by Joe Herrle, CFA
Vice President
Alternative Assets
After a 20% rebound from its April 7 lows, the S&P 500 is positive for the year, marking one of the most significant short-term comebacks in market history. The market rallied on Monday following weekend news about tariff negotiations with China. In a complete reversal from the earlier “Liberation Day” tariff announcement, the punitive 145% tariff rate on Chinese goods was reduced to 30%, with a 90-day pause implemented. In response, China lowered its retaliatory tariff rate on U.S. goods from 125% to 10%.
Hopes are high for deals with other countries too; the U.S. reached an agreement with the UK, and deals are expected with Australia, Israel and India over the next few weeks. Additionally, trade agreements with large trading partners, such as Japan and South Korea, are expected to come this summer.
The fact that the market is positive for the year might surprise many, as fears of recession and inflation have led to extremely negative consumer sentiment, alarmist media coverage and general uncertainty. This type of qualitative information, generated from surveys and forecasts, is considered “soft data.” The divergence between this “soft data” and “hard data” – such as consumer price index (CPI), gross domestic product (GDP) and consumer spending – helps explain why the market's resilience might be unexpected.
So, what has caused such negative sentiment? Tariffs are the primary factor, and lessons from this year’s earlier tariff episode initially suggest a bleak outlook. The last significant U.S. tariff increase occurred in 1930 with the Smoot-Hawley Tariff Act. Following its implementation, from 1930 to 1932, unemployment rose to 24%, global trade declined by 66% and the Dow Jones Industrial Average fell by 64%. However, it's often overlooked that the U.S. economy was severely declining before these higher tariffs were enacted. In the year leading up to the 1930 tariff hikes, GDP and consumer spending were decreasing, unemployment was rising, the stock market was in freefall and banks were failing. Therefore, tariffs were not the immediate cause of the Great Depression.
Encouragingly, new “hard data” released this week was consistently positive. Retail sales saw a 0.1% rise in April after a significant 1.7% surge in March. The Producer Price Index (PPI), the Federal Reserve’s preferred measure of inflation, fell by 0.5% in April, following a flat reading in March. Similarly, PPI’s consumer counterpart, the CPI, reported a modest 2.3% year-over-year increase, its lowest annual pace since February 2021. Additionally, weekly jobless claims, a more current indicator of economic health, remained low at 229,000 this week.
Furthermore, with over 90% of S&P 500 companies having reported their first-quarter results, it's evident that corporate earnings have so far weathered the uncertainty. At the end of the first quarter, analysts expected only 7.2% earnings growth, but actual earnings growth came in at 13.4%. Analysts are now projecting healthy earnings growth of 9.3% for 2025.
As we sort through a myriad of anecdotal and qualitative information that alters perception from reality, we want to rely on what we can substantiate. The message is clear: the current “hard” economic data we can trust does not indicate a distressed U.S. economy.
Takeaways for the Week
The S&P 500 has come full circle and is slightly positive on the year. In February, the market reached a high, producing a 4.5% year-to-date return and subsequently declined 21% to a low in early April. The market is now close to where it started the year.
A draft of the proposed House tax bill has been released. Key proposals include a higher estate tax exemption of $15 million and an increase on the state and local tax (SALT) deduction cap from $10,000 to $30,000.