Week ended May 2, 2025: Risk is back on!

Markets are at last returning to some sense of normalcy, with the S&P 500 now clawing back all of its losses since the infamous “Liberation Day” tariffs announced by President Trump on April 2.  Fortunately – and to coin an acronym used by Robert Armstrong, the author of FT newsletter (and podcast) “Unhedged” – TACO (“Trump Always Chickens Out”) has been the catalyst.  Ever since market guardrails forced Mr Trump to delay or rescind most of his “beautiful” tariffs, investors have gradually found their footing and have rediscovered their appetite for risk.  In fact, we ended last week with US stocks back where they started April, and UST yields not far off their levels where the month started, too. 

 So where do we go from here?  Opinions might differ on what comes next, simply because the administration remains volatile and highly unpredictable.  However, it feels to me as if the worst has passed in terms of market risk, although I am not sure I would bet on a big run from this point forward in risk assets given the relatively fast recovery.  Most tariffs have been deferred, not cancelled, as the Trump Administration negotiates with its largest trading partners.  However, the deadline of 90 days from mid-April for global tariff implementation remains.  In addition, investors (including this one) might argue that the economic and reputational damage in the international markets with respect to the US cannot be completely clawed back, no matter what the outcome is with tariffs and trade negotiations. 

Economic data in the US generally suggested last week that the damage feared from Mr Trump’s erratic policies has not yet shown up in April’s hard data, which as a reminder is backward-looking.  However, forward-looking data remains troubling.  Consumer confidence remains near historical lows, and businesses are clearly expressing caution with their outlooks, many saying that they expect negative effects from the trade war in the coming quarters.  Some management teams are more specific as to the potential damage than others.  In addition, oil and other commodities are signalling – as largely expected – the expectation of a slowing global economy triggered by the trade war.  Pressure on yields also continues, as inflation expectations stagnate above the Fed’s target which jeopardises any early monetary easing by the Federal Reserve.   This could play out a number of ways, but my two cents is that it all suddenly looks too good to be true.  Let’s see.    

WHAT MATTERED LAST WEEK

US consumer confidence

The Conference Board released its US Consumer Confidence survey results on Tuesday (cut-off date 21 April), and you can find the press release here.  Not surprisingly, consumer confidence has plummeted, and this quote from a senior economist at The Conference Board sums up sentiment: “The three expectation components—business conditions, employment prospects, and future income—all deteriorated sharply, reflecting pervasive pessimism about the future.”

Mag 7 earnings

The earnings of the Mag 7 were better than analysts had anticipated.  The table below for the four companies that reported this week – META, MSFT, AAPL and AMZN – shows analysts’ consensus expectations along with actual results.  MSFT and META released results on Wednesday after the close, both delivering much better-than-expected results and sending their shares sharply higher in the post-market.  Keep in mind that the results are backwards looking, but they are certainly encouraging for these two tech giants given all the uncertainty that has been swirling around their valuations.  AMZN and AAPL, both of which released earnings the following day, had top- and bottom-line beats but were much more cautious with respect to their outlooks. Not unexpectedly, both sited the unknown effects of tariffs, with AAPL specifically saying that tariffs were likely to increase their costs by $900 million in the current quarter.  AMZN was less specific, but guided investors lower in terms of expectations for the current quarter. 

You can find the update for earnings for S&P 500 companies last week in “The Week in Earnings” ended May 2, 2025 from LSEG I/B/E/S here.

US economic data: a mixed bag

The US economy lost ground in 1Q2025 for the first time since the 1Q2022, with real GDP declining 0.3% in the quarter (versus expectations of 0.8% growth).  The table below from the BEA press release shows the last few quarters of US real GDP growth.

The decline in US GDP in the quarter was primarily attributable to a “one-off” anomaly related to US companies massively increasing their imports in the first quarter to get ahead of the Trump Administration’s tariffs.  There were aspects of the report (e.g. consumer spending) that held up better than expected, although keep in mind that this data is backwards looking (vs consumer confidence surveys that are forward looking).  On Friday, the US jobs report for April was released (BLS release here), and the data was better than expected.  The US unemployment rate remained at 4.2%, but 177,000 new jobs were added, much more than the anticipated figure of 133,000.  The release of this data sent stocks in the pre-market higher, and bond prices lower (as yields inched higher).  The US economy continues to show better-than-expected resiliency even with trade-war induced uncertainty and heightened market volatility. 

Eurozone GDP

In the Eurozone, 1Q2024 real GDP growth surprised on the upside at +0.4% QoQ, versus +0.2% expected.  Again, a potential anomaly was at work with Irish GDP (normally volatile) surging in the quarter (+3.2%) and contributing to better-than-expected growth in the common currency bloc.  German GDP rose 0.2% and French GDP rose 0.1%, in contrast.  Economists remain very cautious on the outlook for Europe as the trade war will certainly negatively affect economic growth.  The Eurostat press release for 1Q25 GDP is here.

Bank of Japan monetary policy decision

As expected, the BoJ did not change monetary policy at its meeting this week, highlighting in their commentary uncertainty because of potential negatives effects of the global trade war on the Japanese economy.  For the same reason, the BoJ also revised its expectations of growth in the Japanese economy in the coming quarters downward.  You can find the revised “Outlook for Economic Activity and Prices (April 2025)” here.

MARKETS LAST WEEK

As mentioned, US stocks have largely recovered the ground lost in early April just following the “Liberation Day” tariff announcements by Mr Trump, which have either been substantially watered down or deferred for 90 days as countries negotiate with the Trump Administration.  European, Japanese and EM equities were the best performers last week, followed closely by the S&P 500.  Yields in the US Treasury bond market remain under pressure, with the better-than-expected economic jobs report for April suggesting that the US economy remains more resilient than expected.  The USD also staged a slight recovery, gold prices fell as investors moved back into risk assets, and oil prices continued to decline.  Corporate credit spreads were relatively stable, but this is a market that needs to be closely monitored as I suspect it will signal a deteriorating economy faster than equity markets. 

See section “Market Tables” below for an update across indices and asset markets.

WHAT’S AHEAD

From an economic perspective, the week looks “data-light” with most of the attention likely to be focused on central bank meetings in the US and the UK, with the monetary policy decisions in both countries followed by various Fed and BoE officials, respectively, out “on the road” to provide more context to their rate decisions.

Earnings for S&P 500 companies continue with 94 S&P 500 companies scheduled to report earnings this coming week, including PLTR, AMD, SMCI, UBER, DIS, NVO, ARM, SHOP, TDD and COIN.  You can get the full earnings calendar for S&P 500 companies at earningswhispers.com.

Upcoming central bank policy meetings are as follows:

• FOMC: May 6-7 (no reduction in Fed Funds rate expected in May (or June), but three  25bps reductions expected in second half of year, per CME FedWatch Tool)

• Bank of England: May 8 (likely to reduce Bank Rate by 25bps)

• ECB: June 5 (have to get closer but odds are 25bps reduction in policy rates)

• Bank of Japan: June 16-17

MARKET TABLES

_________________

**** Follow E-MorningCoffee on Twitter, and please like and comment on my posts right here on my blog. You need to be a subscriber, so please sign up. Thanks for your support. ****