April 2025 Market Update

It’s been nearly one month since the Trump administration's announcement of global tariffs and Liberation Day. Given wall street and the media’s panic over tariff policy, one would think markets were down significantly, but markets have been resilient and are just about unchanged since the tariff announcement. Meanwhile, the Fed has continued its shift away from strong growth, lower inflation forecast to lower growth, higher inflation forecast.

As of today, US Q1 GDP reported at an annualized rate of -0.3%. This marks the first negative GDP print since Q1 2022. However, much of the negative GDP number was due to inventory buildup from companies front running tariff policy. GDP adjusted for trade did not contract. But Chicago PMi edged lower, and 2025/2026 S&P 500 earnings estimate revisions have begun to get cut.

It is best for investors to ignore the noise and stick with economic and earnings data. Even though the Trump administration tweets and opines daily on trade policy and the stock market, much of this is simply part of their negotiating strategy. Investors must remember that even if a deal with China and many other countries is made, the result will still be higher tariff rates, which will incentivize a change in government spending and impact corporate profit margins.  

For years China has overproduced, and over-exported and U.S. twin deficits have basically financed that. Treasury Secretary, Scott Bessent’s goal of redirecting the U.S. economy toward production and manufacturing in lieu of consumption and services while incentivizing China’s economy to redirect toward consumption and services in lieu of production and manufacturing is a noble but very tough goal. Some would call it, mission impossible, simply because the Chinese economy appears too weak to shift gears. If the U.S. economy can shift gears but China cannot, the weakness from China may contribute to a global economic downturn and a drawdown in corporate profits, as the world liberates itself from the Chinese communist party’s global economic stranglehold.

As the chart below demonstrates, if inflation expectations continue to decline, banks will likely become reluctant to lend and as financial conditions tighten, leading to a decline in corporate profit margins, the Fed will likely be forced to cut interest rates more than they currently expect. The Fed faces a real dilemma moving forward given their forecast of lower growth and higher inflation.

As the economy weakens the Fed will be called on to cut interest rates. However, cutting interest rates while the labor market has remained strong has so far resulted in higher 10yr yields and mortgage rates. The market expects any material economic weakness to be met with many interest rate cuts, but the market may end up disappointed in the number of cuts it receives, depending on the severity of the labor markets weakness. It is possible the Fed decides to sell its MBS holdings (mortgage-backed securities) as an alternative to more interest rate cuts. This alternative could help alleviate pressure from the long end of the yield curve instead of adding to it. Lower long-term interest rates are desired by the White House, Treasury, and the Fed to protect long-term GDP.

Because of these concerns, we feel any short-term rise in U.S. 10yr interest rates to near 4.5% would provide investors with an opportunity to acquire U.S. 10yr bonds before the interest rate declines into an economic downturn, which would benefit the U.S. government’s ability to refinance debt below the long-run average economic growth rate.

Given the need for economic change and the short term turmoil it may cause, we believe investors should remain patient and disciplined with regard to stocks. Companies have not yet reacted to a change in trade policy, but many are already withdrawing forward earnings guidance and preparing investors for a transition on their quarterly earnings calls.

These concerns suggest the S&P 500 has not yet found a bottom and may be in search of a valuation reset toward fair-value. For educational purposes, a measurement of fair-value based on current 2025 and 2026 S&P 500 earnings estimates, BBB US corporate bond yields, and the S&P 500 dividend yield is detailed below.

Our recommendation is to position portfolios to endure a recession, in a defensive manor, risk off and in cash, T-bills, money market funds, short to mid-term 1-10 year U.S. treasury bonds and 10-30 year U.S. treasury bonds at positive carry, 10-year minus 2-year yield curve re-steepening, 10-year minus 3-month yield curve re-steepening, Short USDJPY from 153, and select low duration U.S. equities.

Getting paid to wait for growth assets to be priced at discounts, while being positioned to benefit from bond price appreciation as interest rates decline from downward economic pressure, continues to be a profitable and rewarding strategy. We remain patient and focused on managing risk through 2025.

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