while reducing exposure to the volatility of tariff-sensitive markets.

Serving The American Consumer

While manufacturers often face supply chain challenges related to tariffs, large-scale retailers and wholesalers generally aren’t as sensitive. Wholesalers can purchase goods in bulk, leveraging economies of scale to secure lower prices, and by doing so, can negotiate favorable terms with suppliers and absorb higher shipping costs. Both wholesalers and retailers also benefit from the use of bonded warehouses, where goods are considered to still be in transit, which enable storage without immediate tariff payments. This approach provides them with flexibility in managing inventory costs and delaying the tariff impact until goods are moved into domestic markets and sold to end consumers. Firms like Walmart (WMT) can then pass those costs directly to the consumer if need be in the form of higher prices on both essential and discretionary goods.

Even if tariffs are implemented in the coming months, the major retailers and wholesalers in the U.S. will continue to sell goods to American consumers. Walmart’s recent sales outlook for 2025 sent the stock into a slump due to forecasts lower than what analysts had expected, but they still forecasted 3-4% expected sales growth in the first quarter this year. The American consumer is really hard to slow down! Regardless of the overall economic climate, people need essentials — groceries, cleaning supplies, medicine, etc. — and companies like Walmart (WMT) and Costco (COST) continue to be cost-effective options for Americans. While consumer spending may shift to lower-cost substitutes in a recession, these companies have taken precautions to dampen any worrisome investors.

While added input costs are passed on to consumers, these companies also take steps to “recession-proof” their aisles and provide options for people across the income spectrum. For example, Costco (COST) has leveraged their membership-based business model to create pricing stability for customers. Walmart (WMT) and Target (TGT) both have their own loyalty programs, and even their own private brands which have become more and more popular as people are more open to “trade down” while shopping. Recent survey data from McKinsey & Company suggests that more than 80% of US consumers believe private brands to be of equal or higher quality compared to national brands. So, while Americans are becoming less loyal to brand names and pivoting to private labels like Costco’s Kirkland Signature or Walmart’s Great Value, these chains are still able to retain customers and reward brand loyalty. The composition of goods in grocery carts may change, but where they shop likely won’t.

Building The Right Shopping Experience

With large-scale retailers and wholesalers more insulated from potential tariffs, CEOs are instead contending with how to best balance in-store sales with e-commerce sales. In Walmart’s latest earnings report, considered a bellwether for U.S. consumer trends, e-commerce sales rose 20% YoY and one third of shoppers elected for delivery times of three hours or less. Convenience, speed, and efficiency are top of mind for consumers, and retailers have had to adapt. With the share of goods purchased online continuing to increase, retailers have increasingly turned to micro-fulfillment centers, which are smaller warehouse facilities designed to stock high-demand items closer to consumers. These centers allow for quicker order processing and reduced transportation costs, ensuring that customers receive their purchases faster.

Additionally, the rise of dark stores, retail locations repurposed for online order fulfillments, has helped businesses streamline operations and reduce overhead costs. These dark stores are strategically stocked with high demand products and located in densely populated key markets to reduce delivery times as much as possible. With less foot traffic compared to traditional storefronts, it’s also much easier to implement automated sorting/ packing systems and use robots to speed up fulfillment — whether it be footwear, groceries, or electronics, expect to see more dark stores pop up in your hometown. Investors should also keep in mind the companies that enable the buildout of same-day delivery and micro-fulfillment centers — industrial REITs. Companies like Amazon (AMZN) and Walmart (WMT) collaborate closely with industrial REITs like Prologis Inc (PLD) to develop facilities integrated with cutting-edge automation systems that cater directly to their fulfillment needs.

Even with the need for local fulfillment centers and dark stores, traditional storefronts have also never been more valuable. According to CBRE Group, retail real estate has the lowest vacancies of any commercial real estate sector. It could be as simple as elevated foot traffic from flexible work-from-home schedules or the desire for an expert opinion — but at the end of the day, there’s plenty of reasons for Americans to still shop in-person. In-store shopping still far outweighs online shopping in terms of retail sales dollars. Annual U.S. retail in-store sales for 2023 topped over $7 trillion, while online sales came in slightly above $1 trillion — still a massive difference between the two shopping methods, but one whose gap will likely continue to narrow.

For reference, online sales as a percentage of total retail sales have more than doubled since 2017. So, to further protect the appeal of in-store shopping, retailers can look to promote their installation and pro-shop services. Take Home Depot (HD) for example – as the largest home improvement retailer in the U.S., its earnings are closely tied to housing activity, but even if home sales slow it can still benefit from DIY home renovations by existing homeowners. Offering an expert opinion on drywall installation or paint jobs still has its perks. Either way you slice it; the large retailers have plenty of resources at their disposal to adapt to evolving consumer spending patterns down the road.

