TheChek News Flow

DAX:

MDAX:

SDAX:

How OpenAI’s first reasoning model sparked Silicon Valley’s obsession with general-purpose AI agents — and what comes next.

Shortly after Hunter Lightman joined OpenAI as a researcher in 2022, he watched his colleagues launch ChatGPT, one of the fastest-growing products ever. Meanwhile, Lightman quietly worked on a team teaching OpenAI’s models to solve high school math competitions.

Today that team, known as MathGen, is considered instrumental to OpenAI’s industry-leading effort to create AI reasoning models: the core technology behind AI agents that can do tasks on a computer like a human would.

“We were trying to make the models better at mathematical reasoning, which at the time they weren’t very good at,” Lightman told TechCrunch, describing MathGen’s early work.

OpenAI’s models are far from perfect today — the company’s latest AI systems still hallucinate and its agents struggle with complex tasks.

But its state-of-the-art models have improved significantly on mathematical reasoning. One of OpenAI’s models recently won a gold medal at the International Math Olympiad, a math competition for the world’s brightest high school students. OpenAI believes these reasoning capabilities will translate to other subjects, and ultimately power general-purpose agents that the company has always dreamed of building.

ChatGPT was a happy accident — a lowkey research preview turned viral consumer business — but OpenAI’s agents are the product of a years-long, deliberate effort within the company.

“Eventually, you’ll just ask the computer for what you need and it’ll do all of these tasks for you,” said OpenAI CEO Sam Altman at the company’s first developer conference in 2023. “These capabilities are often talked about in the AI field as agents. The upsides of this are going to be tremendous.”

Whether agents will meet Altman’s vision remains to be seen, but OpenAI shocked the world with the release of its first AI reasoning model, o1, in the fall of 2024. Less than a year later, the 21 foundational researchers behind that breakthrough are the most highly sought-after talent in Silicon Valley.

Mark Zuckerberg recruited five of the o1 researchers to work on Meta’s new superintelligence-focused unit, offering some compensation packages north of $100 million. One of them, Shengjia Zhao, was recently named chief scientist of Meta Superintelligence Labs.

The rise of OpenAI’s reasoning models and agents are tied to a machine learning training technique known as reinforcement learning (RL). RL provides feedback to an AI model on whether its choices were correct or not in simulated environments.

RL has been used for decades. For instance, in 2016, about a year after OpenAI was founded in 2015, an AI system created by Google DeepMind using RL, AlphaGo, gained global attention after beating a world champion in the board game, Go.

Around that time, one of OpenAI’s first employees, Andrej Karpathy, began pondering how to leverage RL to create an AI agent that could use a computer. But it would take years for OpenAI to develop the necessary models and training techniques.

By 2018, OpenAI pioneered its first large language model in the GPT series, pretrained on massive amounts of internet data and a large clusters of GPUs. GPT models excelled at text processing, eventually leading to ChatGPT, but struggled with basic math.

It took until 2023 for OpenAI to achieve a breakthrough, initially dubbed “Q*” and then “Strawberry,” by combining LLMs, RL, and a technique called test-time computation. The latter gave the models extra time and computing power to plan and work through problems, verifying its steps, before providing an answer.

This allowed OpenAI to introduce a new approach called “chain-of-thought” (CoT), which improved AI’s performance on math questions the models hadn’t seen before.

“I could see the model starting to reason,” said El Kishky. “It would notice mistakes and backtrack, it would get frustrated. It really felt like reading the thoughts of a person.”

Though individually these techniques weren’t novel, OpenAI uniquely combined them to create Strawberry, which directly led to the development of o1. OpenAI quickly identified that the planning and fact checking abilities of AI reasoning models could be useful to power AI agents.

“We had solved a problem that I had been banging my head against for a couple of years,” said Lightman. “It was one of the most exciting moments of my research career.”

With AI reasoning models, OpenAI determined it had two new axes that would allow it to improve AI models: using more computational power during the post-training of AI models, and giving AI models more time and processing power while answering a question.

“OpenAI, as a company, thinks a lot about not just the way things are, but the way things are going to scale,” said Lightman.

Shortly after the 2023 Strawberry breakthrough, OpenAI spun up an “Agents” team led by OpenAI researcher Daniel Selsam to make further progress on this new paradigm, two sources told TechCrunch. Although the team was called “Agents,” OpenAI didn’t initially differentiate between reasoning models and agents as we think of them today. The company just wanted to make AI systems capable of completing complex tasks.

Eventually, the work of Selsam’s Agents team became part of a larger project to develop the o1 reasoning model, with leaders including OpenAI co-founder Ilya Sutskever, chief research officer Mark Chen, and chief scientist Jakub Pachocki.

