Trump Will Need More Than a New China Deal to Drive S&P 500 Back Up
The major index is, remarkably, flat on the year. But for the market to go higher, one of two things will have to occur.
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As of this writing, the S&P 500 is flat on the year.
To anyone who had been switched off for the past three months, this may not come as a surprise, especially with all of the concerns coming into the year. But to everyone else who has been "investing" in the past month, this headline would be a complete shock!
We started the year with the U.S. charging near-0% tariffs to most countries and with the S&P 500 struggling around 5,700. After the roller coaster of April's reciprocal tariffs, and after the weekend talks with China, President Trump has now settled with keeping 30% tariffs on Chinese imports and running an average of 10% tariffs on most other countries.
The market is trading at 5,850 as of Monday afternoon, up 3% since the trade wars started. "Incredible" would be an understatement!
At the peak of all the chaos, the S&P 500 was trading at 4,750 with most sell-side analysts who started the year with the market forecast of 7,000 to 8,000 on the S&P 500 quickly slashing all their estimates, calling for a 1930s-style depression but with the average S&P 500 forecast being lowered to 5,000. Such value add from the sell side with probabilities of 80%-plus on a recession this year.
Today, after the recent market rally, recession odds are less than 20%. Outside of the tariff war, the U.S. economy was starting to slow down, given the budget deficit concerns and debt refinancing of $9 trillion this year. U.S. 10-year yields got down to as low as 3.99% but today they are back, flirting with the 4.5% level with the Fed nowhere close to cutting rates.
Wasn’t Trump's tariff war to get rates down so he could have more room to promote his spending plans and have lower rates? Was all of this for nothing?
Q1 earnings have been resilient. The Fed is not wrong, as the U.S. labor market is strong and the economy robust, even if slowing a bit. Overall, 90% of the companies in the S&P 500 have reported actual results for Q1 2025 to date. According to FactSet, of these companies, 78% have reported actual EPS above estimates, which is above the five-year average of 77% and above the 10-year average of 75%.
In aggregate, companies are reporting earnings that are 8.5% above estimates, which is below the five-year average of 8.8% but above the 10-year average of 6.9%. The blended earnings growth rate for the first quarter is 13.4% today, compared to an earnings growth rate of 12.8% last week and an earnings growth rate of 7.1% at the end of the first quarter (March 31). At that level, it will mark the second-consecutive quarter of double-digit earnings growth for the index. The issue arises for 2H where earnings, which have been slashed during this trade debacle.
We have a 90-day pause with China for now, but the bigger question is: What will happen after that period?
Even if things stay as they are, things are quite punitive at 30% tariffs between China and the U.S., and inflation can rear its ugly head in import prices in the next few weeks. The Fed is firmly on hold as both sides of its dual mandate seem to be holding up just fine. The weakness in the first few weeks of the year started with large-cap tech suffering from DeepSeek news and cheaper alternatives in AI, but Q1 showed that companies, instead of slashing capex, actually raised capex for AI and the market rewarded names like META and MSFT.
The AI story is not over, far from it. But to push higher from here, the market will need news on tax cuts or a strong U.S. consumer, which is still battling with higher mortgage rates and lower disposable income.
