The Good Times Might Just Roll Away

The markets have staged an impressive rally after their sharp pullback in the first half of April. And we got a slew of good news over the past week that has helped to sustain this rally. But we are not out of the woods yet and the market remains quite overvalued. In fact, I wouldn't be surprised to see a 5% to 10% pullback before the end of summer. So, I'm positioned cautiously, keeping cash on hand to buy the dip should investment sentiment fade in the months ahead.

But let's go through that good news. Initial trade frameworks with the U.K. and China have been reached. In addition, in recent days both the April consumer price index and producer price index readings have come in lower than expected.

In my view, however, this is as good as it gets for now, and equities are vulnerable here to giving back a decent portion of recent gains.

Both the S&P 500 and Nasdaq are back to where they started the year. After gains of over 20% in both 2023 and 2024, the market was significantly overvalued coming into 2025. Looking at some traditional valuation metrics like price to sales or market cap to gross domestic product ratios, equities were selling at considerably loftier levels than at the tail end of the Internet Boom.

While tariff worries have ebbed over the past couple of weeks, they will still have considerable impact, including on corporate profit margins. This is a key reason both Citigroup and Raymond James have slashed their estimates on S&P 500 earnings for 2025 by 5% to around $255. That leaves the S&P trading at 23-times fiscal 2025 earnings with a paltry 1.25% dividend yield. This at a time when the "risk free" yield on 10-Year Treasury is back at the 4.5% level. The Federal Reserve is also likely to remain on hold until they have a better feel on how tariffs will impact inflation over the longer term.

The recent back up in rates, despite encouraging CPI and PPI readings, certainly isn’t helping the already struggling residential and commercial real estate sectors. Housing inventory continues to pile in many regions of the country including Florida, Texas, Arizona and Nevada. Delinquency rates on CRE loans in most sectors like Multi-Family continues to move up as well.

Then, we have the consumer, which accounts for approximately 70% of economic activity in the U.S. High earners are still in good shape. We had more confirmation of this earlier this week when JPMorgan Chase's JPM reported that its April credit card delinquency rate remained unchanged from the previous month. It was up slightly from the same month a year ago, but still under one percent and solidly below where it was prior to the pandemic.

On the other hand, the lower- and middle-income parts of the market continue to struggle, as they have for several years now. One reason Capital One Financial’s COF current credit card delinquency rate is more than four times that of JP Morgan’s. Auto loan delinquency rates have moved consistently higher over the past couple of years and stand right at five percent overall.

Now consumers will have to deal with whatever tariffs are not eaten by the importer and exporter of goods coming into the country. In addition, student loan payments have finally restarted after a five-year taxpayer funded hiatus. Millions of these will likely go into default and ones that are already in default will be actively collected on again. Given over 40 million Americans owe some sort of student loan balance, that is likely to take a chunk out of consumer spending in the months ahead.

Finally, numerous restaurant and retail names like Big Lots and Boston Market went bankrupt in 2024 and many others continue to struggle. Tariffs could be the straw that breaks the camel’s back and sends many more into insolvency in the coming quarters. I am firmly in Jamie Dimon’s camp that shifting U.S. tariff policies and geopolitical tensions could still result in a recession in the United States.

At the time of publication, Jensen had no position in any security mentioned.