OpenAI would have to divert precious resources — mainly talent and GPUs — to create o1. Throughout OpenAI’s history, researchers have had to negotiate with company leaders to obtain resources; demonstrating breakthroughs was a surefire way to secure them.

“One of the core components of OpenAI is that everything in research is bottom up,” said Lightman. “When we showed the evidence [for o1], the company was like, ‘This makes sense, let’s push on it.’”

Some former employees say that the startup’s mission to develop AGI was the key factor in achieving breakthroughs around AI reasoning models. By focusing on developing the smartest-possible AI models, rather than products, OpenAI was able to prioritize o1 above other efforts. That type of large investment in ideas wasn’t always possible at competing AI labs.

The decision to try new training methods proved prescient. By late 2024, several leading AI labs started seeing diminishing returns on models created through traditional pretraining scaling. Today, much of the AI field’s momentum comes from advances in reasoning models.

In many ways, the goal of AI research is to recreate human intelligence with computers. Since the launch of o1, ChatGPT’s UX has been filled with more human-sounding features such as “thinking” and “reasoning.”

When asked whether OpenAI’s models were truly reasoning, El Kishky hedged, saying he thinks about the concept in terms of computer science.

“We’re teaching the model how to efficiently expend compute to get an answer. So if you define it that way, yes, it is reasoning,” said El Kishky.

Lightman takes the approach of focusing on the model’s results and not as much on the means or their relation to human brains.

“If the model is doing hard things, then it is doing whatever necessary approximation of reasoning it needs in order to do that,” said Lightman. “We can call it reasoning, because it looks like these reasoning traces, but it’s all just a proxy for trying to make AI tools that are really powerful and useful to a lot of people.”

OpenAI’s researchers note people may disagree with their nomenclature or definitions of reasoning — and surely, critics have emerged — but they argue it’s less important than the capabilities of their models. Other AI researchers tend to agree.

Nathan Lambert, an AI researcher with the non-profit AI2, compares AI reasoning modes to airplanes in a blog post. Both, he says, are manmade systems inspired by nature — human reasoning and bird flight, respectively — but they operate through entirely different mechanisms. That doesn’t make them any less useful, or any less capable of achieving similar outcomes.

A group of AI researchers from OpenAI, Anthropic, and Google DeepMind agreed in a recent position paper that AI reasoning models are not well understood today, and more research is needed. It may be too early to confidently claim what exactly is going on inside them.

The AI agents on the market today work best for well-defined, verifiable domains such as coding. OpenAI’s Codex agent aims to help software engineers offload simple coding tasks. Meanwhile, Anthropic’s models have become particularly popular in AI coding tools like Cursor and Claude Code — these are some of the first AI agents that people are willing to pay up for.

However, general purpose AI agents like OpenAI’s ChatGPT Agent and Perplexity’s Comet struggle with many of the complex, subjective tasks people want to automate. When trying to use these tools for online shopping or finding a long-term parking spot, I’ve found the agents take longer than I’d like and make silly mistakes.

Agents are, of course, early systems that will undoubtedly improve. But researchers must first figure out how to better train the underlying models to complete tasks that are more subjective.

“Like many problems in machine learning, it’s a data problem,” said Lightman, when asked about the limitations of agents on subjective tasks. “Some of the research I’m really excited about right now is figuring out how to train on less verifiable tasks. We have some leads on how to do these things.”

Noam Brown, an OpenAI researcher who helped create the IMO model and o1, told TechCrunch that OpenAI has new general-purpose RL techniques which allow them to teach AI models skills that aren’t easily verified. This was how the company built the model which achieved a gold medal at IMO, he said.

OpenAI’s IMO model was a newer AI system that spawns multiple agents, which then simultaneously explore several ideas, and then choose the best possible answer. These types of AI models are becoming more popular; Google and xAI have recently released state-of-the-art models using this technique.

“I think these models will become more capable at math, and I think they’ll get more capable in other reasoning areas as well,” said Brown. “The progress has been incredibly fast. I don’t see any reason to think it will slow down.”

These techniques may help OpenAI’s models become more performant, gains that could show up in the company’s upcoming GPT-5 model. OpenAI hopes to assert its dominance over competitors with the launch of GPT-5, ideally offering the best AI model to power agents for developers and consumers.

But the company also wants to make its products simpler to use. El Kishky says OpenAI wants to develop AI agents that intuitively understand what users want, without requiring them to select specific settings. He says OpenAI aims to build AI systems that understand when to call up certain tools, and how long to reason for.

These ideas paint a picture of an ultimate version of ChatGPT: an agent that can do anything on the internet for you, and understand how you want it to be done. That’s a much different product than what ChatGPT is today, but the company’s research is squarely headed in this direction.

While OpenAI undoubtedly led the AI industry a few years ago, the company now faces a tranche of worthy opponents. The question is no longer just whether OpenAI can deliver its agentic future, but can the company do so before Google, Anthropic, xAI, or Meta beat them to it?

