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More Turbulence Ahead: Our Monthly Survey of the Economy, Interest Rates, and Stocks The stock market was uncommonly volatile in April, first diving on 'Liberation Day' (April 2) and then gradually recovering as the administration moderated its stance. Early days of the month were characterized by sharp selloffs reminiscent of the market crashing toward recession in 2008 or plunging on COVID-19 shutdown fears in 2020. The S&P 500, which on 4/8/25 was down 11.2% for the month, finished with a 0.8% decline for all of April 2025. Positive stock momentum carried into May, fueled by a better-than-expected jobs report -- even as crushing triple-digit tariffs on Chinese goods kicked in on 5/2/25. Amid a range of economic and geopolitical cross-currents, the driving force in the stock market this year has been tariffs and, even more so, tariff talk. As the administration softened its tone on tariffs, the stock market rallied back. Stocks remain far from recapturing year-opening levels and even further away from establishing new all-time highs. But the recent recovery took some panic out the market. We are now seeing selling days that do not turn into routs, as was the case earlier in April. Yet investors are not celebrating the comeback in stocks. The market bravado of 2024 appears to be gone. Institutional investors who were inclined to buy every dip in 2023-2024 now seem trigger-ready to sell every rally, even though the S&P 500 recently recorded its longest string of up days in over 20 years. The Economy, Interest Rates, and Earnings In the first quarter of 2025, gross domestic product was shaped by corporate actions taken in response to early tariffs and in advance of anticipated much steeper tariffs. Trade policy from the administration continues to coalesce, with the White House reportedly working on deals with a multitude of nations and some announced tariffs being paused or pushed out. We expect this uncertainty to impact GDP growth in the next few quarters. The first (advanced) report of first-quarter 2025 GDP showed a decline of 0.3%, following growth of 2.4% in 4Q24. The consensus estimate was for growth of 0.4%. First-quarter GDP was distorted by a massive spike in imports, which are a subtraction to the calculation of GDP. Government spending also decreased, mainly reflecting a pause in defense spending. These subtractions to GDP were partly offset by increases in private inventories, business spending, consumer spending, and exports. The policies of the second Trump administration represent a major change from those of the Biden administration, and pressure from tariffs on 1Q25 GDP was well-anticipated. Imports increased 41.3% in 1Q25, overwhelming 1.8% growth in exports. The value of imported goods in 1Q25 increased $333 billion from 4Q24, for an annualized and seasonally adjusted $4.02 billion in the first quarter versus about $3.65 billion in 4Q24. The vast majority of these imports were goods. Imports represented a 5.03 percentage-point reduction to 1Q25 GDP growth. The surge in imports was reflected in the change in private inventories, which added 2.25 percentage-points to 1Q25 GDP. This volatile category increased 0.06 basis points in 2024 after subtracting 41 basis points in 2023 during the Supply Chain Crisis Argus Economics expects GDP to grow in the remaining quarters of 2025 for two reasons. The export-import balance is likely to normalize and in the near term will favor exports (additive to growth) as first-quarter imports are worked down. And the key growth categories of personal consumption expenditures (PCE) and business spending were positive in the first quarter. PCE for 1Q25 rose 1.8% and contributed 1.21 percentage-points to GDP in the period. Durable goods spending declined while non-durables spending rose. The large category of services spending increased a healthy 2.4%. We expect PCE within the GDP accounts to continue to send conflicting signals in 2025, while remaining in the 1%-3% range as the eventual tariff regime becomes settled and established. Non-residential fixed investment, the proxy for corporate capital spending, rose by 9.8% in 1Q25. This category, which grew in the 6%-7% range over 2023-24, got a boost in 1Q25 as companies sought to invest in their infrastructure before tariff turbulence became too intense. Non-residential fixed investment added 1.29 percentage points to 1Q25 GDP. Overall government spending was down 1.4% in 1Q25 and subtracted 25 basis points from first-quarter GDP growth. The driver was not DOGE job cuts, but an 8% decline in defense spending, which led to a 5.1% decline in total federal spending. State and local government spending edged higher by 0.8%. The price index for gross domestic purchases increased 3.4% for 