Up up and away in my beautiful balloon
Equity markets are either taking time to reflect before their next move, or, more likely, can’t decide which direction to take next. This week, the Federal Reserve confirmed no change to interest rates. Powell stated in his press conference that the Fed is comfortable with its current policy stance and the committee is happy to wait and see how economic conditions evolve during this period of uncertainty due to Trump’s sweeping tariffs. He highlighted that the risks of stagflation have increased; however, despite the uncertainty, the economic background remains resilient, and the job market is strong, although he acknowledged that consumer confidence has been declining. That last part may be somewhat of an understatement.
Despite a reasonably solid earnings season and economic uncertainty, analysts have been downgrading expectations for earnings growth in 2025. The forecast is now around $266 a share for the S&P 500, down from $280, which now puts the S&P 500 at approximately 21 times this year’s earnings, at current levels. At 18 times this year, the average of the past 10 years, you arrive at 4800, for what it’s worth. The 200-day moving average is just above 5700, close to where we are now. Another slightly interesting fact is that US companies have announced a cumulative figure of $1.4 trillion in costs due to Trump’s tariff policies. The S&P 500 cumulative profits this year will be $2.3 billion, so if things stand the same, which they will not, one can see the impact is not negligible to US corporates.
On the other hand, the cup appears to overflow with good news in the UK on Thursday as the US and UK announced a new trade deal to strengthen the economic relationship between the United Kingdom and the United States. How good a deal the jury remains out on, but it is a deal. The agreement is expected to benefit various sectors, including automotive and agriculture, by reducing trade barriers. Then, the Bank of England duly followed through with its cut in interest rates of 25 basis points, as Mr. Bailey confirmed it was influenced by easing inflationary pressures and aimed to support economic growth. The pound took a quick dip against the dollar but recovered well, continuing its resilience against the USD this year, but has not done quite so well against the euro.
Where do I think next? As I mentioned on Wednesday, it’s hard to tell. Trump, in his usual ebullient fashion, is telling everyone to go buy stocks; the economy is a rocket ship that will go straight up. It’s fair to say if economies are built on confidence, the president has that in spades; caveat emptor at this time is my motto. The pain trade seems up, but history reminds us that recoveries like the current one are not unusual in bear markets. While bonds offer decent yields and the economic outlook remains unclear, taking a big bet on a further rally feels unnecessary.