A new law approved by the kingdom is set to give non-Saudis rights to buy homes in designated zones

Saudi Arabia could replicate the success of Dubai in attracting foreign property investors, including those from Hong Kong and mainland China, following the kingdom’s relaxation of homebuying rules, according to experts.

A new law approved by the kingdom last month is set to allow non-Saudis to buy real estate in designated zones. The law will take effect in January.

“Saudi Arabia can absolutely succeed at making itself a major destination for investment and residency,” said Kashif Ansari, co-founder and CEO of real estate broker Juwai IQI. “The new law will give non-resident foreigners a clear path to own property in Saudi Arabia for the first time.”

Ansari said the Saudi capital of Riyadh and another major city, Jeddah, offer greater value than Dubai and Abu Dhabi in the United Arab Emirates (UAE). For comparably sized residential units, the average price per square foot in Jeddah is US$100 and in Riyadh, it is US$123. In Dubai, that figure rises to US$400.

Foreigners owned around 43 per cent of all homes in Dubai, according to data compiled by the think tank EU Tax Observatory. Sales of homes in Dubai worth more than 10 million dirhams (US$2.7 million) jumped tenfold to 4,670 in 2024 from 2020, according to data tracked by Savills. In the first quarter of this year, 1,300 such homes changed hands, up 31 per cent from a year earlier, the property consultancy added.

Chinese buyers accounted for 14 per cent of Dubai property sales so far this year, up from 13 per cent a year earlier, Savills said.

Meanwhile, Hong Kong and the UK were the top sources of ultra-wealthy individuals who owned a second home in Abu Dhabi, according to a study released last month by US-based Altrata, which tracks wealthy individuals.

Saudi Arabia’s property market was projected to nearly double in size from now to US$133 billion by 2033, according to Patricia Casaburi, CEO of Global Citizen Solutions, a boutique investment migration consultancy with offices in the UK, Portugal and Brazil.

“What really catches my attention are the rental yields,” Casaburi said. “At a 6.75 per cent average and with Riyadh hitting nearly 9 per cent, these returns significantly outperform most developed markets. Combine that with zero personal income tax, no capital gains tax and no inheritance tax and the net returns become even more attractive.”

Casaburi likened the kingdom’s plan to relax rules surrounding foreign property ownership to the evolution of Dubai’s market when it opened to international buyers. Liquidity and accessibility in the kingdom should increase, she said.

Under the Saudi Vision 2030 plan, the country is modernising and diversifying its economy to reduce its reliance on oil. The initiative included mega infrastructure projects such as The Line, a glass-panelled development billed as the crown jewel of Neom, a city that is being built in Tabuk province.

“Since the launch of the [plan], the real estate market in Saudi Arabia has grown noticeably,” said Jihad Elabbas, senior client adviser in the Middle East and North Africa at migration consultancy Henley & Partners.

“Heavy investment in infrastructure has been a key factor, including the new metro service in the capital and the upcoming opening of King Salman Park, which is said to be the largest urban park in the world,” he said.

Juwai IQI’s Ansari said Muslims were the most likely to invest, noting “significant pent-up demand among high-net-worth” individuals.

Investors based in Hong Kong and mainland China who have business interests in the kingdom might also be interested in buying homes there, Ansari said.

“Chinese companies are actively engaged in projects across Saudi Arabia and the local Chinese expat population is growing,” he said.

Between 2005 and June 2024, China invested US$53.85 billion in infrastructure projects in Saudi Arabia, according to data cited in January by the Carnegie Foundation, a US-based think tank.

Ansari said Saudi Arabia could further relax residency rules to attract foreign investors.

“Riyadh can unlock demand at scale from Greater China with more inviting residency rules,” Ansari said. “Crucially, Beijing and Hong Kong buyers will compare Saudi entry rules with Dubai’s. So, the two countries will be competing on their residency terms. With golden visa rules similar to those in the UAE, Saudi Arabia will be appealing to investors and to families looking for relocation or second-home status.”

Casaburi of Global Citizen said Dubai was appealing to lifestyle investors and those seeking established international communities, while Saudi Arabia was positioning itself to attract institutional money and family offices.

Saudi Arabia was moving steadily towards becoming a destination for wealthy families, said Elabbas of Henley.

“However, it is to be expected that the kingdom will take some time to catch up with its neighbour, the UAE,” he said.

Engineers propose a solution that could dramatically boost UAVs’ prospects of evading advanced air defences

In Ukraine, about nine in 10 Russian drones have been shot down by advanced air defences, according to various estimates.

Ukrainian air force data suggested that about 15 per cent of drones had penetrated its defences between April and June — rising from just 5 per cent previously.

But a group of Chinese aerospace engineers and defence researchers have now proposed a radical technological enhancement for combat drones that may dramatically increase their ability to survive to nearly 90 per cent.