1Q25, after rising 2.4% in 2024. And the PCE price index advanced 3.6%, up from 2.5% in 2024. The Fed needs both GDP growth and lower price increases if it is to cut rates going forward. Elsewhere, the economy has flashed positive signs based on jobs growth and corporate earnings. The U.S. economy generated 177,000 new jobs in April, better than the consensus call of 130,000. Even with March and February non-farm payrolls revised lower, three-month average jobs growth was a healthy 155,000 and not much below the full-year 2024 average of 166,000. The Labor Department's diffusion index for April indicated that more than half of 250 private industries are hiring. The unemployment rate held at 4.2% for April, in line with the March level. Average hourly earnings grew 3.8% annually. Annual wage growth continues to run above inflation but has moved below 4.0%, and the premium to inflation has narrowed. Industrial production decreased 0.3% in March from revised 0.8% growth in February. On the upside, industrial production increased 5.5% for the full first quarter of 2025. Manufacturing production rose 0.3% in March after 1.0% growth in February. Mining rose 0.6%, while formerly strong utilities declined 5.8% on mild weather. Capacity utilization stepped down to 77.8% and was 1.8 percentage points below the long-run average. The small business optimism index from the National Federation of Independent Business (NFIB) reached a six-year high of 105.1 in December 2024 in anticipation of a change to a more business-friendly administration. That optimism has been dented, and the index fell to 102.8 in January 2025, to 100.7 in February, and further to 97.4 in March. Sales expectations and business conditions contributed the most to the decline. Fewer small business owners are planning capital investments in the next few months. The ISM manufacturing PMI remained below 50 for April, but at 48.7 actually ticked up from 47.9 for March. That could signal that purchasing managers are anticipating that tariffs will begin to compel companies to downscale overseas manufacturing and onshore more production. Consumers appear to be concerned that tariffs could lead to higher inflation. The University of Michigan Consumer Sentiment Index for April 2025 fell to 52.2, the fourth-lowest reading since the series began in 1952. The Conference Board's Consumer Confidence Index for April 2025 declined to 86.0. The Expectations Index, based on consumers' short-term outlook for income, business, and labor market conditions, dropped to 54.4, the lowest level since 2011. According to the Conference Board, the current level is well below the threshold of 80 that usually signals a recession ahead. The Bureau of Economic Analysis within the Commerce Department reported that personal incomes rose 0.5% in March 2025, following growth of 0.7% in February. Personal consumption expenditures (PCE) rose 0.7% for the month after rising 0.5% in February. The Atlanta Fed's GDPNow model, which forecast negative 1Q25 GDP, is currently estimating that second-quarter GDP will grow 1.1%. That is consistent with the outlook from Argus for low-level but positive GDP growth for the remainder of 2025, with a modest uptick in 2026. Argus Chief Economist Chris Graja, CFA, is modeling GDP growth of 0.5% for 2025, down from his recent 1.3% forecast. Following the negative print for 1Q25, Chris expects GDP to grow 0.2% in 2Q25, 0.8% in 3Q25, and 1.5% growth in 4Q25. Argus believes GDP growth is likely to remain positive in 2026, but we have reduced our GDP growth forecast for the year to 1.8% from a prior 1.9%. The Federal Reserve raised interest rates more than five percentage points between March 2022 and July 2023. After holding rates steady for eight straight meetings, the Fed at its mid-September 2024 FOMC meeting cut interest rates by 50 basis points (bps). The central bank then cut the fed funds rate by 25 bps at its November and its December FOMC meetings. The federal open market committee (FOMC) of the U.S. Federal Reserve concluded its March 2025 meeting at mid-month and, as expected, maintained its fed funds target at the 4.25%-4.50% level. This marked a second straight meeting in which the Fed stood pat, after 100 bps of cuts in fall 2024. Ahead of the mid-May FOMC meeting, investors broadly expect the Fed to stand pat once again. The Trump administration is mindful that tariff policies can cause near-term softening in economic activity. The administration would like the central bank to lower rates as a means of offsetting tariff impacts, and the president has been vocal in calling for rate cuts. After calling Jerome Powell a 'major loser' and saying the central bank was making a mistake by not immediately cutting interest rates, the president then moderated his stance and said he