SUMMARY
While US equities have bounced from recent lows, earnings forecasts are still falling. We are also watching the dollar and US bonds closely.
KEY TAKEAWAYS:
Economic confidence is weakening, but activity has so far mostly held up
We don’t think the Fed can be counted on for large-scale rate cuts near term
The fundamental outlook for equities is still deteriorating, in our view
We look for further US dollar weakness ahead
Corporate and consumer confidence – aka “soft data” – are still weakening. So far, though, this hasn’t fed into a meaningful decline in economic activity or “hard data”.
When and how much soft data transmits into hard data is difficult to predict. That’s especially true given that the new US tariff regime isn’t close to being finalized.
Encouragingly, the labor market remains stable. Also, consumers and businesses alike have brought forward spending this month to try to get ahead of rising prices.
As tariff costs start to weigh heavily on goods supply in coming months, spending activity will likely retrench somewhat in the face of this new tax.
With less visibility on policy, many investors have been actively reducing their big overweight to US assets over recent months. This has led to US dollar weakness.
While the US economy remains resilient by global standards, the combination of slower growth, policy uncertainty, and trade wars is forcing global investors to consider the share of US allocations in diversified portfolios.
Given the tariff issue is unlikely to be fully resolved for the foreseeable future, we expect dollar weakness to continue even if US equity and fixed income market volatility continues to stabilize.
Many are clearly hopeful that worsening economic data will spur the Fed to ease policy by the start of the summer. While rate cuts will likely be appropriate in 2025, we caution investors against counting on a large-scale policy easing. After all, inflation is sticky and the growth outlook deeply uncertain.
We believe policymakers will base their decisions on hard economic data and will resist rushing.
Equities continue to be whipsawed by headlines and promises, with a flurry of conflicting statements and leaks coming out of the White House.
The strong price action in equities following White House comments hinting at (1) de-escalation of trade tensions with China, and (2) fewer challenges to Fed independence, illustrated how desperate market participants have been for any shred of good news.
Measures of volatility are now meaningfully lower than at their peak in early April following the tariff announcements. However, average volatility in 2025 is still more than 60% higher than in 2024. We are far from an “all-clear” signal.
Even with several days of euphoric moves over the last week, the fundamental outlook for equities continues to weaken and earnings forecast revisions have moved sharply lower this month.
Within equities, while the regional rebalancing has contributed to the outperformance of non-US markets, we still believe that US large caps are a high-quality asset that should anchor diversified portfolios over the long term.
That said, we are watching sentiment around other widely held US assets – namely the dollar and credit spreads – as both have weakened alongside US equities this year.