At the heart of the proposal was an innovative concept: fitting compact, side-mounted rocket boosters to small or medium-sized drones so they can perform instantaneous, high-G manoeuvres in the final seconds before a missile impact.

According to the researchers, this “terminal evasion” system allowed drones to perform abrupt, unpredictable course changes that even the most sophisticated missiles could not track or follow.

In extensive digital simulations detailed in a paper published in the Chinese defence journal Acta Armamentarii last month, the system saw a huge improvement in survival rates, passing 87 per cent.

In many cases, the drones effectively caused missiles to detonate harmlessly in empty space.

In modern wars, including the conflict between Russia and Ukraine, combatants have “extensively employed drones for reconnaissance and aerial combat, making [them] increasingly crucial on the battlefield,” wrote the project team led by Bi Wenhao, an associate researcher with the National Key Laboratory of Aircraft Configuration Design in Northwestern Polytechnical University in Xian.

Chinese military analysts, after studying the war in Ukraine and other areas, “place higher demands on the evasion capability and survivability of unmanned combat aircraft,” the team wrote.

Traditionally, drones are expected to make evasive moves long before the missile hits, but this can end their mission. As an alternative, Bi’s team suggested taking evasive action at the last possible moment.

The concept hinges on three critical principles, the first is precise timing, which means the anti-drone missile must ignite within a one to two-second window before impact – early enough to alter trajectory, late enough to deny the missile time to correct.

The second is directional intelligence: the system must determine whether to climb, dive, or veer laterally based on the missile’s approach vector.

The last of the three is thrust: the boosters must generate at least 16Gs of acceleration – far beyond what conventional aerodynamic control surfaces can achieve – ensuring a sudden, disorienting shift in flight path.

The project team faced some formidable challenges in integrating the rockets into a drone’s airframe without disrupting aerodynamic stability.

The forces unleashed during ignition must be perfectly synchronised with the drone’s flight control surfaces and onboard software – otherwise, the violent thrust could cause the aircraft to spin out of control or disintegrate mid-air.

Moreover, the system operates within a razor-thin time window. The booster burns for only about two seconds. Any delay – by mere fractions of a second – could render the manoeuvre useless.

There are also trade-offs that have to be considered. Adding weight, consuming payload space, and reducing fuel capacity all threatened the drone’s range and mission endurance.

The researchers said they had validated their model through thousands of combat simulations and found that their evasion algorithm was able to execute complex compound manoeuvres to maximise the drones’ ability to evade defences.

Once successfully miniaturised and integrated, such evasion systems could transform inexpensive drones into formidable, resilient strike platforms – capable of surviving in airspace once considered too dangerous.

In a conflict such as the war in Ukraine, where drones have already proven pivotal in intelligence gathering and precision attacks, a survivability boost of this magnitude could dramatically alter the nature of aerial warfare.

However, the concept has yet to be tested on a real battlefield. The drone would need to see the threat coming, sometimes from more than 200km (120 miles) away, and requires support from an integrated space-air-ground surveillance network.

Other challenges to overcome include delayed data transmission, particularly from distant satellites; signal jamming and misinformation; and insufficient onboard computing power for split-second decision-making.

The technology was designed to evade missiles with a top speed of Mach 4. Its effectiveness against hypersonic weapons remains unknown.

Freight groups warn the $250bn megamerger could raise prices and cut services

US railroad customer groups have demanded regulators block or put onerous conditions on the proposed merger of Union Pacific and Norfolk Southern, as both sides prepare for a regulatory battle over the $250bn deal.

Seven associations of shippers — as freight railroads’ customers are known — have expressed concern that the planned deal announced on July 29 would significantly increase the power of the merged railroad to raise prices or reduce service standards.

Opponents of a deal are also concerned it could prompt a further merger between BNSF and CSX.

A merger between UP — the biggest US rail network — and NS — the fourth biggest — would create the first US railroad able to operate transcontinental services all the way from the Pacific to the Atlantic coasts.

Ann Warner, a lobbyist working on behalf of the Freight Rail Customer Alliance, the National Industrial Transportation League and the Private Railcar Food and Beverage Association, said shippers were “overwhelmingly” opposed to the proposed deal.

“Every shipper is expressing concern and all the shippers have a long-standing position against further consolidation in the railroad industry,” Warner said.

Another customer group, the Alliance for Chemical Distribution, called on regulator the Surface Transportation Board (STB) to block the deal.

Eric Byer, the group’s president, said approval of the deal would be contrary to the public interest.

“Approving a transcontinental megamerger will benefit the merging rail companies and Wall Street, at the expense of US chemical distribution companies who are critical contributors to the American economy,” Byer said.

