April Fool's +1

“And April 2nd, I would’ve made it April 1st. But you know what April 1st is? April Fool’s Day. I figured I don’t like doing it, but I made it April 2nd. But it’s a liberation day for our country …” So said President Trump about the reciprocal tariff release date that everyone seems to be anticipating. Seasonally, in a new presidential term, market conditions often improve in the spring after a shaky start. What caused this year’s shaky start? Since other asset classes haven’t displayed the volatility we’ve seen in equities, the most logical cause is a much-deserved momentum unwind. If the problem were tariffs, we might have seen volatility in currencies and if it were an impending recession, probably downward pressure on oil prices and bond yields. For all the volatility and bearishness, the retail investor has held on, with only seven days this year of net selling. Sentiment is still depressed with Investors Intelligence and AAII both showing significant bearishness—a good contrary indicator. The Consumer Confidence stock price expectations shows the largest expectations for a drop since 2009—the mirror opposite of last fall’s reading. Bullish sentiment for gold, by contrast, is at the 99.8% level in the past 10 years. Hmm. Over the past decade, March has been weak for stocks with no return for the S&P 500, on average, in the first quarter, but then advancing six percent in the stretch through late July. Any recovery is likely to have a short leash unless policy becomes less uncertain, and earnings come in strong. With tariffs on everyone’s mind, CEOs have voiced their displeasure, registering very soft confidence in the economy one year out. Of course, they’re the ones who hire us …

The so-called Mar-a-Lago Accord has been in the news of late. This would involve a comprehensive international effort to weaken the dollar, refinance the US debt and return factory production to the US. The question of just how much change Trump seeks has not yet been resolved. Of course, tariffs remain the focus for now. Piper Sandler thinks Trump wants to transform US trade policy. Others, such as Fundstrat, picture a less sweeping change, believing that Trump is more interested in lowering rates other countries impose on US exports than on raising rates on imports. Wolfe Research reports they’ve heard Trump’s team were once considering grouping countries into low, medium and high tiers of 10%, 30% and 70%, which they see as a stark indication that Trump wants to go big. Piling on are Trump’s suggestion to include other countries’ value-added tax (VAT) into his tariff rates and “secondary” tariffs on countries that buy oil from Venezuela. Gavekal offers reassurance, though: “While Trump’s chaotic trade war will disrupt US producers, the negative impact on US growth should not be overstated. As a share of GDP, imports stand at 14%, exports are 11% and manufacturing is 10%. Thus, even if the tradeable goods sector is harmed by the trade war, growth in the far bigger services sector could keep the US economy bobbing along.” Furthermore, while a trade war would indeed be damaging, the rise of domestic stimulus (as seen recently in China and Germany) could spur global growth. As for the effect of tariffs on inflation, Goldman Sachs figures a 1% increase in the effective tariff rate raises core prices by about 0.1%.

In the end, it’s all about earnings. Earnings estimates generally come down as the quarter goes on, but, until quite recently, this one has shown little deterioration. Quarterly earnings should show their eighth-straight y/y increase, and nine of the 11 S&P 500 sectors are due to see revenue growth in Q1. Estimates for bottom-up S&P 500 operating EPS have been revised down 4.1%, in-line with the 4% long-term average drop. Despite the correction and all the drama, it seems likely that the Q1 earnings season will also provide welcome surprises, especially since the dollar has sold off and company managements were generally restrained in their outlook last quarter. Consumers may be glum, but on the whole spending is intact, with credit card usage at or above trend year-to-date and no indication of financial stress. S&P 1500 management teams have not raised concerns about the consumer. Of note: there has been no increase of high spenders becoming low spenders. A working paper from the Minneapolis Fed says that tariffs’ effect on inflation should be transitory. Asked about the reciprocal tariffs, Trump indicated that they might not be as harsh as they could be “because they’ve charged us so much, I don’t think they could take it.” Later he offered further reassurance, calling the tariffs he means to impose “very lenient.”

