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Summary
• The U.S. economy went from outperforming expectations in January to recession warnings on April 2nd because markets viewed the unrealistically high “reciprocal” tariff rates as policy errors, which were then reversed on April 9th (with the 90-day pause) in response to selloffs in stock markets, Treasuries, and the dollar. This sequence of events created a V-shaped bottom in global equities markets, not unlike past episodes when the Fed committed policy errors and then (thankfully) reversed them in response to market selloffs signaling threats to financial stability.
• Foreign developed equities were up +16.9% and US large cap equities were up +1.1% year-to-date as of May 31, after +25.0% total returns in 2024.
• Consensus forecasts of 2025 U.S. GDP growth rates were cut to 1.4% from 2.1% due to tariffs. We forecast a 35% probability of recession in 2025 (up from 15% in January).
• S&P 500 earnings growth rates consensus forecasts are +8.6% in 2025 (down from +12.5% in January) in 2025, and +13.6% in 2026.
• The Fed rate-cutting cycle is getting complicated with 2.3% CPI inflation set to rise due to tariffs. Fed chair Powell said he would be willing to cut Fed Funds Rates if needed, but 4.2% unemployment rates remain low, and consumer spending continues to grow.
• Tax-exempt investment grade municipal bonds offer very attractive after-tax yields with the highest interest rates in 17 years for government bonds.