The American Fuel and Petrochemical Manufacturers said its members had “great concerns” about further consolidation of the freight rail industry.

“We fear this latest announcement will only compound the service problems refining and petrochemical shippers already face,” it said.

The deal is contentious because the number of large — or Class I — railroads in the US and Canada has fallen from about 40 in 1980 to just six, including the two Canada-based operators Canadian National and Canadian Pacific Kansas City.

Among the four US Class Is, two — UP and BNSF — operate west of the Mississippi, while NS and CSX operate in the eastern US.

Shipper groups fear that a further reduction in competition would leave them with less choice about which network to use.

Some groups, including the Soy Transportation Coalition, have expressed concern that a UP-NS merger could prompt BNSF and CSX to merge, reducing choice even further.

Ancora Holdings, an activist group that last year targeted Norfolk Southern, has been building a stake in CSX, its chief executive has said.

UP and NS have argued that an approved merger would benefit shippers by eliminating interchanges between railroads in places such as Chicago and St Louis, which often become congested.

In response to the shippers’ concerns, UP said its combination with Norfolk Southern was “about improving outcomes for customers and enhancing the US supply chain”.

“We’ve already spoken with more than 100 customers who are excited about the prospect of faster, more accessible, sustainable and lower-cost rail options,” it said. “They recognise the value of having end-to-end visibility across a transcontinental network and competitive single-line pricing.”

The STB will consider the deal in a lengthy process expected to take about two years. The two parties have said it will be six months before they even submit their application to the board.

Henry Posner, a veteran railroad investor and chair of the Iowa Interstate Railroad, said he believed only a minority of shippers thought the advantages of having “slightly easier” journeys between the eastern and western US outweighed the disadvantages of reduced competition.

The American Chemistry Council has also expressed deep concerns about a potential transaction.

The Intermodal Association of North America (IANA), which represents groups moving shipping containers by rail, sounded more supportive, however. Hub Group, an intermodal logistics company, has also welcomed the planned merger.

Because they typically handle higher value, time-critical cargo, intermodal shippers are more concerned than others about hold-ups during changeovers between railroads.

In a statement, IANA said intermodal rail thrived when there were “strong efficiencies, a focus on growth and a commitment to customer service”. “As this merger moves forward, we will be looking for these core values to be reinforced,” it said.

Telecoms operators MasOrange and Vodafone Spain had anticipated selling a larger stake to an external investor

Singapore’s GIC is set to take a 25 per cent stake in a fibre optic broadband venture between MasOrange and Vodafone Spain in a deal that will give the sovereign wealth fund a foothold in one of Europe’s biggest telecoms markets.

GIC’s investment in the company, which will serve 12mn premises, will be announced as soon as Monday, people familiar with the matter told the Financial Times, with one adding that its stake would be worth about €1.4bn.

The deal, which will create one of the biggest fibre companies in Europe, comes after the two Spanish telecoms providers announced the creation of the joint venture in January.

The two companies had originally planned for an external investor to take a stake of up to 40 per cent, but the share taken by GIC — which manages an estimated $800bn in assets — will be significantly lower.

MasOrange — Spain’s largest mobile network operator, formed by the near-€20bn merger agreed in 2022 between Orange España and MásMóvil — will hold a 58 per cent stake in the venture, according to the people.

Vodafone Spain, which was sold by its eponymous parent to London-listed Zegona Communications in 2024, will have 17 per cent. The two companies had originally expected to complete the deal by the end of June.

MasOrange said in January it would use the proceeds from any deal to reduce its debt, while Vodafone Spain said it would use the funds to cut leverage and return capital to shareholders.

The Spanish telecoms market has been fiercely competitive in recent years, as providers — including Vodafone Spain and MasOrange — have battled for customers with industry heavyweight Telefónica.

The desire to attract customers has seen the groups sign agreements to expand their networks in an effort to grow market share.

Zegona, which paid €5bn for Vodafone Spain, has signed a deal for another fibre joint venture with Telefónica to cover a further 3.5mn premises. Talks to find a minority investor in that deal are also progressing, according to a person with knowledge of the matter.

Zegona, which is led by former Virgin Media executives Eamonn O’Hare and Robert Samuelson, specialises in buying, fixing and selling struggling telecoms assets.

Since its acquisition of Vodafone Spain last year, Zegona has cut 28 per cent of the Spanish operator’s staff and streamlined other costs. Zegona’s share price has risen 170 per cent in the past year.

O’Hare received total pay of £131mn last year, making him the highest paid chief executive of a London-listed business.

Zegona, MasOrange, Vodafone Spain and GIC declined to comment.

Investors today might be too complacent about the risks to earnings from slower growth and higher inflation

Donald Trump sees “tariffs” as the most beautiful word in the dictionary. Investors should not see them so benignly.