has 'no intention' of seeking to fire the Fed chair. Investors believe Treasury secretary Scott Bessent and other administration officials persuaded the president to back down by citing rapid deterioration in the Treasury market and in the dollar. The Fed had been generally sanguine about the economy in the past two years, but now appears to be acknowledging there are new strains in the outlook. In mid-April, Fed Chairman Powell acknowledged that the central bank could find itself in a dilemma as it seeks to be control inflation and support economic growth. After earlier saying that 'uncertainty around the economic outlook has increased,' the Fed chairman signaled that patience (i.e., inaction) was the best near-term course. Investors will be watching if the May meeting triggers any changes in the Fed's so-called 'dot plot,' which signals its intentions for interest-rate policy in the intermediate term. The dot plot released after the March FOMC meeting predicted two rate cuts in 2025 and two in 2026. FOMC voting members were not unanimous in their predictions, as four members voted for just one cut in 2025 while four voted for no cuts. The central bank also lowered its forecast economic growth and raised its forecasts for unemployment and inflation. As of March, the Fed forecast GDP growth forecast for 2025 of 1.7%; an unemployment rate of 4.4% exiting 2025; and core PCE inflation at the end of 2025 of 2.8%. These are slightly less-favorable forecasts, consistent with slowing growth, but not recession. Where the Fed goes from here may be require further progress on inflation, which is stubbornly stalled above the Fed's 2% target range. The Fed is cognizant that tariffs historically are associated with higher goods price. Were inflation to rise from current levels, we believe this Fed would not hesitate to return to neutral or even to restrictive monetary policy, i.e., start raising rates again. The Consumer Price Index dipped 0.1% month over month in March 2025. All-items CPI was up 2.4% over the preceding 12 months. Core CPI was up 0.1% month over month and up 2.8% from March 2024. All of these readings represented improvement from the February CPI. The Fed's preferred inflation gauge, the Core PCE Price Index, was unchanged for March after rising 0.5% in February. This metric was up 2.6% on an annual basis, compared with 3.0% year over year in February. Bond yields, which hit multi-month lows following the Fed's September 2024 rate cut, have been volatile ever since. Over the past month, maturities at the short end of the curve had tended to move slightly lower, and those at the long end of the curve have moved slightly higher. The 10-year Treasury yield was 4.33% as of the end of April 2025, compared with 4.27% as of the end of March 2025. The long yield reached a low of 3.75% as of September 2024, while the cycle peak for the 10-year yield was around 4.9% in October 2023. The two-year Treasury yield was 3.83% as of the end of April 2025, versus 3.89% as of the end of March 2025. The two-year yield reached a cycle low of 3.55% in September 2024; the peak level was 5.2% as of October 2023. Notwithstanding current noise in the market, Argus expects short-term yields to move lower from current levels. Long yields over time are expected to widen their relative premium to short yields. We likely have seen an end to twos-10s inversion in this cycle, although the three-month yield was level with the long yield at end of April. With the Fed is in 'no hurry' to cut interest rates further, Argus Fixed Income Strategist Kevin Heal continues to model two quarter-point rate cuts in 2025. Two cuts in 2025 would bring the central tendency in fed funds to 3.75%-4.0% by December 2025. Argus also acknowledges the possibility that the Fed holds rates unchanged in 2025, as it continues to monitor the economy, employment, and inflation. Calendar first-quarter 2025 earnings season is well along, and as usual earnings are surprising to the upside. The blended EPS growth estimates from FactSet, Refinitiv, and Bloomberg have all ticked 500 to 600 basis points higher than they were at the beginning of 1Q25 earnings season, as upside surprises displace conservative estimates in the blended tally. With a little a little less than three-quarters (73%) of component companies having reported, FactSet is estimating a 12.8% blended growth rate for S&P 500 earnings from continuing operations for 1Q25. That is up from 10.1% a week earlier, when about one-third of companies had reported 1Q results. Refinitiv is estimating 13.6% EPS growth on a blended basis, while Bloomberg is right around 12%; both were in the 9%-11% range a week earlier. About three-quarters of companies to date have surpassed Street expectations; early in reporting season, that percentage was closer