Investors Spooked by Trump-Driven Recession Need a Sanity Check
Wherever you look, extreme bearishness is prevailing. But there's a method to the president's madness.
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What a difference one quarter makes.
After President Trump's nomination at the end of 2024, animal spirits took over as each sell-side note was filled with targets of 7,000 or higher for the S&P 500. The optimism was based around deregulation, tax cuts and a business-friendly environment. Fast forward to today, some 200 executive orders later, and the market is down 8%, massively underperforming Europe and China, with gold up 20% in one quarter! Today, the U.S. exceptionalism is being questioned under Trump's tariff regime.
No matter what metric one looks at, it is showing extreme bearishness across the board. The Conference Board’s March survey is showing 44.5% of consumers expect stock prices to decline over the next year. That’s the highest since July 2022 and, before that, October 2011. Consumers are worried about jobs and this can impact their spending in the future.
The Q1 Allianz Life Study found that 51% of Americans believe “another big market crash is on the horizon.” The media headlines and narrators calling for another 2008 or 1930s style crash is growing. The March BofA Fund Manager Survey reported the largest drop in U.S. equity allocation on record. Small business optimism has fallen to lows. Needless to say, there is doom and gloom everywhere, even though we are miles from all of the shenanigans of 2023, when U.S. regional banks were failing or the lows of 2024, when bond yields were out of control.
So, what has changed today?
If one were to look at the U.S. economic data, or the labor market, it is quite robust. It has been resilient over the past few years of aggressive, 500-plus BPS Fed tightening even, but investors are so scared and uncertain of Trump and his tariff tantrums, that they fear he may be about to snap an already fragile system.
Trump inherited an economy riddled with tons of debt, the Fed with its hands tied and an economy that was seeing debt to GDP skyrocket. He was unable to pass any of his fiscal measures or plans, lest he killed the bond market altogether. So, they are trying to trim the fat, clear the excess public workers and focus more on the private sector. Eventually, it is the growth in the private sector that will be able to boost productivity to close that debt-to-GDP gap.
It is no mystery that there was fraudulent spending under the Biden administration, as that government kept printing $1 trillion every 100 days with no accountability whatsoever. Trump is trying to raise funds for the U.S. by getting his neighbors and allies to pay up for all the things the U.S. has spent on, like NATO and defense. The U.S. needs to look out for itself and all Trump is doing is getting resource independence back, bracing for a new future by trying to weaken China by aligning closer to Russia via peace in Ukraine. Trump may not be as eloquent as one would like but, barring the ego fits, there is logic behind every one of his moves — for America, that is.
Expectations are worse than the actual numbers.
Today, analysts have decreased Q1 EPS estimates for the S&P 500 by 4.1% since December 31. This is larger than the 10-year average of -3.2% for any quarter. The index is expected to report a year-over-year earnings growth of 7.3% for Q1 2025, which is below the 11.7% expected at the end of December.
If earnings actually hold up well along with the U.S. economy, then the market will be forced to close the gap of fear and expectations versus reality. That is where we are, as everyone expects Trump to go all in and kill the global supply chain and trigger a crash. All he is doing is using the U.S.'s superpower status and bullying his neighbors to pay up a bit. It is true that he better be careful, because if he does not back off, the credit markets that are behaving well at the moment could start breaking, and it will be too late for anyone to bully anyone.
Trump may be walking a fine line here, but recessions have never occurred when oil prices and bond yields have been at lows, especially with an “accommodative” Fed looking for a reason to cut rates. It is time for a sanity check.
At the time of publication, Bengali had no positions in any securities mentioned.