US stocks have rallied since the shock of President Trump’s “liberation day” announcement of bigger than expected tariff increases. Initially, this reflected the pause in their implementation. But stocks have continued to rise, even as bilateral deals between the US and its trading partners have confirmed tariff increases. Strong earnings and economic data have lifted sentiment. And investors appear to have reverted to riding the rally led by buoyant tech stocks.

But there are good reasons to be wary of the trend. The headline tariffs emerging out of negotiations might be less than “liberation day” levels but they are still substantially higher than before Trump came to power. Consumers face an overall average effective tariff rate of 18.3 per cent if all the announced increases up to August 1 are brought in, the highest since 1934, according to the running calculations of Yale’s Budget Lab as of last Wednesday. Since then, Trump has announced more tariff increases. Clearly, this is anything but business as usual.

Most economists agree that tariff rises will probably lead to slower US GDP growth and higher inflation. Historically, this combination has seen equity market valuations fall. However, the overall impact on US stocks will depend on the tariff impact on corporate profits.

Current US earnings expectations suggest a sanguine view of that. Upward revisions of earnings forecasts currently dominate cuts to them. And the consensus for projected earnings of the S&P 500 companies over the next 12 months is 11.4 per cent — above the 10 year average of 10.4 per cent.

This optimism on profits appears to reflect three key assumptions, all of which can be questioned: 1) the US is a large domestically driven economy; 2) companies will pass through the tariffs; 3) The Nixon administration raised duties and these had a relatively limited impact on earnings. Let’s look at these in turn.

The US is definitely a more domestically driven economy compared with the OECD average. Exports account for only 11 per cent of US GDP compared with 28 per cent across the OECD. And the US level is much lower than the 31 per cent and 42 per cent respectively in the UK and Germany.

But it also important to remember that the S&P 500 does not represent the US economy, and our estimates suggest that the proportion of revenues of index constituents coming from overseas is now about 41 per cent. Even if US GDP suffers only modestly, growth might be slower outside the country as a result of the new trade regime. And Trump has already made it clear that he expects companies to “eat the tariffs” rather than pass on cost increases.

Some of my clients like to compare the Trump tariffs to what happened in 1971 under Nixon’s tariff regime, when US profits saw no negative impact from the tariffs. However, the Nixon shock saw tariffs of just 10 per cent, and these were removed after four months following an international agreement to end dollar convertibility to gold.

The key risk for investors is that the scale of Trump’s tariffs are, potentially, more akin to the tariff increases seen in the 1920s and 1930s — larger and more open-ended than those under Nixon. Data going back to 1900 collated by Professor Robert Shiller at Yale shows that the only two occasions when earnings fell as much as they did in the Great Financial Crisis were in the early 1920s and 1930s. Whether a coincidence or not, this should certainly be alarming.

The Smoot-Hawley tariffs of 1930 and their role in causing the US depression has been much discussed. Less well known are the 1921 Emergency Tariffs Act (increasing tariffs on farm products), and the 1922 Fordney-McCumber Tariffs (which impacted a broader range of products). As a result of these measures, the average tariff on dutiable goods was 38 per cent. While any causality is hard to prove, S&P earnings fell by 61 per cent in 1921 and US equities dropped by 44 per cent from their peaks of late 1919.

What is also notable from the tariff episodes of the 1920s and 1930s is that global exports as a percentage of global GDP fell sharply — by almost 3 percentage points in the early 1920s and more than 5 per cent in the early 1930s. While the structure of the US economy has clearly changed since the early 20th century, global trade and profit growth are closely linked. Markets today appear to be priced not for “business as usual”, but for perfection.

BP to report on cost cuts as activist investor Elliott steps up pressure

Status update on plan to save $5bn comes as US hedge fund pushes energy major to go even further

BP will reveal on Tuesday its progress on a $5bn cost-cutting plan, as activist investor Elliott Management increases pressure on the energy major to rein in operating expenses more aggressively.

The US hedge fund, which has built a 5 per cent stake in BP, has made operating cost reductions a central focus of its campaign at the UK group, which it is urging to aim for $20bn of free cash flow in 2027.

Elliott wants Murray Auchincloss, BP chief executive, to add another $5bn of cost savings to the target he announced in February of $4bn-$5bn of reductions by 2027 from a 2023 baseline.

The hedge fund has “identified tens of thousands of BP support staff globally” as an example of the company’s bloated cost base, according to one person familiar with Elliott’s thinking. BP declined to comment on the number.

BP has already cut $750mn of costs towards its target in 2024, and Auchincloss has pledged a detailed progress report alongside the company’s half-year results on Tuesday, five months after unveiling a “fundamental reset” to its strategy aimed at reviving its performance.

The company is looking to reach its savings target through a combination of streamlining supply chains, job cuts, exiting parts of the business such as hydrogen, and divestments — including selling BP’s onshore wind assets and spinning off its offshore wind arm.