to 70%. On a long-term basis (past 10 years), about three-quarters of companies reporting EPS growth have surprised to the upside. Additionally, the magnitude of the EPS beat jumped meaningfully higher, to around 9%. That is better than the 7% long-term average and now also in line with than the 9% intermediate-term average. While the earnings year is off to a strong start with first-quarter results, we are becoming more guarded in our growth assumptions for 2025 and 2026. Across Wall Street, analysts have dialed down 2Q25 EPS expectations by two to three percentage points. At the same time, we look for EPS growth to continue. We expect the AI transformation to drive growth in Communication Services, Information Technology, and Consumer Discretionary. We look for growth to slow in defensive sectors but potentially to pick up in Energy. We have made no changes in our forecast of S&P 500 earnings from continuing operations for 2025 or 2026. For 2025, our forecast for S&P 500 earnings from continuing operations is $276, implying full-year EPS growth of 12%. For 2026, our estimate is $307, which assumes EPS growth of 11%. Once the 1Q25 EPS season is concluded, we will assess the earnings outlook, with a bias to reducing our growth forecasts by a few percentage points to reflect the heightened uncertainty in the intermediate-term outlook. Domestic and Global Markets Stocks hit their 2025 trading year lows in the immediate aftermath of President Trump's 'Liberation Day' tariffs announced on 4/2/25. At a closing lows of 4,983 on 4/8/25, at the height of tariff panic, the S&P 500 was down 15.3% year-to-date and 18.9% below its all-time closing high of 6,147 from February 2025. At its low near 15,267 on that date, the Nasdaq was down 20.9% year to date and 24.4% below its all-time closing high. The stock market enjoyed a strong second half of April, and as of early May the various indices had recaptured all or nearly all of the post-Liberation Day decline. At the end of April 2025, the S&P 500 was down 2.9% YTD after being down 4.8% at the end of March. The Nasdaq was down 6.7% YTD at the end of April after being down 10.1% at the end of March. The Dow Jones Industrial Average was the only of the three major indices to lose ground, ending April down 2.4% for the year after ending March with a 1.9% year-to-date decline. Wilshire Large Cap Growth was down 57% as of April-end, versus unchanged for Wilshire Large Cap Value. The Russell 2000 was down 9.0% year to date, even though these smaller, domestic-facing companies are expected to be less impacted by tariffs. The Barclays Bloomberg U.S. Bond Index, which finished 2024 with a 0.9% gain, was up 2.2% year to date as of the end of the April. Bond returns bounced around all through 2024, and there is no reason to assume they will be stable in 2025. With April now over, the stock market is showing very different sector leadership in 2Q25 compared with 1Q25. During the first quarter, the best-performing sectors were defensive, rate sensitive, and/or provided inflation protection. Winning sectors in 1Q25 included Energy, Utilities, Staples, Healthcare, and Materials. The worst first-quarter sectors were Information Technology, Consumer Discretionary, and Communication Services, all down 6%-12%. Those last three sectors tend to offer the best growth prospects and apparently have become attractive to investors on weakness. The best-performing sector in 2Q25 to date is Information Technology, up 5.5% as of 5/2/25. Also as of that date, Consumer Discretionary had a 2.0% gain. Utilities, Real Estate, Financial, and Industrial were all break-even to up 2% for second quarter to date. Energy, the first-quarter winner, was down 11.7% for 2Q25, as energy prices continue to sink. Healthcare has also given back its first-quarter gain and was down 5.0% for 2Q25, with leading health insurers getting crushed. Despite weakness in growth sectors in 1Q25 and weakness in defensive, rate-sensitive, cyclical, and inflation-protection sectors in 2Q25, the majority of sectors have climbed out of the red and into the green for 2025 to date. Consumer Staples and Utilities were both higher by more than 6% YTD as of 5/2/25. Real Estate was up 3.8%, Financial was up 3.5%, and Industrials were up 2.5%. Also positive were Materials and Healthcare. Thanks to its April bounce-back, Information Technology (down 8.2% YTD) is no longer 2025's worst sector. That distinction belongs to Consumer Discretionary, which was down 12.2% as of early May. Discretionary, which bounced higher in the 2024 second half on hopes that the Fed's rate-cutting campaign would stimulate big-ticket purchases, has weakened in 2025 on fears that tariffs would cause costs and prices on big-ticket items to balloon. Expensive items such as vehicles, homes, and