SUMMARY
Companies are starting to report their latest earnings. We believe forecasts remain too optimistic amid trade turmoil.
KEY TAKEAWAYS:
Elevated trade uncertainty is unnerving investors
Rapid de-escalation seems unlikely near-term
Current earnings per share forecasts may well come down
Less correlated and income-seeking assets may assist portfolios
Amid last week’s historically sharp equity selloffs and a brief – but historic – rally, “safe haven” assets failed to provide portfolio ballast. The yields on long-duration Treasuries moved sharply higher while the US dollar weakened against global currencies. Investors sent a clear signal that given increasing levels of economic uncertainty, they would prefer to reduce their level of risk.
The root cause of this uncertainty was the US following through with its pledge to impose extremely high individualized “reciprocal” tariff rates the morning of April 9 on imports from the rest of the world, and then that very same afternoon surprising markets by revising down the tariff rates for all countries (except China) to 10% for 90 days. (Sectoral tariffs on steel, aluminum, autos, and non-USMCA goods from Canada/Mexico were not revised lower, however.)
Even as the US signaled a willingness to engage in negotiations with some countries, the trade tension between the US and its third-largest trading partner, China, reached fever pitch. As of April 11, and after several retaliations from each side, Chinese exports to the US face a tariff rate of 145%, while China’s tariff rate on US imports is 125%.
Policy-induced market volatility remains extremely elevated as investors turn their attention to first quarterly earnings. Several big banks and financial institutions that reported early on Friday cautioned that activity is likely to slow amid ongoing trade and economic “turbulence.” We will continue to monitor changes in corporate guidance and have noted that several consumer bellwethers including Delta Airlines and Walmart pulled guidance earlier in the week. Citi believes that current earnings per share (EPS) estimates (~+10% year-on-year ) for full-year 2025 are improbable.
Bottom line
The world is in the early stages of a global trade realignment. As we highlighted earlier in the week, although we may be past the peak tariff shock, we do not expect a rapid de-escalation or near-term resolution that will sustainably buoy corporate, consumer or investor sentiment. The crisis of confidence borne from dramatic policy changes will likely curtail economic activity, and we expect downgrades to earnings estimates over the course of the reporting season that kicked off today. We continue to stress patience for investors looking to deploy cash in this volatile market and we reiterate our call that this is not yet an attractive time to add to risk. Investors should consider shoring up portfolios with less correlated assets and structures that can generate income while limiting downside.