But Elliott has questioned the credibility of BP’s plan. The hedge fund estimates that the net new cost savings in the plan will be closer to $1bn after divestments and previously realised savings are excluded and new costs from growth are added, and believes BP’s general and administrative expenses are far too high.

Not all investors are aligned with Elliott’s approach. David Cumming, head of UK equities at Newton Investment Management, said “BP still needs to demonstrate better operational improvement overall, but cost control is not the key issue”.

Another major investor said that asking BP for a further $5bn of cuts risked derailing its future growth. “Starving the company of capex and opex in the near term may not be the optimal outcome for the long-term health of the company,” they said. “I would guess there is some upside to BP’s stated target but doubling it to $10bn seems overly aggressive.”

BP’s distribution and administration expenses, which include payroll, overheads and product distribution, have totalled nearly $69bn over the past five years, $9bn more than Shell, despite the latter generating significantly higher revenues and earnings.

However, a person close to BP suggested the two companies’ numbers could not be compared because of accounting differences.

BP’s employee numbers have risen 58 per cent to 100,500 since 2020, as it absorbed roughly 30,000 workers by acquiring the TravelCenters of America fuel station chain and taking full ownership of Brazilian ethanol business Bunge Bioenergia, compared with a 10 per cent rise in Shell employees in the same period to 96,000.

“They are going in two completely different directions,” said Lydia Rainforth, an analyst at Barclays. “Shell has clearly made more underlying progress on any definition.”

BP has announced 4,700 job cuts this year from its roughly 40,000 office-based staff, and a reduction of 3,000 contractors. Kate Thomson, BP’s chief financial officer, said in April that the company was also assessing a further 3,400 contractor roles.

A number of senior executives have also departed, as BP pivots away from its ambitious energy transition goals back to its core oil and gas business.

Giulia Chierchia, the former head of strategy, and Richard Bartlett, head of electric vehicle charging unit BP Pulse, both left in June. Tracey Clements, who led the European fuel and convenience retail business, departed in January.

Shell said at its second-quarter results last week that it had made $800mn of cost savings in the first half of the year, of which only $300mn came from divestments. Wael Sawan, chief executive, said the company had made $3.9bn of reductions since 2022, “faster than maybe I expected that we were going to get there”.

Other oil majors are also moving to slash costs. Chevron said this year that it planned to cut up to 20 per cent of its workforce and reduce annual costs by $5bn to $7bn by the end of 2028.

Is it still worth buying a flat in London?

It’s the question one buying agent is repeatedly being asked right now. The answer is . . . mixed

Buying a leasehold London flat seems out of fashion. With the Covid rush to houses — which offered more space and a garden — prices surged ahead of flats, which are often associated with high service charges, gnarly legislation and legal hazards. As a buying agent, I’m often asked whether buying a flat in London is still worth it.

Sometimes, yes. If you only need a London pied-à-terre several times a year, a flat still wins hands down for security, maintenance and a concierge. And even for those with big budgets, flats are the only option for many of central London’s coolest neighbourhoods — excepting the odd mews house (in Marylebone, for example). Flats also remain the entry route for many on to the property ladder.

And houses aren’t always the right choice. One client I spoke to recently is lamenting the high maintenance costs, and worries his house is not secure enough when he is abroad. He’s planning to sell it and buy a flat, stumping up at least £1mn in stamp duty; it has been an expensive mistake.

Due diligence on flats has become harder, true. But here are some ways to navigate the path.

Don’t celebrate the Leasehold and Freehold Reform Act 2024 quite yet. It should be a boost for London flats, promising to make lease extensions quicker, cheaper and more likely. But much of it is being challenged in the courts (by London landowners including Cadogan Estates and Grosvenor Estate), a process that could take years to resolve. In the meantime, key pillars — including abolishing the marriage value calculation that increases the cost of shorter leases, caps on annual ground rent and exempting leaseholders from paying freeholder costs — can’t be enforced.

Until the questions are settled, there’s a risk of overpaying for a home with a short lease. There’s no point in snapping up what seems on the face of it to be a good deal, only to find when you add on the cost of extending the lease the resale value is less than you’ve spent. A good surveyor is vital when preparing an offer.

Scrutinise the service charges. Distinguish genuine increases — we’re all paying more for our heating and maintenance — from unjustified ones, by investigating the past three years of accounts which the vendor or managing agent should provide (if you’re buying the home they must, as part of the conveyancing process). Check early that there is a reserve fund to cover future work, and look out for peeling paint, worn carpets, crumbling facades or anything that suggests the building isn’t being looked after. Are the managing agents cagey or do they seem competent?

Be mindful of refurbs. After the Grenfell tragedy the 2022 Building Safety Act (BSA) was passed to protect occupants of tall buildings (more than five storeys or 11 metres — most Victorian terrace flats are shorter). Its major teething problems are well documented.

