Financial Highlights
Markets Rally Despite Economic Jitters: Earnings, Tariffs, and Jobs Take Center Stage
The U.S. economy delivered a mixed bag this past week, but markets managed to rally anyway. The S&P 500 gained 3% and has now risen 14% since early April, with the Nasdaq up over 11% in just two weeks. This surge was powered by a trio of encouraging developments: cooling trade tensions, solid corporate earnings, and a better-than-expected April jobs report.
Roughly 70% of S&P 500 companies have reported earnings, with 76% beating expectations, slightly above the 10-year average. Q1 earnings are on track to grow 12.5% year-over-year, a notch above forecasts. But the optimism should be short-lived as Q2 earnings growth expectations have now dropped from 11.3% to 5.8%. Companies are flagging concerns about tariffs and uncertain consumer demand which is leading to lower revenue, tighter margins, and a frozen labor market. Big tech, however, may continue to defy the odds. Microsoft and Meta alone committed over $150 billion to AI infrastructure, reassuring investors the AI race is still on.
Economic growth is deteriorating, even while the economy resists the stress of tariffs. Q1 GDP fell 0.3%, its first decline in three years, due to companies eager to stockpile imported goods ahead of Trump's tariffs. This may have caused spending to be diverted away from domestically produced goods and services, which hurt GDP. While this may cause upward revisions to Q1 and should rebound in Q2, real growth for the year will most likely be diminished to ~1-1.5%. Initial and continuing jobless claims jumped higher this week, both above their forecasts, and reflect the tighter level of hiring. Job openings are at a 7-month low, a sign the labor market is cooling even before the full impact of tariffs and inflation.
Consumer spending, while down from Q4, still grew 1.8%, and business investment soared nearly 22% as companies stocked up on equipment. This will normalize as consumers and business attempt to return to business as usual.
Jobs data helped calm nerves on Friday. April saw 177,000 new jobs, beating forecasts, and the unemployment rate held steady at 4.2% as expected. Prior payroll reports were revised down which leaves us with an average of 164K monthly payrolls in 2025, well below the 215K average from 2024. A revision is expected for April. Wage growth slipped slightly to 3.8%, which is still healthy and a sign that wage inflation pressure may be easing. CPI is out in two weeks and will offer a clearer indication of pricing trends.
Bond markets were choppy, with Treasury yields rising after the jobs report tempered hopes of imminent Fed rate cuts. Markets are now pricing in three cuts for 2025 instead of four, with June's odds falling to just 33%.
What This Means for Investors
The worst-case recession fears appear overstated for now. If we have one, it is expected to be mild. Markets are jumping on the hopes of trade deals, and pricing in business resilience. Volatility is sure to continue, so long-term investors should monitor their portfolios for opportunities to rebalance after the recent run up. Since the close on April 8th, the S&P 500 is +14% and the NASDAQ +17%. Don’t let your portfolio get offsides riding the wave higher.
Market Activity
Retail buyers have not let up during the entire month of April, and had a hell of a round trip in 30 days. Institutions got bearish, and stayed out. The relative intelligence of these moves are going to depend on if this turns out to be bear market rally that takes us back to new lows.
Did retail leave any dry powder? If not, the next leg(s) lower will be exhausting and tense.
Stocks
Fixed Income
Economic Reports
FOMC coming up this week. There are 3 likely scenarios:
- Dovish Hold (80% chance): I expect Powell and the committee to hold, but also soften their language to imply additional attention to the labor market and potential support of financial markets if necessary.
- Hawkish Hold (19% chance): If Powell wants to earn Trump’s wrath, he’ll keep up the tough talk about inflation and the downplay rate cuts. Odds of a June cut have fallen hard already and doubling down will be a harsh move.
- Dovish Cut (1% chance): We’re not cutting in May. Unless Powell is trying to make an inside move on Polymarket, its just not happening. This would also send the market spiraling by signaling something is very wrong.
Last Week
Next Week
Earnings Releases
Earnings are still coming in strong and companies like Microsoft are adding fuel to the still-burning AI infrastructure fire keeping us all warm. Visa earnings reiterated the sentiments from Mastercard earnings: spending appears to be holding up and they expect double-digit earnings growth in 2025.
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Next Week
Recommendations
End of an Era
Warren Buffett announces his intention to retire at the end of the year | There is nothing I can say about Buffett that hasn’t already been said. 1 of 1. And still crushing the market at 94 years old.
Navigating a Changing Environment
- This post will change your life | Certainty is persuasive, but it should be setting off alarms instead. The only certainty is uncertainty.
- Green paper is not evergreen. Gold is. | This is a short and useful write-up on gold and its use as an investment, security blanket, and diversifier. However, ignore the four investment options at the end because there is only one best way to invest in gold: Bullion Funds (example: GLD). If you feel the need to own real gold, then you should just own a bunker and a gun because they’ll do more for you than gold will if what you fear comes to pass. Owning futures or miners is just added risk and complexity.
- Your Home Without China | The NY Times analyzed import data to show where Americans may see product shortages, fewer choices and price increases. For example, 97% of strollers and 93% of children’s books come from China.
Chart(s) of the Week
Small businesses are the engine of the economy and they will be the hardest hit by our slowing economy and tangled trade. Hiring and employment will suffer in a recession. But it isn’t clear the market will. We all need to be prepared for another huge economy/market dislocation as the market looks through past the slowing economy and rises on the back of better than expected earnings growth and AI and online advertising spend.
A weaker dollar means investors can’t fall back on the comfortable post-GFC playbook. It’s time to look further back in history, and that history points to broad alternative and international diversification.
Projected earnings growth is 12.8%, and would mark the second consecutive quarter of double-digit earnings growth for the index. It will also mark the seventh consecutive quarter of year-over-year earnings growth. 76% of reporting companies have reported EPS above estimates, which is below the 5-year average of 77% but above the 10-year average of 75%.
Related: Market Tug-of-War: Tariff Tensions, Tech Turmoil & Treasury Moves