Market Update
The S&P 500 finished lower for the week last week, down after two-straight weeks of gains. This morning, we had the announcement that China and the U.S. will cut reciprocal tariffs for 90 days – the U.S. brought Chinese import tariffs down to 30% and China brought their tariff rate on U.S. imports down to 10%. China is also removing some non-tariff countermeasures imposed against the U.S., although it remains unclear if the rare earths restrictions are still in place.
As expected, the Federal Reserve kept policy rates unchanged on Wednesday, and Fed Chair Powell highlighted the risks of higher inflation and high unemployment. Tariffs continue to dominate the headlines and corporate earnings, with tariffs being a topic in 93% of earnings calls. Given Powell’s press conference, it seems that
- The bar to cut is high given the high starting point for inflation.
- The Fed is putting some weight on soft data but would like to see hard data turn given the false positive in the soft data post covid
- Labor market softening will be the key to precipitate a cut, and the Fed will not be preemptive.
Looking ahead to this week, we have the CPI report for April on Tuesday where inflation is expected to remain mostly unchanged. We’ll also get an update on the state of the consumer with retail sales data on Thursday.
FOMC Meeting
The Federal Reserve kept rates unchanged last week, with Powell citing that the economy remains in good shape and that they are in a good position to wait for more clarity on the policy front until a change in monetary policy is required. The most notable change to the FOMC statement was that they acknowledged the risk of potentially higher unemployment and higher inflation, and that uncertainty around the outlook for the U.S. economy has “increased further.”
During the press conference, Powell acknowledged that while there is a lot of uncertainty around trade policy and their impact on inflation, the labor market remains in a good position with low unemployment and stable jobless claims. He also added that the decline in Q1 GDP was due to swings in net exports not weak demand, and that private domestic final purchases (which excludes net exports, inventory investment, and government spending) was up a strong 3% annual rate in Q1. Even though the labor market remains healthy and there are upside risks to inflation, the market is expecting the next rate cut to be in September. However rate cut expectations have been pushed out over the past 6 months, so if labor market conditions remain healthy it’s possible that we don’t see another cut until Q4 of this year. The Federal Reserve did not update their Summary of Economic Projections this time around, so next meeting we will see if they keep the number of projected rate cuts to two this year.
Q1 Earnings Update
Overall, Q1 earnings are coming in much better than anticipated. With approximately 90% of S&P 500 companies having reported, 78% of companies have beat earnings, above the 5 and 10-year averages. Earnings beats have been strong as well, with companies beating estimates by approximately 8.5%, just slightly below the 5-year average of 8.8%. As a result, the S&P 500 is reporting higher earnings growth (13.4%) for Q1 today relative to the end of the quarter. Healthcare and Communication Services are driving most of the earnings growth this quarter, with Consumer Discretionary, Technology and Utilities also seeing strong growth.
Corporate guidance is subdued however – with many mentioning that tariff uncertainty is making it difficult to estimate future earnings and revenue. Many companies that maintained guidance did so while excluding the potential effects of tariffs. It’s possible that if we do see weakness in corporate earnings it won’t be until Q3 as companies have taken advantage of the 90 day reciprocal tariff pause by frontloading imports, which has temporarily allowed them to avoid the potential tariff costs.
PMI, ISM and Productivity
The April PMI and ISM services surveys indicate continued moderation in economic growth compared to the stronger pace in the second half of 2024. Still, the current readings suggest a more resilient economy than the slight first-quarter GDP contraction might imply. The PMI business activity index eased to 50.8 in April from 54.4 in March and 55.6 in 2H24, while the ISM equivalent slipped to 53.7 from 55.9 in March and 56.3 in late 2024. Notably, employment indexes in both surveys are near their 12-month averages, consistent with broader labor market data pointing to a job market that remains relatively steady.
Separately, U.S. labor productivity declined 0.8% in Q1, the first drop in nearly three years, as business output fell 0.3%. This decline drove a 5.7% jump in unit labor costs, the largest in a year. The weakness, tied to trade-related GDP headwinds, may persist as businesses defer investment amid ongoing uncertainty around U.S. trade and tax policy.
Sources:
https://www.federalreserve.gov/newsevents/pressreleases/monetary20250507a.htm
https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html
https://www.nytimes.com/2025/05/09/business/trump-tariffs-corporate-uncertainty.html
https://markets.jpmorgan.com/jpmm/research.article_page?action=open&doc=GPS-4979078-0