Less publicised are the new rules around refurbishments of tired period flats in prime central London. So much of the city has these lovely tall mansion blocks, with flats calling out for renovation. But if they’re more than six stories or 18 metres, they are deemed a “high risk building”, facing tough rules. Any significant work needs approval from a new Building Safety Regulator (BSR), but currently getting these approvals is extremely tricky.

Building safety experts are in short supply, meaning potential delays. The BSR is swamped with requests and frequently asks for more information, further slowing things down. One of our clients is seven months in, tens of thousands of pounds down in consultant and application fees, and still without approval. He hoped to have moved in by now; instead, he is in limbo paying a huge mortgage and service charge every month for a home he can’t live in.

Another obstacle for those planning renovations comes from leases with “absolute prohibition” against works — still common in Mayfair and other parts of Westminster. Historically, landlords got around these, granting permission for alterations in exchange for a fee from the leaseholder. But after a landlord in Maida Vale was successfully sued for this by another leaseholder in the block in 2020, many of the larger landlords in central London are simply saying no.

We still hear of buyers trying their luck — buying a flat then approaching their neighbours informally to persuade them not to object. But this is risky: don’t buy a flat assuming you’ll succeed — especially in a big block with lots of neighbours.

A solicitor will spot the absolute prohibition clause — ensure they have had a chance to, before spending £3,000 on a building survey.

A good planning consultant can be worth their weight in gold. Buying adjacent flats in a building then combining them was once a great way to create a large high-end lateral apartment. But today, councils are desperate not to reduce the number of housing units. Since last July, “amalgamation” has become nearly impossible in Kensington and Chelsea — Westminster has also cracked down. In both boroughs, we often see sellers and selling agents claiming it is still possible.

Restrictions can be circumvented, however, such as when you’re improving the housing supply by creating a family-sized home, or if the units are substandard — badly ventilated, say, or lacking daylight. Where the property is listed and you’re returning it to its original plan, that could work, too. (Meanwhile, if you own adjoining properties with existing permission, or that are combined, your home could be more valuable if it’s in a “high risk building”.)

Be brave, be prepared. Don’t desert the classic London flat. They may well still be the only option to live where you want, and their current unpopularity means there remain real finds out there. Just hold your nerve.

European banks get their meme-stock moment

The region’s sector has been on a rally of late and can still look forward to an earnings boost

A long-suffering company suddenly doubles in value on the back of newfound investor exuberance. Is it the latest revival of meme stock mania, or just another European bank?

Société Générale’s solid second-quarter results last week pushed its year-to-date share price gains briefly above 100 per cent, until Donald Trump’s next salvo of tariff announcements dragged the stock back on Friday.

Admittedly, SocGen has been helped by an especially lousy starting point but, among its rivals, the stock is exceptional only for the extent of the gains, not the direction.

The wider European banking sector has been on such a barnstorming rally this year that even bullish analysts were wary of a pullback as earnings season began at the start of July; instead, the Stoxx 600 banks index of European lenders jumped 7 per cent over the month, bringing its 2025 gains to almost 40 per cent.

If the rally was looking tired before, surely it must be on its last legs after the latest sprint? Not necessarily. The sector is no longer cheap, but most of the companies are in decent shape and there are still some tailwinds that could help boost earnings.

The economic and political uncertainty that dominated the past few months weighed on some areas of growth in the second quarter, but banks did a decent job controlling what they could control. Costs across the sector were lower than expected. Deutsche Bank and BBVA are two that comfortably beat analysts’ cost expectations.

Moreover, while the uncertainty discouraged some activity, there were few signs that clients were in trouble; provisions for bad loans were also lower than feared. NatWest, SocGen and UniCredit were among those that upgraded their full-year earnings forecasts.

Sharp share price drops in reaction to Trump’s latest tariff announcements on Friday highlighted the most obvious risk to the rosy outlook. Should trade-related uncertainty turn into a full-on economic downturn that hits employment levels, banks would suffer. 

But Friday’s response was muted compared with the panic that accompanied the first wave of announcements in April. If markets continue to rebound and recent trade agreements lead to less unpredictability over the medium-term, investment banks in particular could benefit — Barclays, UBS, Deutsche and BNP Paribas all highlighted strong pipelines of clients keen to push ahead with deals.

Even without that, banks continue to benefit from moves in the yield curve — the difference between short and long-term bond yields. A wider gap — known as a steeper curve — increases profitability for banks, since their basic model is to borrow short and lend long. BNP and Spain’s CaixaBank both highlighted the benefits from steepening this quarter, and the trend should continue as European governments increase long-term borrowing to fund infrastructure and defence spending. Bank investors had to wait a long time for this moment; they deserve to enjoy it a little longer yet.