Waiting Game
US equity index levels have roundtripped over the last month, since the April 2nd tariff announcements, even though effective tariff rates are dramatically higher than they were a month ago and the forward outlook for growth has deteriorated. After peaking north of 50, the VIX has fallen to 22 as investors bet that the worst tariff news may be behind us.
More recently, comments from both the US and Chinese officials hinting at de-escalation of trade tensions combined with encouraging tech capex guidance has helped spark a re-risking. That said, we believe the US equity market is at the top end of the range justified by fundamentals and a full retracement to February highs is highly unlikely.
3 Things to Know
“Hard” Data Has Yet to Turn
Widely followed economic activity data such as the CPI, non-farm payrolls, and GDP are typically the cornerstones of any serious macroeconomic analysis.
As we write just one month after a sharp hike in US tariffs, economic conditions as described by this “hard” economic data are now only useful to historians, as they reflect a break between a “pre-tariff” and “post-tariff” implementation.
Moreover, pre-tariff economic activity is likely to show higher growth due to a burst of inventory stocking and consumer purchasing ahead of perceived tariff impacts.
In our view, more coincident consumer sentiment data such as from the University of Michigan — reflecting a collapse to levels not seen since CPI was printing 9% — may be a more accurate predictor of the economic scenario unfolding in the back half of 2025 should tariffs remain in place.
No Fed Rescue Yet
Last week’s employment data was reasonably strong, but as mentioned above it gives the Fed an excuse to delay cutting rates. While net revisions cast the prior two months as mildly softer, there are no tariff fingerprints on the job market yet. Even temporary help — which can often be a canary in the coal mine for overall employment — showed no meaningful shift in trend.
Expect Further Downward Earnings Revisions
First quarter GDP, which printed negative largely due to the pull forward of imports, likely reflected corporate decision making in February, as companies incorporated the long lags from orders to actual imports hitting US ports.
The US still has not received all the cargo ships that departed China prior to April 2nd and won’t likely see emptying shelves for at least another month. This means that weakness in retail sales and employment may not begin at the earliest until late May or early June, and therefore won’t show up in data publications until well after the Fed’s June 18th meeting.
As mentioned, earnings revisions are unequivocally negative. Over the past month, revision ratios (upgrades relative to downgrades) were in the 6th percentile of observations since 1986.
Normally, when we observe extreme negativity in markets, we think of this as an opportunity to take advantage of others’ fear. But it’s not clear to us that we’ve reached peak negativity.
While the pace of downward revisions has been swift, the magnitude of the revisions remains muted and bottom-up EPS estimates still point to 8% growth for 2025. Barring a rekindling of animal spirits and a decisive resolution to trade tensions, we expect further downward revisions.
See our weekly CIO Strategy Bulletin for more details