For those of you who would prefer to listen:
The American Economy has shown real signs of stalling. Appetites to spend have been curbed a bit as the Trade War activity persists. You can certainly see it reflected in the Stock Market. Looking more broadly, Corporate America and the American Consumer have been tightening their wallets. The Economy was already in slowdown. The massive tariffs created a shock.
The monthly Retail Sales report was timely. It provided the actual data to reflect consumer activity. The report is extremely relevant as consumer spending accounts for 70% of America’s GDP. The good news is, Americans increased spending in March. In fact, the pace was ahead of expectations. The bad news, the period measured was before the tariffs went into effect. Consumer sentiment is at 3-year lows, with 12-month inflation expectations the highest since 1981. So, there’s that.
Retail sales increased 1.4% from February. That was thebiggest gain since January of 2023. They increased 4.6% compared to a year ago. Strength was found in cars, bars, sporting goods and gardening. That sounds very Spring-like. Restaurant sales have been soft the past three months, so it was interesting to see it pick up a bit. The warmer weather likely contributed there. Tax refunds probably played a role too. The IRS reported the average refund was 3.5% higher this year compared to last. More money to spend.
Digging further into the data showed that motor vehicle sales jumped 5.3% month-over-month. There was clear evidence of people purchasing ahead of the tariffs. Front-loading seems to be at play. That begs the question about what spending will look like heading into Summer. However, Bank of America CEO Brian Moynihan sounded more optimistic in his earnings report. He said the American Consumer is still proving its resiliency. Moynihan runs the second largest bank in the country. He definitely has an inside track to see daily transactions from coast-to-coast.
Another angle: The Retail Sales report also sheds light on how stores are handling the situation. Management teams are finding it incredibly difficult to plan with the unpredictability and confusion. Americans tend to buy less when they are uneasy about the Economy. Spending tends to freeze. Retailers could be facing a long period of uncertainty over imported goods and how to handle higher prices. Companies that sell large appliances and electronics could feel it the worst.
Travel has been white-hot ever since Covid. Activity is still strong. United just reported its best quarter in 5 years. It’s not sure if the strength can continue though. The airline did something I’ve never seen in my career. It gave 2 sets of guidance for the rest of the year. One applied to a recession, should it manifest. CEO Scott Kirby said it is “impossible to predict” with any degree of confidence how the Economy will fare over the rest of the year. Here’s something else that is telling: A week into Earnings Season, not one company has raised guidance for the rest of the year.
Domestic travel has shown signs of slowing. It’s the international flights that remain strong. Delta said it last week. United reiterated it this week. There is another factor that just erupted. Travel to the United States. United saw a 6% decline in European travelers coming to the US. It saw a 9% drop from Canada. Overall, European travelers visiting the United States fell sharply in March, dropping 17% from a year ago. Canada reported a whopping 70% decline in bookings. It’s not just airlines that feel that. Hotels, restaurants and transportation providers are all tied to travel. The tariffs aren’t just about prices. The data shows it’s definitely having an impact on attitude too.
The big news heading into the week, from a Market perspective, was a temporary tariff reprieve on Tech. The Trump administration said it would exclude computers, smartphones, and chipmaking equipment from the 145% tariffs on China. That put a bid under the Tech trade to start out the week. What’s more, Beijing said the US electronics exemption was a small step toward rectifying wrongdoings. There’s a lot more to go here.
Apple is as big a beneficiary as anyone from this decision. Fierce competition could have seen Samsung and others take advantage of the large levies. But it’s definitely not stopping the Cupertino company from moving. Apple has accelerated production in India and Vietnam to take advantage of 90-day grace period on US tariffs. They’ve been active for a while. Apple reportedly assembled $22 Billion of iPhones in India in the prior 12 months. That’s a 60% increase in a year.
Apple is the number one smartphone manufacturer in the world again. The iPhone took the top again in Q1, with a 19% share in the global market. Sales in the U.S., Europe and China were either flat or down, but Apple saw double-digit growth in Japan, India, and the Middle East. South Korea’s Samsung came in second with an 18% market share. China’s Xiaomi took the third spot with 14%. Xiaomi has shown strong sales momentum and gaining market share. The company is experiencing significant growth in the domestic Chinese market and is successfully cracking into other countries. Competition is fierce. Innovation and market share gains are not just an American thing.