Delivering The Goods

With that being said, last-mile delivery is now the name of the game. Companies like DoorDash (DASH), Instacart (CART), and Uber (UBER) dominate last-mile delivery for grocery stores, restaurants, and even convenience stores, but how do the larger players make it happen? Costco, for example, has embraced partnerships with Instacart to offer same-day grocery delivery, allowing members to receive bulk goods without visiting physical warehouse locations. By leveraging these networks, stores can scale their delivery operations without maintaining an extensive fleet of delivery vehicles, making the process both cost-effective and able to comply with consumer expectations.

Even without scale, smaller retailers have options. Walmart’s home delivery service, GoLocal, has gained significant traction and recently announced integration into IBM’s Sterling Order Management system. IBM customers can now access the delivery service through their order management system and greatly reduces the friction for accessing GoLocal’s same-day delivery options. The gig economy drivers within GoLocal’s network are able to deliver goods from places like Home Depot to Sally Beauty, meaning traditional storefronts have almost become their own makeshift warehouses.

On the flip side of that coin is a retailer like Amazon. While the e-commerce giant used to rely on partnerships with the likes of FedEx, UPS, and USPS, the scale at which it’s grown has allowed for the build out of its in-house logistics network to get orders from their distribution centers to the end-consumer. Amazon offers both independent contractor work called Amazon Flex and third-party businesses called Delivery Service Partners for package deliveries, in addition to having their own employees drive their fleet of more than 20,00 electric delivery vans and counting. Reducing the distance between inventory and their customers has also been enabled by their same day delivery centers where fulfillment, sortation, and delivery are all vertically integrated. Besides Whole Foods, Amazon doesn’t have its own stores, so to compete with the likes of Walmart and Target, faster deliveries are the key to customer loyalty.

Investing In The Future

With major players having leveraged third-party services, while also expanding their own logistics networks, it will come down to who can offer the fastest delivery at the lowest cost. To achieve lower costs while not sacrificing quality of service, automation stands to take a front seat in the buildout of last-mile delivery. Drones and driverless cars have quite an opportunity ahead, but the upfront capital investment required will be substantial, meaning partnering with large-scale retailers or third-party delivery services has been common especially during this initial buildout phase. Certain cities like Los Angeles have already seen an increased acceptance of robotics for food delivery thanks to Serve Robotics Inc (SERV). The company’s partnership with Uber (UBER) introduced autonomous sidewalk delivery robots to bring down the all-in costs of ordering food online. Noteworthy is that without having to tip the robot, customers feel like they’re saving money which can lead to a stickier customer base.

Artificial intelligence, outside of robotics, is also transforming last-mile delivery by making routes more efficient and cutting input costs. Predictive analytics allow businesses to foresee demand spikes and allocate resources properly, in turn avoiding costly delivery delays. Embedded AI in third-party delivery services can examine traffic patterns, weather, and roadblocks to recommend the quickest delivery routes and lead to smarter navigation over time. Time is of the essence in last-mile delivery, so every second counts. While AI is already being used in proprietary logistics operations, the next step is to implement at the ground level, meaning equipping delivery drivers with the latest IoT technology to further enhance delivery data collection and overall efficiency. Amazon has reportedly been developing smart glasses for its drivers to assist with road navigation and even navigating hallways in commercial buildings for drop offs. From where we stand today, wearable tech will likely be adopted first by employees like delivery drivers, as there’s more of a use-case compared to the typical American consumer.

Checking Out

Retailers and wholesalers are navigating a rapidly evolving supply chain landscape, balancing the impacts of nearshoring, tariff uncertainties, and shifting shopping preferences. While they can pass through costs associated with tariffs or inflation, their competitive advantage increasingly depends on last-mile delivery innovations and expanded consumer services. The competitive landscape demands investments in logistics, automation, and micro-fulfillment centers to transforming how goods reach customers quickly and efficiently. As e-commerce continues to grow, the retailers that present the best investment opportunities are those who best integrate technology, delivery networks, and in-store experiences to solidify their market dominance.

By: Colin Cheaney, CFA

With the release of January’s CPI figures on Wednesday, inflation has proved stickier than expected. But which inflation gauge is actually worth paying attention to? The US Consumer Price Index (CPI) and Personal Consumption Expenditure Index (PCE) both have an underlying basket of goods and services used to calculate their indexes, but the main difference lies in how those items are weighted.

There’s a reason the Fed prefers the PCE index – it’s backed by hard data. When calculating the weights assigned to each good and service in the index, actual spending data gathered by the Bureau of Economic Analysis (BEA) is used, rather than annual survey data used in calculating the CPI, to determine what percentage of people’s paychecks gets spent across healthcare, groceries, gas, capital goods, etc.

Generally speaking, core PCE will run cooler than core CPI. The core figures exclude volatile food and energy prices and give a better feel for actual price increases across the economy. PCE recognizes that people substitute cheaper goods when prices rise and will update its underlying basket monthly, while CPI’s basket of goods and services is relatively constant with weights updated on an annual basis.

It’s important to note that just because PCE is less than CPI, doesn’t mean inflation should be downplayed. Nobody likes making substitutions when spending, so inflation will still hurt when CPI is high, even if it’s PCE that represents the real ability for people to get by.