Positives

• A glimmer of hope for homebuyers The FHFA House Price Index rose 0.2% m/m in January, below expectations (+0.3% m/m); and the S&P Case-Shiller 20-City index grew 0.46% m/m, vs. consensus of 0.4% m/m. Both are trending sideways in their y/y gains, indicating that some house price relief may be on the way. New home sales gained 1.8% m/m in February, remaining in line with pre-Covid levels. The median price now stands at $414,500, down 3.0% m/m and 1.5% lower y/y. Meanwhile, the Mortgage Bankers Association reports the average loan size on purchase loans is up just 0.2% y/y as of March 21, indicating that there are more sellers than buyers. As a result, inventories are climbing, and price cuts are mounting.
• Just tariff front running? Durable goods orders rose 0.9% over the month in February, ahead of expectations (-1.0%), likely reflecting pre-tariff restocking. Same for the 4.0% m/m surge in new orders for motor vehicles and parts. Excluding volatile transportation equipment orders (up 1.5%), durable goods orders rose 0.7%, relative to consensus expectations for a 0.2% increase. Core capital goods orders slid 0.3%, but core goods shipments were up 0.9%, suggesting equipment investment spending will improve in Q1.
• Strength heading into tariff worries The S&P Global US services PMI rebounded sharply in March to 54.3%, above consensus (flat at 51.0%). The underlying composition of the services PMI was firm, as the new business and employment components both increased. However, the outlook darkened, as the future activity index fell 2.6 points to 60.6, reflecting tariff worries, a low point since the pre-election nadir in September, which in turn was a low point since October 2022. Elsewhere, real gross domestic income jumped 4.5% q/q in Q4—the strongest print in a year—with corporate revenue accelerating at 6.0% y/y, profits climbing to a record high, and rising profit margins—an important buffer against tariffs.

Negatives

• Record uncertainty The March Conference Board consumer sentiment index tumbled 7.2 points to 92.9, a low since January 2021 and below consensus (94.0), with high earner confidence seeing the biggest drop (down 11.2 points m/m). The expectations component fell 9.6 points to 65.2, well below the 80 mark typically consistent with recession, and the lowest level since January 2013. The percentage expecting the same availability of jobs fell from 65.4% last October to 54.8% in March, a magnitude of decline which has coincided with the start of previous recessions. Year-ahead inflation expectations surged to a 23-month high of 6.2%. In the same spirit, University of Michigan consumer sentiment broadly plunged across all age, education, income, political and geographic groups in March. Current conditions slipped 1.9 points to 63.8, with expectations down a big 11.4 points to 52.6. Year-ahead inflation expectations surged 0.7% m/m to 5.0% (highest since November 2022), while long-run expectations climbed from 3.5% to 4.1% (highest since 1993!). Real income expectations declined to their lowest level on record (data since 1978).
• Not the dreaded stagflation?! February headline PCE was in line with expectations at 0.33%, while core PCE inflation just barely beat consensus of 0.3%, coming in at 0.37%, largely driven by goods. The one bright spot in the report was the continued strength of nominal personal income, which remains one of the key supports for the medium-term outlook. It came in stronger than expected at 0.77% m/m, vs. consensus of 0.4%, though government transfers (+1.78% m/m) contributed the most to income gains, while wages and salaries were up modestly (+0.44% m/m). Disposable personal income rose 0.9% and personal consumption expenditures rose 0.4% over the month. (Services consumption decreased 0.15%, the first decline since January 2022.) This left the saving rate at 4.6%, up since December and consistent with somewhat spooked consumers.
• Guess what manufacturers are worried about The preliminary S&P Global manufacturing PMI fell 2.9 points to 49.8 in March, below consensus (51.8). The new orders component slid 2.6 points to 50.5, but the output series plunged 5.7 points to 48.8. It also cited tariffs as a reason why the input price index, which rose 4.1 points to 66.2, accelerated in March. The index for future output was unchanged at 71.8, following gloomy outlooks in other recent manufacturing surveys.

What Else

Oblivious? According to a Jeffries survey, 40% of US workers are thinking about quitting in the next 6 months, as 40% respond they are required to be fully in-office in the US but less than 10% want to be. Meanwhile, 85% of US businesses are using generative AI, but only 31% of workers are concerned they could lose their current job due to automation. This as a March 2025 Dataiku/Harris survey found that 79% of US CEOs agree they're at risk of losing their job if they don't deliver measurable AI-driven business gains within two years.

Some consumers and local governments are already tapped out Financial tech company Klarna has partnered with DoorDash to allow for staggered interest-free payments for purchases over $35, while a recent report from the Fed found revolving credit-card balances in the third quarter hit their highest levels in data going back to 2012. Americans are behind on their car payments at a record level, with 2024 car repossessions the most since 2009, while a record number of Americans are tapping into their 401(k)s early. Meanwhile, Bloomberg News reports a “doomsday scenario” for Chicago’s transit system with a $770 million budget deficit, and the LA Times reported a nearly $1 billion LA budget shortfall “making layoffs nearly inevitable.”

The Coffee of Popes and Kings and me Coffee consumption in the US is at a 20-year high, with 67% of Americans drinking coffee daily and 75% drinking coffee at least once a week. Fed Chief Powell says any tariff-related effect on consumer prices of goods like coffee will be transitory.  Still, Fundstrat notes that efforts are being made to revive the coffee industry of Puerto Rico, once so well-regarded it was known as the “the Coffee of Popes and Kings.” But risk takers are also hoping to produce coffee beans in parts of the US recently made feasible due to climate change, to include southern California and Florida.