- Ripple effects of Donald Trump’s tariffs start to make themselves felt
- US GDP forecasts weaken markedly as companies prepare for and adjust to trade frictions
- US equity market has welcomed Trump’s planned tax cuts and deregulation drive but had assumed the tariffs would go away
- Consensus earnings forecasts for 2025 and 2026 assume strong ongoing growth
- S&P 500 trades on lofty multiples by historic standards, even assuming bullish growth estimates prove accurate
“America’s stock markets, the dollar and cryptocurrencies all gave Donald J. Trump’s second presidential election victory a very warm welcome last November, but their enthusiasm has started to cool,” says AJ Bell investment director Russ Mould.
“All three have started to lose ground as they focus on the implications of the policies about which they are unsure – trade and tariffs – and not just the tax cuts and deregulation they desire. This may be why markets are seizing upon comments from commerce secretary Howard Lutnick that the levies could be rolled back as a compromise is reached.
“The S&P 500 has now shed all of the gains made since Trump’s victory over Kamala Harris in the US election on 5 November last year.
Source: LSEG Refinitiv data
“The dollar, as benchmarked by the trade-weighted DXY, or ‘Dixie,’ index is down by some 4% from January’s peak, to erase two-thirds of the gains forged after the presidential poll.
Source: LSEG Refinitiv data
“Bitcoin and cryptocurrencies still seem happiest. Even after the sudden early spring sell-off, Bitcoin, the world’s largest cryptocurrency by implied value at $1.7 trillion, is up by almost a third since last November.
Source: LSEG Refinitiv data
“The departure of Gary Gensler as head of the Securities and Exchange Commission and arrival at the regulator of the more positively pre-disposed Paul Atkins, the SEC’s withdrawal of legal action against Coinbase and Binance and a presidential announcement of an American Strategic Reserve for five cryptocurrencies all mean Trump is delivering on his campaign promise to deregulate and support the asset class.
“However, sceptics will argue that holders’ desire for regulatory recognition and government approbation runs strongly counter to the initial ethos of Bitcoin and crypto, namely that it was outside ‘the system.’ As a result, no-coiners will also continue to ask what purpose crypto can serve and problems it can solve, if it is simply another tool for government or financial market speculation.
“Supporters may counter by saying that the creation of a strategic reserve, however it works (and we may find out more on Friday at the summit hosted by US crypto tsar David Sacks), shows that crypto can fulfil one of the three functions of money, namely be a store of value. That still leaves the roles of being a unit of account and a medium of exchange, but one of three is potentially a start.
“The next challenge for Bitcoin bulls is news flow. Everything they could have hoped for upon Trump’s victory has happened and even rampant buying by Michael Saylor’s MicroStrategy is not proving enough to fend off the latest price swoon, at least as yet.
“Bulls of US equities may face a similarly thorny situation. The S&P 500 has beaten all-comers hands down this decade, but the result of its strong performance is a valuation that is lofty by historic standards, whether the metric is market capitalisation to GDP, market cap to sales, forward price to earnings (PE) or Robert Shiller’s cyclically adjusted price earnings (CAPE) ratio.
“Shiller’s model looks to iron out near-term swings in profits and profit forecasts by taking a 10-year view, but bulls will likely cast it aside on the grounds that US equities have looked expensive using this metric for some time – and simply kept on going up.
“But even those who prefer to use one- or two-year forward earnings forecasts may need to tread a little warily. The S&P 500 trades on a much higher multiple of earnings than it did at the time of Trump’s first election win on 8 November 2016.
Source: LSEG Refinitiv data
“As such, investors already think America is great again, and you could argue that has been the case for some while, given how the S&P 500’s surge means it now represents 62% of the FTSE All-World’s market capitalisation, compared to 50% in November 2016.
Source: LSEG Refinitiv data
“Good news is expected and priced in, to again reflect the positive view that investors already have of America’s stock market and its economy.
“Consensus earnings forecasts reflect this optimism. Earnings per share from the S&P 500 is expected to grow by 14% in 2025 and 16% in 2026. Those anticipated growth rates compare to the 6.7% compound annual growth rate (CAGR) exhibited by the S&P 500 since 1988, according to data from Standard & Poor’s.
Source: Standard & Poor’s
“Such bullish forecasts rely on the tech sector to some degree, given the great expectations attached to anything related to generative artificial intelligence (AI), and upon wider growth in the US economy as Trump’s policies stimulate growth, thanks to the hoped-for combination of tax cuts, deregulation and onshoring.
“Such hopes may well be met, but the combination of paying a premium multiple for premium growth rates means the downside could be considerable if those earnings forecasts are not met.
“In this context, the collapse in the Q1 2025 GDP growth forecast from the Atlanta Fed GDPNowcast is eye-catching. In marked contrast to most estimates, this survey is now looking for a 2.8% year-on-year drop in US economic output on an annualised basis for the first three months of this year.
Source: US Bureau of Economics Analysis, Atlanta Fed GDPNow for Q1 2025E estimate. Q2 2020 saw a fall of 28.1%, Q3 2020 growth of 35.2%
“Granted, this could be the result of near-term noise caused by Trump’s tariff deadlines.
“The trade deficit is soaring as companies scramble to corral imported supplies before the imposition of new duties. Imports subtract from GDP calculations so this could hit the Q1 data hard.
Source: FRED - St. Louis Federal Reserve database
“New orders for manufacturers are sliding, based on the latest reading from the ISM’s purchasing managers’ index, as companies hunker down amid the uncertainty. The last reading fell sharply to go below 50, a reading which can be suggestive of a slowdown or contraction in activity.
Source: ISM, LSEG Refinitiv data
“Consumer confidence is weakening as inflation expectations rise, thanks in part to the prospect of tariffs on imported goods.
Source: US Conference Board, LSEG Refinitiv data
“The effect of pulled-forward imports could be dramatic and as such the next few quarters of macroeconomic data are likely to be noisy.
“But any clear indication that the US economy is slowing down or even slipping toward its first recession since 2008-09 (barring the short, sharp shock caused by Covid in 2020) could stoke fresh volatility in US equity markets, as the one thing that is not priced in by current valuations is a downturn and weak corporate earnings growth.
“It remains to be seen whether any sustained uptick in US equity market volatility or a downdraft in US share prices focuses the mind of the Trump administration, but Mr Lutnick’s comments suggest this could yet prove to be the case.”
