Solid Earnings Helps Market
What happened last week?
Equities continue to be whipsawed by headlines and promises, with a flurry of conflicting statements and leaks coming out of the White House.
The strong price action in equities following White House comments hinting at (1) de-escalation of trade tensions with China, and (2) fewer challenges to Fed independence, illustrated how desperate market participants have been for any shred of good news.
While measures of volatility are meaningfully lower than the peak in early April following the tariff announcements, average volatility in 2025 is still more than 60% higher than in 2024 and we are far from an all-clear.
Even with several days of euphoric moves over the last week, the fundamental outlook for equities continues to weaken and earnings revisions have moved sharply lower this month.
3 Things to Know
“Hard” Data Has Not Indicated Activity Decline
Although "soft data" continues to indicate deteriorating corporate and consumer confidence, recent “hard data” has not yet demonstrated any meaningful decline in activity. The timing and magnitude of the transmission between soft data and hard data is difficult to predict, especially given that the new tariff regime isn’t close to being finalized.
With 35% of S&P 500 companies reporting earnings through this week, 74% have beat Q1 estimates, roughly in line with historical norms. The average Q1 beat is north of 10%. But as we previewed before earnings season began, investors are squarely focused on forward-looking statements.
Not surprisingly, we’re seeing far more guidance downgrades than upgrades. The three-month ratio of guidance upgrades to downgrades is 0.3x, well below the historical average of 0.8x. However, the aggregate number of downgrades so far this earnings season isn’t large. Only 24% of S&P 500 companies reporting so far have cut or withdrawn guidance.
US Portfolio Allocations Being Re-examined
Against a backdrop of lower policy visibility, many investors have been actively reducing their significant overweight to US assets over the last few months, resulting in USD weakness. While the US economy remains resilient by global standards, the convergence of slower growth, policy uncertainty, and trade wars is forcing global allocators to examine the size of US allocations in diversified portfolios.
Given that tariffs are unlikely to be fully resolved for the foreseeable future, we expect weakness in the USD to continue even if US equity and fixed income market volatility continues to stabilize.
Don’t Bank on the Fed Until There Is More Hard Data
Market participants are clearly hopeful that weakening data will spur the Fed to engage in policy easing by the start of the summer.
While rate cuts will likely be appropriate in 2025, we caution investors against banking on a large amount of policy easing against a backdrop of sticky inflation and a deeply uncertain growth outlook.
We believe policymakers will ground their decisions on hard economic data and will resist rushing to action.
28 S&P 500 companies have provided separate tariff-related guidance for FY 2025. In some cases, these estimates are incorporated into official guidance, but in most it’s been presented as a separate scenario analysis. Because no one – economists and CFOs alike – can model the full potential impact of tariffs on activities at this point, sticking with the regularly scheduled program makes sense for now.
Among firms already reporting, above-consensus capex guides are over 2 times more frequent than below-consensus guides. Most of the Mag 7 is yet to report, but Alphabet reiterated FY 25 capex despite swirling worries about cuts to data center spend. This matters because hyperscalers account for 22% of S&P 500 capex, and consensus expects hyperscaler growth of 36% in 2025.
Financials, while down 7% since markets peaked in February, have outperformed most other cyclicals, mostly due to strong performance from insurance and payments names.
Since the market bottomed on April 8, solid earnings from the big banks also helped shore up confidence in the sector as investors await potential announcements related to deregulation.
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