Weekly Newsletter: April 28, 2025
“He loves me, he loves me not.” A game, where the last petal represents the truth of whether s/he indeed loves you or not. This game has been playing out in Washington over the past few weeks. No love for China earlier in the month; today rumors fly that negotiations have been ongoing. Fed Chair Powell was to be fired late last week; today he was never going to be fired. Liberation Day was all about raising tariffs across the board; today we are in the midst of a 90-day moratorium while negotiations occur. In response, the financial markets have been having a love/love not relationship on seemingly a daily basis. This week, the SP500 started with a 2.5% decline only to finish the week 4.5% higher. In the height of earnings season, some companies have skipped the ritual of providing forward guidance on revenue and earnings since the environment changes on a dime. Back at the economy, the data still looks like an economy that is doing just fine. Along with earnings reports, it has been argued that these data points all preceded the imposition of the tariffs. The biggest question facing the markets and one of the main reasons for the daily volatility is the impact on the economy and earnings. Unfortunately, that answer will require more than a bouquet of flowers to determine whether the markets love the economy or not.
The cynical view of the earnings season is two-fold. First, earnings “beats” are coming in about in line with historical averages. This makes sense given the reporting period ended before tariffs. However, many companies are severely talking down the coming quarters due to the fog of tariffs. The tariff impact may not have been felt just yet, but it may also provide “cover” for companies to talk down expectations, only to beat them again come the July reporting season. The weekly jobless claims continue to be in line with historical averages, while durable goods orders, excluding aircraft, were ahead of estimates. Much of the economic data is being discounted and the focus is solely on the tariff talks and the love/hate relationship between Trump and Powell. By Friday, the markets have determined cooler heads have prevailed and the rhetoric has been turned down from eleven to merely a dull roar. Of course, that can easily change and once again roil the markets. The coming week’s focus will be once again on jobs, with estimates for a gain of 130k and stable unemployment at near historically low levels. Wages will be in focus as well. They provide the fuel for overall spending and have been running above the rate of inflation for the last two years, helping retail sales to also rise faster than inflation.
Worries over the Fed’s independence have come into question over the past few weeks as Trump continually cajoles the Fed to cut rates and threaten the replacement of Powell as Chair. Once that got put to bed early in the week, bonds rallied across the risk spectrum. Spreads between “junk” bonds and treasuries have contracted by a full percentage point over the past two weeks, indicating an overall return to a “risk-on” stance by investors. The bond model has once again flipped toward lower rates ahead. It is unlikely that the Fed will cut rates at their May meeting and inflation data hits in two weeks. Again, the data is before the tariff announcements were imposed, so it may not reflect their impact just yet.
Risking the worst start to the first 100 days of a presidency on Monday has quickly morphed into thoughts of a full recovery of the decline beginning with the tariff announcement. Some point to the possibility of a new bull market after the SP500 declined by just over 20% from the mid-February peak to the early April intra-day lows. This past week saw the return to technology stocks as earnings from Netflix and Google provided hope that the remaining “Mag-7” will have similar positive reports in the next two weeks. Earnings are still expected to rise by 17% from current levels to yearend, which may be a stretch IF the tariffs do crimp economic growth. Comments of overall economic and earnings weakness have not made it to the estimates for this year, meaning many feel that most, if not all, the tariffs will be rolled back and the impact will be minimal. Valuations remain near historically high levels, so even a rally from current levels may be difficult to sustain.
The Fed goes into a quiet period ahead of their May 7th rate decision. More earnings, especially big tech names, and the employment report should keep things interesting. Of course, trade comments could move markets as well. It may be that these April “showers” bring May “flowers”, only to have their petals plucked.
The opinions expressed in the Investment Newsletter are those of the author and are based upon information that is believed to be accurate and reliable but are opinions and do not constitute a guarantee of present or future financial market conditions.