For those of you who would prefer to listen:
I was back east this week for Barron’s Top Independent summit. It’s our industry’s annual elite gathering. It was very timely. It’s super helpful to access smart thinkers to try to make sense of what’s going on. Importantly, there wasn’t much fear. But there was definitely a sense of caution around all the uncertainty. Our group is used to Market corrections. It’s what creates opportunities. That’s precisely the purpose of the summit; To highlight success and uncover new opportunities for our firms and industry.
Jack Otter, who hosts the Barron’s Roundtable show every weekend, does a great job of bringing together this group of 400 investment professionals from across the country for thoughts and idea sharing. Jack’s also a reader of this, my weekly piece. I take great pride in that.
One thing that pretty much everyone agreed on: Investor expectations were sky-high heading into the year. Prospects of less regulation and a return to pro-business policies out of Washington was the driver. Earnings growth was going to accelerate. It hasn’t quite played out that way yet. Another belief that seemed near unanimous: Trump 2.0 is much different than the first term.
It’s been confusing and incredibly difficult to account for the constant contradictions coming out of the White House. The Trump 2.0 policy uncertainty has spilled over to consumer and corporate behavior. Corporate America likes clarity and stability to run its business. As we all know, the Market hates uncertainty. There sure is a whole lot of that today.
Trade tensions continued to dominate the headlines this week. It’s been reported that constructive talks are taking place between the US and Canada. In fact it was described as “extremely productive”. So while the North American neighbors continue negotiations, the Oval Office directed its attention back towards Europe. The President threatened 200% tariffs on all French wines and champagne if the EU bloc does not scrap its tariffs on whiskey. Trade wars are brewing.
A government shutdown looks to be avoided. As usual, Congress waited to the 11th hour to cut a deal.
Q1 economic contraction? The Atlanta Fed’s GDP tracker went negative for the current quarter, reversing what was previously expected to see 2% growth. These trade wars are happening at a time when the US Economy was already slowing. With the nagging high prices, consumer spending is very fragile.
Here’s more evidence: Americans are finally slowing their travel. Delta just lowered guidance. The airline said it expects 3-4% revenue growth in Q1, down from prior guidance for 7-9% growth. The American Consumer is dealing with serious pricing pressures and retailers also reflect it. Target and Costco acknowledged a tightening of wallets from its customers.
The Street is now racing to revise its estimates. JP Morgan, Citigroup and Goldman all cut their forecasts for GDP growth in Q1, though only Citi sees actual contraction. It sort of doesn’t matter since the quarter ends in 2 weeks. The critical timeframe is what’s ahead for the rest of the year. The Street is always late to move. Goldman also lowered their price target for the S&P to 6200. The Market always prices things in well before Street economists react.
JP Morgan did raise their probability of recession this year to 40% from 30%, citing reduced confidence in policies coming out of Washington as the reason. The Business Roundtable CEO survey showed a drop in the economic outlook index as post-election exuberance dissipates. The survey cites economic challenges and Washington uncertainty. The Business Roundtable pointed out optimism would return should the White House execute pro-growth policies.
The new administration is requesting patience. Treasury Secretary Bessent asserted that the Economy is going through “detox” after its addiction to the excessive government spending in response to Covid. The Treasury Secretary said the process does not have to result in recession. But these trade wars could do it. That’s what the Market is trying to figure out.
Earnings drive stock prices. The Street now estimates earnings growth of 7.3% in Q1. It was 11.6% at the start of the year. Earnings Season starts up again in April. Importantly, earnings are still growing. This should be the 7th consecutive quarter with earnings growth. It would mark the 18th consecutive quarter for revenue growth. The Street still sees double-digit earnings growth for the year 2025.
Bottom line: For the Market, it’s all about earnings. The Street has been recalibrating the earnings outlook. The bottom-up earnings estimate for Q1 decreased by 3.5%. It’s now $60.66 from $62.89 with 2 weeks to go. For the full year 2025, that translates to $271.28 from $274.12. The length and extent of a trade war clearly presents further risk to these estimates.
Corporate America has sent a warning sign. Of the 500 S&P companies, 259 have stated tariffs are a risk to their outlook. Multiple compression versus earnings contraction. The S&P was trading at a historically high multiple of earnings to start the year. It was over 26X. Average over the last 90 years has been 15.5X. Average in the 21st century has been 18X. It’s now back under 21X. Of course these are estimates. We will learn starting next month what actual earnings look like. One thing is clear, Investors are less willing to pay high multiple prices with so much uncertainty.
For the first time in history, the price of Gold hit 3K. The precious metal advanced after a period of consolidation. We’re exposed there. Gold tends to do well in time of uncertainty. Silver is playing catch-up. It’s important to have stuff go up while stocks go down.
After 4 straight weeks of near relentless stock selling, the Bulls appear to have given up. That’s generally a really good sign. It’s a contrarian indicator. The S&P has corrected 10% since reaching a new, all-time high just a month ago. It took just 16 trading days for the Stock Market to fall into correction levels. And how investor attitude has completely changed.
This is the 5th fastest to correction in 50 years, as defined by a 10% decline, and the 7th fastest since the data started being recorded in 1929. You might not be surprised that 3 of them have come under the Trump administration. It happened in 2018, 2020 and today. The good news is those corrections cleared the decks setting up rallies to new, all-time highs. It’s a process. And it’s never fun.
For the first time since the lows of 2022, the Investors’ Intelligence survey of Bulls versus Bears has inverted. Bears are now in the majority. The I.I. survey is very useful for 3 reasons: 1. It is the longest running sentiment survey going back to the 1960s. 2. Its process has remained consistent throughout. 3. Most importantly, it tends to work. Since 1964, the average inversion lasts 7-weeks. The median is 4-weeks. The subsequent 1-month returns following the inversion have proven mediocre. But the 13 and 26-week returns are well above average. Timing is incredibly hard. But emotional sellers in those weak periods have consistently kicked themselves for years.
Stocks take the escalator up and the elevator down. There’s greed on the upside and fear on the downside. That’s the Market’s way. Corrections are healthy. That’s what this is. Uncertainty will ultimately lead back to certainty. That will be a positive. The Market will move in advance of that. But investors are realizing that the international economic system is being recalibrated. Global norms are being tested and are changing. This is new.
Friday brought a nice and needed reprieve with a lot of green on the screen. Things got way oversold in short fashion. We still anticipate this volatile price action to stick around. We are navigating through it. We’ll get to the other side. We’re doing it together.
Have a nice weekend. We’ll be back, dark and early on Monday.
Mike
