The S&P 500 is now trading at 21x the projected earnings growth rate of 9% in 2025. That is an extremely rich multiple on a very optimistic earnings growth rate, given the fact that US GDP shrank during Q1. And, that shrinkage will soon be combined with significant margin pressure from the tariff chaos that began at the start of Q2. You simply cannot get earnings growth when both profit margins and the economy are contracting. Not only this, but a parade of companies are now pulling away revenue and earnings guidance for the second quarter, which is a very rare occurrence indeed.
For example, take SNAP, a technology company primarily known for its visual messaging app called Snapchat. The company also offers advertising services to businesses. The company’s shares immediately fell 15% on the report that it would not provide any outlook for the second quarter, citing uncertainties surrounding "how macroeconomic conditions may evolve in the months ahead, and how this may impact demand more broadly." But as mentioned, Snap (NYSE: SNAP ) is not an isolated case: General Motors (NYSE: GM ), United Parcel Service (NYSE: UPS ), Procter & Gamble (NYSE: PG ), PepsiCo (NASDAQ: PEP ), Harley Davidson, Chipotle (NYSE: CMG ), Thermo Fisher Scientific (NYSE: TMO ), United Airlines (NASDAQ: UAL ), Delta Air Lines (NYSE: DAL ), American Airlines (NASDAQ: AAL ), JetBlue Airways (NASDAQ: JBLU ), and Southwest Airlines (NYSE: LUV ), just to name a few of the larger companies suffering the same uncertainty about their future earnings prospects.
Nevertheless, the stock market has already priced in the imminent removal of all tariffs and the Fed’s "PUT" being deployed (think lower interest rates and QE). It has also priced in the seamless and harmless extension of the Trump 1.0 tax cuts, which are set to expire at the end of this year.
What is not at all priced in is the empty shelves and a surge in prices, which lies just around the corner. As Bloomberg reports, By the middle of May, thousands of U.S. companies will need to replenish inventories. Big Box retailers such as Walmart (NYSE: WMT ) and Target told President Trump in a meeting last week that shoppers will likely see empty shelves and higher prices very soon. Economists are warning of "Covid-like" shortages and significant layoffs in industries spanning trucking, logistics, and retail. This is not theory or conjecture. Since the U.S. raised levies on China to 145% in early April, cargo shipments have plummeted by 65%. The ramifications of this tax shock are now unavoidable.
Peter Friedmann, executive director of the Agriculture Transportation Coalition (ATC), a leading export trade group for farmers, reported to CNBC that the number of canceled purchases of U.S. agriculture should not be described as approaching a crisis., "It is a full-blown crisis already." For example, data released by the U.S. Department of Agriculture revealed last week that China made its biggest cancellation of pork orders since 2020, halting a shipment of 12,000 tons of that other white meat. The ATC also reported massive losses are already racking up at farms due to canceled orders, pricing pressures, slumping demand, and layoffs as China stops buying pork, hay, straw, and lumber products.
Inflation has become the salient issue for the U.S. consumer, especially for those in the bottom four quintiles. For instance, 11.1% of all credit card holders now make only the minimum down payment on their outstanding balances. This is the largest percentage on record in the 12-year history of this data series. A Lending Tree survey found 25% of buy now, pay later users fund grocery purchases with this type of loan. This is an increase from the 14% figure in 2024. Also, 41% of survey respondents said they made a late payment on a Buy Now Pay Later loan in the past year, up from 34% last year. The Federal Reserve’s preferred inflation measure, known as the personal consumption expenditure price index, sharply increased by 3.6% in Q1, up from 2.4% in Q4 last year.
The economic data is already rancid, and this was before the markets and economy hit a major speed bump following the April tariff chaos. Do not forget that the March and Q1 data contain the front-running of tariffs by consumers and corporations. But we will see the data for this current month begin to be reported in May and June. So yes, expect the plunging soft data to be reflected in the hard data very soon. By the way, Q1 GDP fell by -0.3% Q/Q at a SAAR. Hence, we are already halfway to a technical recession.
U.S. job openings dropped to 7.19mm in March vs. the 7.5mm estimate and the 7.5 reading reported in February. Existing home sales fell 5.9% in March from February, according to the National Association of Realtors. That is the slowest March sales pace since 2009. The March trade deficit widened to $162 billion, up from $147 billion in April. This puts more pressure on the Trump administration to increase tariffs and make U.S. export-friendly trade deals and puts more downward pressure on GDP growth.
Speaking of the further economic drop to come in Q2, private sector payroll growth, according to ADP , increased by just 62K in April, missing the estimate of 120K and well below the March gain of 147K.
Despite the recent rally, the stock market is still in big trouble unless the following three conditions are met:
1. There must be an imminent cessation of the tariff war. Meaning all countries must stay at the current 10% level or below after the 90-day reprieve ends in July. And, the China tariffs are brought down below 50% within that same timeframe
2. The Tax Cut and Jobs Act (TCJA) gets extended, and the debt ceiling is raised by this summer.
3. The $4 trillion increase in deficits over the 10-year horizon from making the TCJA permanent does not cause a revolt in the bond market.
If not, a retest of the April lows is a likely scenario.
As always, we will own whichever equity, bond, commodity, or currency best fits the second derivative of inflation and growth. Unbiased and active management truly has its advantages.