Earnings Season is in full force now. The Banks all reported solid results. But the winds have definitely changed.The Street is now looking for S&P 500 earnings growth of 7% for Q1. That isdown from the 11.7% growth expected at the start of the year and the +14% projected back in Q4 2024. Revenues in Q1 are now expected to be up 4.2%. The Street was looking for 5.2% growth back in January. The slower growth is spilling into lower estimates for the rest of the year.
Wall Street has already started cutting 2025 earnings estimates due to the economic slowdown and tariffs.Morgan Stanley is now modeling $257 for S&P earnings, down from their previous $271. Citi joined the party, cutting its 2025 estimates down to $255 from $270. However, the rest of the Street is still around $270. Remember, more than anything else, it’s earnings that drive stock prices. When earnings growth slows, stock prices generally fall. Investors don’t like to pay up for slowing growth; Particularly in the chaotic environment like the present. Multiples have contracted.
The S&P is now trading at 19.5X those 2025 Street estimates. But it’s trading at 20.5X those Morgan Stanley and Citi estimates. Regardless, it’s trading at a much cheaper valuation now, after the sell-off, compared to where it was in February, at those all-time highs. Back then, it was trading at 25X those $270 estimates, marking it amongst the most expensive valuations for the Stock Market since the Dot-com days. But even at 19.5X earnings, the Stock Market is not cheap. The average earnings multiple for the S&P in the 21st century has been around 17X. Going back nine decades, the average was closer to 15.5X. Investors have proven time and again its willingness to pay up for exploding earnings growth, as evidenced by the AI craze. But those investors can also get a little euphoric, as evidenced by, you know, the AI craze. There’s still more to go in this corrective price action, we think, before a firm bottom is in place. We’ve seen it before. It’s all part of the process, whether we like it or not.
The Fed is paying close attention to all the trade activity and economic risks. Fed Chair Powell said this week, thelevel of tariff increases announced is significantly larger than anticipated and will likely lead to higher inflation and slower growth. That irked the White House. The Fed Chair and the President don’t exactly like each other. That said, Powell reiterated the central bank is well-positioned and will wait for greater claritybefore considering any rate moves. The Market was looking for more immediate rate cuts. The disappointment led to an acceleration of selling on Wednesday.
Fed Governor Chris Waller, a voting member, took it a step further. He said these tariffs were one of the biggest shocks to the US Economy in decades. The Fed Governor asserted that monetary policy remains highly uncertain and requires Fed flexibility. If the economic slowdown accelerates and threatens recession, Waller will favor cutting sooner and to a greater extent than previously thought. The 2-Year Treasury yield, the one most tied to the Fed, ticked up this week while 10s and 30s fell. The Bond Market is definitely seeing the economic slowdown and the trade wars are exacerbating the situation.
Another factor in the volatile price action has been found in the Options Market. The April monthly contracts expired Thursday. Expiration day is usually the 3rd Friday of every month, but Friday is a holiday. Zero-day options have become all the rage in derivatives. Zero-day-to-expiration options are contracts that expire the same day that they’re traded. The trading volume of these zero-day options tied to the S&P surged to 8.5 Million in April, That was a 23% jump since the beginning of the year, accounting for roughly 7% of the total volume in the U.S. Option Market. Active traders see them as a strategic tool to make a quick buck or hedge against sudden event-driven moves in the broader market. These large volume trades in these short-lived vehicles can exacerbate price swings in the Market as dealers and Market Makers have to buy and sell underlying assets to balance their positions.
There is so much going on that is Market-moving. We don’t see that changing anytime soon. So far, the rally off the lows has held. Sideways action for a couple weeks would be healthy as the Market recalibrates and more data pours through. Earnings Season is data-driven. We are studying the data. We are interpreting the data. And we use it to anticipate what’s next. Informed decision making; We are doing it without emotion. We’ve found that’s the best course, leading to the best outcomes.
Happy Easter! The Market is closed Friday in observance of Good Friday. Our office will be too.
Have a nice weekend. We’ll be back, dark and early on Monday.
Mike
