Well, as mentioned last week, April 2nd should have been circled in red on every investor’s calendar as it had been billed by the new Administration as ‘Liberation Day’, when a bevy of fresh tariff announcements would be published. Leading into this date, there had been a tremendous amount of uncertainty regarding which countries would be tariffed, how steep would be the tariffs be, would they be a flat rate across the board, etc. The questions regarding the policies to be announced on this date were seemingly endless because the messaging from the Administration on the topic was constantly changing as well, so investors had little clarity about what to expect. There was a reasonable hope that ‘Liberation Day’ would perhaps bring tariffs that were not as steep as some of the worst fears and at least provide some clarity on the rules of the road ahead for businesses and investors. After the market closed on Wednesday, investors finally got the announcements that they had long anticipated, and they were a doozy. The ‘Reciprocal’ tariffs that were announced turned out to not really be quite ‘reciprocal’ as promised and the steep tariff levels that were announced were widely considered to be much higher and worse than even the worse case scenarios that had been forecast. Additionally, uncertainty continued for investors as mixed messaging was coming from the Administration about whether the tariff rates would be negotiable or not. This is why almost instantly the market futures took a steep dive in after-hours trading as the policies were being announced. This culminated in the two significant gap down opens we saw to close out the week in which all three major indexes declined between 7.8-10% on the week.
There’s no other way around it, this past week we witnessed substantial and nearly indiscriminate selling pressure across the markets in the wake of President Trump’s new tariff announcements. While the Nasdaq Composite index is the only of the three major indexes currently in a ‘technical’ Bear Market, down 22.8% from its all-time high, after this past week’s developments the case can no longer be made that this drawdown is just a standard ‘garden-variety’ correction as now it has morphed into a full on trend change and Bear Market. Even though the S&P 500 index is down 17.5% from its highs, less than the traditional Bear Market indicator of down 20%+, make no mistake, as things currently stand, this index is also in a Bear Market. Diving deeper into the individual constituents of the index, more than 75% of S&P 500 stocks are now 20% or more off of their all-time highs. So, while the official ‘Bear Market’ headlines may not have been printed quite yet, make no bones about it, the widely tracked index is unfortunately already there. The question now is how long will this new trend last and how deep could the decline go?
Just generally speaking, in order for stocks to go up, at least one of two things must occur, either the P/E ratio or ‘multiple’ that investors are willing to pay up for the market’s earnings must increase (multiple expansion) or the actual EPS numbers must increase. At least one of these two must occur for stock prices broadly to increase. Currently, there is a bit of a cloudy picture about which one, if either, will be the number to provide this increase. Over the past two months, consensus estimates for the S&P 500 CY25 EPS estimates have actually been trending down with the consensus now being around $269.50 EPS for the year. While these earnings estimates have gotten trimmed, the forward P/E multiple has also been contracting from a recent high of 22, now down to just above 19. While this is a notable decline in the forward P/E multiple, we may not be done quite yet with this bout of multiple contraction. The average forward P/E multiple over the past 10 years has run at about 18, a bit further down from here. Now, just make the assumption that the current consensus EPS number of $269.50 is accurate, use our historical multiple of 18, do some simple math and that gives you an S&P 500 level of call it 4850. Now, let me be clear, I am not predicting that we for certain are headed to this level in the index. But, just doing traditional market valuation calculations, this is the level one would come up with as ‘fair value’ using the 10-year average multiple. So, if we do indeed contract back to a multiple of 18 times, this level is clearly in play. After Friday’s decline, the S&P 500 has erased the past years’ worth of gains as well as blown through a number of key support levels. From the technical perspective, the next key level to watch will be 4950 on the S&P 500, which would represent nearly a 20% decline in the S&P 500. A full 20% decline on the S&P 500 would be another key level to watch. Beyond that, the 4850 level would become more significant. One thing we feel certain about is the broader markets are likely not done falling quite yet, but the amount is uncertain, yet these are some notable levels to keep your eye on.
Key Events to Watch For
- Tariff Developments
- CPI/ PPI Inflation Report
- Q1 Earnings season begins
Coming off a week in which stocks were rocked by much worse than expected tariff news, this will continue to be a central theme to markets and our economy moving forward. Now that these tariffs have been announced, they will soon be implemented in short order as businesses and investors are bracing for their impact. There is still a good deal of uncertainty about whether these tariff policies are even going to be subject to negotiations or not as there has been mixed messaging from the Administration. At one moment the tariffs are permanent and non-negotiable and later that same day the door is potentially opened to negotiations. It’s difficult to track, however, it is the sincere hope of investors that truly these tariffs are a bargaining chip and one by one they will be negotiated down to a more tolerable level and that the current policies as they stand today will not end up being permanent or remain for any long period of time. Any news regarding progress on this front should be followed closely as markets are almost principally focused on this item now.
In addition to watching for progress on reigning in tariff rates, there are a number of other significant events happening for the market this week as well. Towards the end of this coming week, two crucial inflation reports, the March CPI & PPI, will be published. Now that these tariffs have been announced, coupled with other recent groups of data indicating that the economy has been slowing since the beginning of the year, these factors make this week’s inflation data all the more important. While there is a debate about how much, there is almost universal agreement that these new tariffs will cause some amount of inflation once they are implemented, so we know this is coming down the pike. Since inflation has still yet to return to 2.0% on an annual basis, if inflation reaccelerates at the same time that growth is slowing, or even potentially worse, declining, this would be a manifestation of one of the market’s greatest fears related to these tariffs in the current environment, stagflation. In a stagflationary period featuring high and sticky inflation coupled with stagnating to declining growth, Central Banks are generally left with few tools to address either issue. Their tools are focused on throttling economic demand up or down as needed and in this type of environment, adjusting Monetary policy up or down only addresses one issue while exacerbating the other. With recent developments, this fear is becoming much more real for markets, so it is crucial for these inflation reports to at least meet expectations if not produce a nice surprise to the downside as most are fully expecting a second bout of inflation in the months to come.
Finally, we are now back in earnings season, with Q1 earnings reporting beginning this week. Reporting season will really ramp up later in the week as more large-cap names begin releasing their first quarter results. As is usual, a handful of the major U.S. Financials will be among the first to report their Q1 results. A few of these companies are J.P. Morgan Chase & Co., Wells Fargo & Co., BlackRock, Inc., & Bank of New York Mellon Corp. In addition to just evaluating these company specific results, generally these major Financials’ guidance can provide some solid insights into the state of the economy. As this is a growing concern amongst investors, any new info that can be gleaned from these companies will be helpful in evaluating the broader market. Even as rough as the past week of trading was, we always remind ourselves that in periods such as this, with heightened uncertainty and spiking volatility, in the past, investors have rarely been rewarded for panicking in the moment and making highly emotional trading decisions. With this said, we are cognizant of the current downside risks to the market amid this bearish trend reversal. We plan to continue following our technical systems and likely seek out new bearish setups as they present themselves.
Thank you for reading this week’s edition of the Weekly Market Periscope Newsletter, I hope you enjoyed it. Please lookout out for the next edition of the newsletter as we will give you a preview of the upcoming week’s important market events.
Thanks,
Blane Markham
Author, Weekly Market Periscope
Hughes Optioneering Team
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