Key Data Points to Watch in May

• Rest of Q1 2025 corporate earnings. The remaining 25% of S&P 500 companies that have not yet reported March quarter earnings will be reporting over the coming weeks. Earnings growth so far has been ahead of expectations, at 12% vs 7%. As clarity on tariffs and other administration priorities increases, we will be closely watching company commentary regarding potential changes to their growth outlook. Currently, expectations are 7.5% earnings growth for 2025 and 12% for 2026
• (CPI May 13 and PCE May 30). Inflation has remained above 2% for some time; the most recent readings were 2.4% (CPI) and 2.6% (PCE). This may make it more difficult for the Federal Reserve (“Fed”) to defend reducing interest rates. Tariffs may increase inflation, although this impact is unlikely to be seen in the data for a few more months
• Q2 2025 GDP – Atlanta Fed GDPNow currently projecting1%. A GDP reading of 1.1% will reflect the expected rebound from the -0.3% reported for Q1 GDP, but is still notably lower than the 1.5%-4.0% growth we’ve seen over the past three years. Much will depend on whether imports are again inflated due to tariff uncertainty
• Fed meeting May 6-7. As expectations have declined for growth and increased for inflation, the Fed is facing a tough choice. Slowing growth warrants a cut in interest rates, while higher inflation warrants keeping them at current levels or even increasing them. Currently, the market is pricing in a 0.75% reduction by year end, or three cuts of 0.25% each

April/early May Takeaways:

• Interest rates soared after April 2. The 10-year Treasury bond yield gyrated in early April –ranging between 3.9% and 4.6% in just a matter of days—as tariff uncertainty drove equity market declines, margin calls and capital flight from the US. A Treasury auction on April 8 met with weak demand, further spooking bond investors. Markets calmed though, and year-to-date returns for the Bloomberg Aggregate Bond Index of 3.2% compare favorably with those of the equity market
• Inflation continues above 2%. March CPI – reported in the second week of April –continued above the Fed’s 2% target, at 2.4%
• With nearly 3/4 of the S&P 500 companies having reported Q1 2025 earnings, average revenue growth has been a respectable 4%. Earnings growth has been even stronger at 12%, handily beating analysts’ estimates (the average company beat by 8%). Companies with the highest earnings growth rates have been, unsurprisingly, in the communication services sector (think Google parent Alphabet and Facebook parent Meta Platforms). Other areas are performing well too: the healthcare sector had the second-fastest earnings growth, propelled by companies like Incyte (81%), CVS (72%), and Boston Scientific (34%)
• Valuations and estimates. With the recent equity rebound, the S&P 500 index is now trading at 21.5x forward earnings, less than one standard deviation above its 30-year median. Earnings estimates for 2025 have declined slightly though still reflect expectations for 7.5% earnings growth this year. If estimates do not materially decline, the equity market could hold its multiple, supporting prices
• European earnings revisions are flattish. We noted last month that after increasing by about 6% during the first two months of the year, European earnings estimates had declined by about half a percentage point in March, and that further declines could put those equities at risk. Estimates increased during the first two weeks of April, while tariff uncertainty was at its peak, but subsequently declined, ending the month of April roughly flat
• April new nonfarm payrolls were stronger than expected. New jobs created of 177,000 were well ahead of consensus, which was expecting only 138,000. The labor market has been the single strongest component of the US economy over the past several years; any weakening will portend negatively for equity markets
• Q1 2025 GDP weak, as expected. Q1 2025 GDP was reported at -0.3%, marginally worse than expectations of -0.2%, although materially higher than the Atlanta Fed’s GDPNow forecast of -2.8%. The single biggest contributor to Q1 2025 GDP being a negative number was the -5.0% imports (imports count as a negative; exports count as a positive), as companies rushed to build inventories ahead of anticipated tariffs
• Equities recouped most of the early April loss. The S&P 500 declined by 21% from the February peak to the mid-April low but rebounded sharply. As of the end of April, it is down just 3.5% year-to-date

The tariffs originally announced on April 2, 2025 would have been a significant negative for the US economy if implemented. This was swiftly evident in market action, in analysts’ estimates, and in commentary by both Fed officials and corporate leaders. The equity market’s displeasure was reflected in the -21% peak-to-trough drop in the S&P 500 Index, while the bond market’s revolt showed up in US Treasury yields spiking by over 50 basis points (0.50%) in just a few days. As if further evidence were needed, the US Dollar weakened by 6% in fewer than three weeks.

