3 Key Issues Are Presenting Substantial Headwinds for U.S. Stocks
These significant and interrelated issues that are causing problems for the market.
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The market enjoyed one of its best weeks in several years last week, with the S&P 500 jumping 7.3%, but the daily trading range was nearly 7%, with a swing of over 10% on one day. Volatility is likely to continue at very elevated levels as the tariff situation remains highly uncertain and first-quarter earnings season begins.
The market is currently dealing with three significant and interrelated issues that are causing problems.
The first is obviously tariffs. Over the weekend, there was news that tariffs on some semiconductors and consumer electronics would be exempted, but President Trump then stated this was only temporary while further review was done. The market liked the news anyway, and there was a strong move on Monday in early trading with Apple AAPL and Nvidia NVDA leading with substantial early gains, but the risk of selling into the strength is high.
The next big event in tariffs will be the announcement of trade deals with individual countries. There has been much talk about the fact that 70 countries have approached the U.S. about deals, but there are no clues yet about how easy it will be to negotiate these deals and avoid the earlier tariffs that are now on hold. Some good news here will help, but China is not going to be easily resolved, and that is where the majority of problems lie.
The second issue that the market is dealing with is even more difficult. In large part, because of tariffs, U.S. equities and bonds are falling out of favor. This is causing pressure on bonds and the dollar. Despite lower CPI and PPI reports and the greater likelihood of Fed rate cuts, interest rates rose last week because of weak demand for bonds. This also impacts the dollar, which is losing ground against all major currencies. Tariff deals may help to fix this situation, but there is a third issue that contributes to it as well.
That third issue is a slowing economy. While inflation is coming down, there is fear that it is only temporary and will boosted again when tariffs take hold. Citigroup C downgraded U.S. equities to neutral from overweight this weekend, citing the tariff impact, slowing earnings due to recession, and trade risk. Citigroup's strategists now expect EPS growth of just 4% in 2025, which is well below consensus views.
Technically, several indexes and many individual stocks have hit bear market levels, but the rebound last week prevented further immediate damage. Progress on tariffs will help, but the big risk will be first-quarter earnings, which will likely feature very cautious forward guidance.
It will continue to be a challenging environment for a while, but there are good values out there, and the damage to some stocks has been excessive.
At the time of publication, Rev Shark had no positions in any securities mentioned.
