Wait-and-See Mode

1. Tariff Negotiations Carry On. Tariffs once again remained in focus with the Trump administration working out deals with foreign nations. The markets remain on edge and are now down 11% for the S&P 500 and 17% for the Nasdaq year-to-date (YTD). Heavily owned growth is down 16% versus value, which is down 5%. On Wednesday, President Trump said that the negotiators made “big progress” in trade talks with Japan in hopes of closing a deal before the 90-day pause expires. Additionally, discussions with Mexico and Italy have taken place with the same goal. Treasury Secretary Bessent stated that while deals are likely to take longer than 90 days to be formally completed, there should be substantial clarity on terms with 14 of the 15 largest trading partners before the 90-day deadline, with China being the outlier. That said, Trump mentioned last week that regarding the U.S.-China trade war, “I would think over the next three or four weeks, I think maybe the whole thing could be concluded.”^[1] Any clarity on tariffs will likely push equity markets higher and give corporations the transparency needed to continue doing business overseas. But for now, we remain in a holding pattern with elevated volatility. 

Something we continue to watch is equity valuations, and they are getting more reasonable. The Nasdaq is trading at 23x forward estimates (compared to 36x in February), and the S&P 500 is trading at 20x forward estimates (compared to 27x in February). The Magnificent 7 was trading at 36x forward estimates in December, and now it is trading at 24x. This was a cause of concern for many heading into this year – stocks were trading at all-time highs with valuations well above historical averages and back-to-back years of 20+% gains. As we noted in our 2025 Outlook webinar, this year was always going to be more difficult given the backdrop. Minimal fiscal stimulus this year, after $7 trillion was injected into the U.S. economy, was going to be a headwind for stock prices, and with uncertainty regarding the Trump administration, stocks have taken a hit. We continue to find long-term opportunities in the dislocation, buying the #1 and #2 players in each industry on sale.

Chart 1: Valuations Are the Lowest in Nearly Three Years^[2]

2. Powell Shakes Markets. Fed Chair Jerome Powell spoke at the Economic Club of Chicago on Wednesday, and he was far more hawkish than the dovish expectations, ignoring the economic slowdown while expecting tariffs to remain inflationary. It is ironic since the inflation figures have been coming down and are nowhere near the peak levels that we saw two years ago when the Consumer Price Index saw a 9% increase. Less fiscal stimulus, lower commodity prices, and slower GDP will lead to lower inflation in our view. But the Fed does not see it this way and is waiting on lowering interest rates to see how the tariff situation plays out – something that could be reactionary versus being proactive on watching the growth side of their dual mandate. It was no surprise that the markets did not like the commentary and the S&P 500 fell over 2% intraday before recovering some losses into the close. The Fed’s next interest rate decision is on May 7^th, with markets projecting a 13% chance of a 25 basis point (bp) cut and an 86% chance of a rate hold.

3. Fixed Income. U.S. Treasury yields fell across the curve last week, partially retracing the material increase from the prior week’s selloff. The 2-, 10-, & 30-year yields were lower by 16, 16, & 7 bps, respectively. Investment-grade bond issuance rebounded with $32 billion in new bonds brought to market, up from $15 billion issued in the first two weeks of April. Credit spreads improved across both investment-grade and high-yield segments. Investment-grade spreads tightened 7 bps to +154 bps, while high-yield spreads tightened 12 bps to +444 bps. In terms of credit quality, the main rating agencies issued 26 downgrades and 13 upgrades.

Tax-exempt yields were lower across the curve last week, at a slower pace than Treasuries. In April, the AAA 10-year Muni curve increased 28 bps compared to 11 bps for the 10-year Treasury. The Muni-to-Treasury ratio, a key metric for assessing the relative value to municipal bonds, has continued to rise, offering an opportunity for municipal investors with compelling entry points and attractive yields. Notably, the 2-, 5-, & 10-year ratios have reached their highest levels since 2022.

4. The Week Ahead.

Economics – Wednesday: Building Permits, PMI Manufacturing, PMI Services; Thursday: Continuing Jobless Claims, Durable Orders, Initial Jobless Claims, Existing Home Sales; Friday: Michigan Sentiment.  

Earnings – Monday: WRB; Tuesday: COF, DGX, DHR, EFX, ELV, ENPH, GE, GPC, HAL, ISRG, IVZ, KMB, LMT, MCO, MMM, MSCI, NOC, NTRS, PHM, PNR, RTX, SYF, TSLA, VZ; Wednesday: APH, AVY, BA, BKR, BSX, CB, CME, CMG, EQT, EW, GD, GEV, IBM, LII, LRCX, LVS, MAS, NEE, NEM, NOW, NSC, ODFL, OTIS, PKG, RJF, RMD, STLD, T, TDY, TEL, TMO, TXN, WAB; Thursday: ALLE, AMP, BMY, CBRE, CMCSA, CMS, CNP, DFS, DLR, DOV, DOW, FCX, FE, FI, GILD, GOOGL, HAS, INTC, IPG, KDP, LHX, LKQ, LUV, MOH, MRK, NDAQ, ORLY, PCG, PEP, POOL, ROL, RSG, TMUS, TSCO, TXT, TLY, UNP, URI, VLO, VRSN, WST, WTW, XEL; Friday: ABBV, AON, CHTR, CL, CNC, DOC, EMN, ERIE, HCA, HIG, LYB, PFG, PSX, SLB, WY.

Stephanie Link’s TV Schedule:

Return for Selected Indices^[3]

Sources:

^[1] Source: Market Watch. As of April 18, 2025.

^[2] Source: Bloomberg. As of April 20, 2025.

^[3] Source: Bloomberg. As of April 21, 2025.

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