appliances tend to be built with parts and components sourced from all over the world via highly complex supply chains. Forecasting the final costs and prices for such items is pretty much impossible when the tariff landscape is changing every day. As of this writing, seven of the 11 sectors are now in positive territory for 2025 year to date. Even if traditional leadership remains absent, this level of breadth is positive for a broad market reversal and then a rally over the coming months and quarters. For much of 4Q24 and all of 1Q25, investors rotated away from traditional growth leadership and toward defensive, interest-rate-sensitive, and cyclical sectors. We have seen a bit of reversal in the second quarter, with growth coming back into favor on stock-price weakness for well-known names including MSFT, META, and GOOGL. Sector leaders in Information Technology and Communication Services have been helped by well-above-consensus earnings for calendar 1Q25. Information Technology exited April 2025 with a 30.3% weighting. That is below its 31% reading entering 2025, though above its weighting of 29.2% a year earlier. Communication Services at 9.3% of S&P 500 sector weight is below peaks exceeding 10%, though up 20 bps from 9.1% a year ago. Consumer Discretionary, another growth sector that has wavered in and out of investors' favor, is at 10.3% of the market or even with its level a year ago. Financial has gained the most weight on a relative basis over the past year. The sector represented 14.5% of S&P 500 sector weight as of April 2025, compared with 13.1% as of April 2024. Healthcare has lost the most weight on a relative basis over the past year, representing 10.8% of S&P 500 sector weight as of April 2025, compared with 12.3% a year ago. Over that period, the weighting differential between Financial and Healthcare has gone from 80 bps a year ago to 430 bps currently. Both of the interest-rate-sensitive sectors have gained weight over the past year. Utilities have gone from 2.3% of the market to 2.6%; and Real Estate has gone from 2.2% of the market to 2.3%. After Healthcare, the sector with the most notable share loss is Energy. From 4.1% a year ago, Energy was down to 3.2% of S&P sector weight as of April 2025. The president is seeking to offset the impact of higher goods prices by encouraging domestic energy production and thus lower gasoline prices. The combination of increasing global caution and higher production is keeping oil prices low and Energy sector earnings negative. The major rotation away from growth and toward defensive and rate-sensitive may be winding down after dominating the stock market for more than six months. Investors may take more of a bargain-hunter's approach for the remainder of 2025, with less regard to sector trends. Like the U.S. market, global stocks did better in 2023 than they did in 2022; and most carried that momentum across 2024. In 2025, overseas markets are doing better than the U.S. market. Within our composite of global bourses, just two markets (the U.S. and Japan) are down YTD; the remaining seven are positive for the year. Some of the worst markets in 2024, such as Mexico, are doing better in 2025. Conversely, some of 2024's winners, such as India and the U.S., are struggling in 2025. In terms of our themes, resources economies are up 9.6% and lead the pack. BRICs-minus-Russia are up 7.0% year to date after rising 4.2% in 2024. Americas markets are up 6.4% as Canada and Mexico offset a weak U.S. Asian markets are up 2.9%. Mature economies, which led in 2024 and 2023, are up just 1.7%, reflecting weakness in Japan and the U.S. Conclusion The multi-year pattern of higher highs has been replaced in the 2025 year-to-date by a pattern of lower lows. This includes key lows in mid-March and in early April in the wake of President Trump's tariff announcements. If the market is able resume its climb, key markers for the S&P 500 would be the close at 5,671 just before 'Liberation Day.' On 5/2/25, the index hit that level, effectively cancelling the entire Liberation Day selloff. Another key target would be the close at 5,777 on 3/25/25. Currently, key tariff negotiations reportedly are underway with Japan, India, and other nations. By all accounts, any negotiations with China are at the lowest level. The outcome of the elections in Canada could result in a hawkish, anti-American tone from our northern neighbor. Outcomes from these events, or a stray posting from the president on Truth Social, could knock the market back down toward its lows. If the market does pitch lower from here, red flag zone would be the 4/21/25 close at 5,158 and the year-to-date low at 4,982 from 4/8/25. But for now, the market mood is improved from one month ago.

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