While the headlines are talking about CPI, keep in mind that the Fed’s decision on interest rates, which affects everything from your credit card rates to mortgage rates, will depend more on the PCE print scheduled to be released on February 28^th.

Taking a look at the May 2023 market outlook, IHT Wealth Management examines the recent banking challenges, labor market, and areas of opportunity for investors.

May 2023 Market Outlook for Banking Sector

As many saw in the headlines, the banking sector faced massive issues over the last few months. However, the big banks with the highest risk and worst operational execution have already been dealt with. Particularly, First Republic and Silicon Valley Bank both had unique circumstances that do not reflect the broader health of the banking system. Furthermore, while First Republic did not get closed until weeks later, it suffered the majority of its damage in the first few days of the banking crisis.

On the other hand, most of the other regional banks reported much smaller deposit declines and fewer liquidity issues. Generally speaking their deposit bases are have more insured depositors and face fewer concentration risks. Down the road, some of these regional banks may face issues generating high earnings, but the immediate liquidity issues are behind us.

May 2023 Market Outlook for Labor Market

The broader market faces recession risks as rate hikes and a pull-back in bank lending impact the American Consumer. At this point, a recession is nearly certain. The question is less whether “if” it occurs and more so pertaining to its magnitude. Will this trigger a hard landing or a soft landing?

Right now the job market is exceptionally strong, paving the way for a soft landing. However, if the banks start to be too restrictive in issuing new credit and the labor market starts to crack then the risks of a more severe recession elevate. The debt ceiling is also a concern. Historically the politicians have always come to an agreement, even if it comes at the eleventh hour – but the deliberating and time wasting does not inspire confidence for the markets.

Safety Bid for Tech and Stance on Energy

Technology is becoming a safe haven. Sector cash flows are exceptionally strong and most companies carry little debt, limiting the impact of interest rates. Furthermore, most of the tech sector has ample room for margin improvements.

Emerging markets look interesting – they are ahead of the United States in the battle against inflation. In fact, many South American countries are now pivoting towards rate cuts rather than rate hikes. China reopening after Covid is also significant.

Finally, energy is another space we are monitoring. While it is exceptionally volatile, companies in the space have become much more disciplined allocators of capital and have generally become much more shareholder friendly.

Watch the full interview on YouTube.

To reevaluate your inflation strategy in 2023, contact the financial advisors at IHT Wealth Management.

When discussing 2023 inflation trends, we first take a look back at the Federal Reserve’s recent moves regarding interest rates. Last month, the Federal Reserve raised rates by 25 basis points. This stepped down from 50 basis points in December. However, the latest strong batch of economic reports suggest that 50 basis points returned to the table.

Examining the Future Beyond 2023 Inflation Trends

Regardless of whether the Federal Reserve raises rates by 25 or basis points, investors need to ask themselves about where the United States economy will head over the course of the next 6-12 months. Furthermore, what does the terminal rate look like for interest rates? Will it be 4.75%, 5.0%, or 5.25? Currently, any of these numbers is in play. Additionally, most fixed-income investors should feel capable of handling these rate increases.

However, in the event that the Federal Reserve feels the need to increase the federal funds rate beyond 5.25%, this causes greater challenges for investors and the United States economy as a whole. Rates at 6.0% and 6.25% create more cause for concern.

Understanding the Federal Reserve’s Inflation Strategy

This past week, the Produce Price Index, inflation figures, and consumer spending figures came in stronger than anticipated. For instance, the Producer Price Index rose 0.7% month-over-month in January. This exceeded the 0.4% increase consensus forecast. Ultimately, this data does facilitate concerns over the “stickiness” of inflation.

Overall, the Federal Reserve’s hands are somewhat tied. Not only are they combatting inflation, they are dealing with expectations of future inflation as well. Food prices, fuel prices, and other volatile market sectors contribute to higher inflation expectations. In another example, housing prices facilitate further inflation. Since the Great Recession, the United States dealt with a shelter shortage. To make matters worse, raising interest rates further increases prices related to home construction, skilled labor, and material costs.

Best Practices for Dealing with 2023 Inflation Trends

Despite these challenges, inflation will eventually come down. At present, the economy is facing a lag effect from the Federal Reserve’s periodic rate increases. Even by the end of 2023, it is unlikely that the Federal Reserve will begin to cut interest rates due to this lag effect. Crucially, the Federal Reserve wants to “beat” inflation the first time around, as opposed to pausing or scaling back interest rate hikes only to redo them later down the road.

In the meantime, the bond market should see plenty of activity, making banking stocks and investing vehicles attractive. Simply put, they do not face the same wage pressure that other sectors, like restaurants and bars might. As for the ongoing concerns regarding the tech sector, this market segment proved time and time again to find new ways to drive margins, even in tough times.

Watch the full interview on YouTube.

To reevaluate your inflation strategy in 2023, contact the financial advisors at IHT Wealth Management.