On the analytic side, economists chopped their estimates for US GDP growth for 2025 from 2.2% in late February to 1.4% by the end of April, while the probability of a recession (as measured by a Bloomberg survey of economists) increased from 20% in February to 40% in April.

On the commentary side, corporate leaders from JP Morgan CEO Jamie Dimon to BlackRock CEO Larry Fink suggested that the economy might already be in recession. Meanwhile, the Fed’s February meeting minutes – released in April – detailed the committee’s concern about stagflation. Fed officials have recently been on a veritable parade of interviews and giving speeches stressing that tariffs pose an economic risk.

Markets bounced back. Despite the handwringing, equity markets have regained the entirety of the losses from the day before the tariffs were announced, implying that they believe the worst-case outcome is likely off the table. Bear in mind that equity markets had started weakening before that day; the S&P 500 was already down 8% from the February peak to April 2 as tariff rhetoric intensified. By returning to pre-April 2 levels, markets are reflecting a likely tariff increase, perhaps a 10% universal tariff and a somewhat higher percentage on China, but not the full April 2 levels.

Corporations, while discussing tariffs, are not (yet) throwing in the earnings guidance towel. Tariffs have been a hot topic on conference calls, of course. In the most recent season, tariffs were the second-most mentioned topic (after guidance), with tariffs mentioned by 307 of 364 S&P 500 companies. This is up from only 80 mentions in the October calls and 244 in January. Nearly every other topic got crowded out, with fewer mentions of revenue, pricing strategy, margins, and stock buybacks than in prior quarters. While companies spoke of uncertainty, most have not materially reduced earnings guidance.

Perhaps unexpectedly, between February 28 and early May, analyst’s bottoms-up 2025 S&P 500 earnings estimates have declined by only 2.5%, from $271 (10% growth year over year) to $265 (7.5% growth year over year).

Even more interestingly, although some companies (like Delta and JetBlue) withdrew guidance altogether  and others (like Procter and Gamble and Federal Express) reduced guidance, many companies have increased earnings guidance in recent months, including Norwegian Cruise Lines, Gilead Sciences, and Quanta Services. Surprisingly, company earnings guidance (for those companies that provide it; not every company does) has risen an average of 2.4% over the past 60 days, while the median is unchanged. Companies are discussing tariffs and guidance, but for the most part seem to be taking the volatile economic backdrop in stride.

This is consistent with the market’s behavior. As discussed above, markets are reflecting that tariffs may be finalized above 2024’s 2.3% level, but nothing like the declaration on April 2. It’s too soon to be sure of anything, but some indicators suggest that the storm may have passed.

American Exceptionalism? Much has been made of the potential end of so-called “American Exceptionalism.” In this context, the term refers to US equities trading at a higher multiple than equities of other countries, because the US is perceived to have both faster earnings growth and a qualitatively strong business environment, including things like rule of law, regulation, innovation, and business formation. With the MSCI World ex-US index having trounced the S&P 500 Index by 15 percentage points (11% vs -5% year-to-date through April 2025), many are wondering if this US-led era is coming to a close. The market action in April noted above – lower equities, higher yields, and a lower US Dollar – do not typically occur at the same time, but they would if capital is systematically leaving the US markets.

For the last two decades or more, the US has dominated global markets. The US has been the home of internet companies, social media companies, artificial intelligence, easy monetary policy, solid legal frameworks, strong institutions, a deep and liquid Treasury market and a strong US dollar, much of which has led to high equity multiples. While it’s tempting to compare the current US situation to the waning of prior dominant regimes, it is also true that the US has faced substantial challenges over the past few decades: the tech bubble bursting, the global financial crisis, the pandemic, and high inflation, and all the while the US equity market continued to thrive. At the same time, if exceptionalism is unwinding, it would look a lot like what we’ve just seen. We continue to assess both US and global competitiveness and seek to invest client assets where we see compelling return opportunities. It may very well be that the US is no longer the only investment game in town.

Disclosures