The Markets

The winds of uncertainty are blowing, and the waters are choppy.

In recent weeks, United States stock markets saw steady gains, recovered from the April downturn as investors set aside uncertainty,” reported Connor Smith of Barron’s.

Last week, investors became more cautious as they considered:

Trade successes and negotiations. Last week, President Trump announced a trade deal with the United Kingdom and, over the weekend, U.S.-China trade negotiations began. “With talks between the US and China about to start, trillions of dollars are hanging in the balance for American companies. The average member of the [Standard & Poor’s 500 Index] made 6.1 [percent] of its revenue from selling goods in China or to Chinese companies in 2024, according to an analysis from Bloomberg Intelligence’s Gina Martin Adams and Gillian Wolff,” reported Rita Nazareth of Bloomberg.

The outlook for the economy. Last week, the Federal Reserve left rates unchanged. Fed Chair Jerome Powell offered assurances that the economy is solid, the unemployment rate remains low, and inflation is closer to the Fed’s two percent goal but not there yet. In a post meeting press conference, Powell stated,“…we’ve judged that the risks to higher employment and higher inflation have both risen [compared to March]…there’s a great deal of uncertainty…”

The outlook for company earnings. Companies in the S&P 500 Index performed well in the first quarter. Overall, the earnings growth rate for companies that have reported so far is 13.4 percent, reported John Butters of Factset. However, as Butters explained, analysts lowered [earnings per share] estimates more than normal for S&P 500 companies because of uncertainty, including a possible economic slowdown or recession.

Last week, major U.S. stock indexes finished flat to slightly lower. Yields on many maturities of U.S. Treasuries moved slightly higher over the week.

NO, YOU DON’T NEED TO STOCK UP ON TOILET PAPER. During the pandemic, concerns about supply chains and shortages led some people to stock up on items like toilet paper. As it turns out, the frenzied buying may have been the cause of those shortages.

Today, people are concerned about items that are typically imported from other countries becoming scarce. Last week, Bloomberg published the “Ultimate Tariff Buying Guide” to help people understand “what to purchase right now, what to skip and what’s a maybe.” Claire Ballentine and Will Kubzansky of Bloomberg advised that “right now” purchases may include:

Kid stuff. A lot of the equipment parents rely on – car seats, strollers, cribs, toys – are made in China so prices may rise significantly. Parents don’t have to worry about disposable baby care items as “diapers, wipes and most infant formulas won’t see a huge impact from tariffs because the majority of these products are manufactured domestically.”

Computers, smart phones, and electronics. While these goods currently are exempt from reciprocal tariffs, they are subject to other types of tariffs. If you have a student headed to college in the fall who will need electronics or you’re considering replacing your current smartphone, tablet, or computer, you may want to accelerate the purchase.

Automobiles. “If you already planned to buy a car sometime in 2025, bringing your purchase forward a few months could save you thousands of dollars,” according to a source cited by Ballentine and Kubzansky.

It’s a good idea to be prepared for higher costs if you’re planning to travel outside of the United States, too. “Due to tariffs shaking global markets, the [U.S.] dollar has weakened this year. That downward trend shows no signs of subsiding, so international travelers should expect worse deals when scoping out a trip or traveling abroad,” reported Ballentine and Kubzansky.

Weekly Focus – Think About It
“If you know the enemy and know yourself, you need not fear the result of a hundred battles. If you know yourself but not the enemy, for every victory gained, you will also suffer a defeat. If you know neither the enemy nor yourself, you will succumb in every battle.”
– Sun Tzu, Military strategist

Sources:

https://www.barrons.com/livecoverage/stock-market-today-05092025/card/the-market-had-a-banner-two-weeks-now-things-get-dicey–rHXi6aRToipIR0drAYQ2 or go to https://resources.carsongroup.com/hubfs/WMC-Source/2025/05-12-25-Barrons-Market-Banner-Two-Weekds%20-%201.pdf

https://www.whitehouse.gov/fact-sheets/2025/05/fact-sheet-u-s-uk-reach-historic-trade-deal/

https://www.bloomberg.com/news/articles/2025-05-08/stock-market-today-dow-s-p-live-updates?srnd=undefined or go to https://resources.carsongroup.com/hubfs/WMC-Source/2025/05-12-25-Bloomberg-S&P-500-Wavers%20-%203.pdf

https://www.federalreserve.gov/mediacenter/files/FOMCpresconf20250507.pdf

https://advantage.factset.com/hubfs/Website/Resources%20Section/Research%20Desk/Earnings%20Insight/EarningsInsight_050925.pdf

https://insight.factset.com/analysts-making-larger-cuts-than-average-to-eps-estimates-for-sp-500-companies-for-q2

https://www.barrons.com/market-data?mod=BOL_TOPNAV or go to https://resources.carsongroup.com/hubfs/WMC-Source/2025/05-12-25-Barrons-DJIA-S&P-Nasdaq%20-%207.pdf

https://home.treasury.gov/resource-center/data-chart-center/interest-rates/TextView?type=daily_treasury_yield_curve&field_tdr_date_value=2025

https://cnr.ncsu.edu/news/2020/05/coronavirus-toilet-paper-shortage/

https://www.bloomberg.com/news/articles/2025-05-08/what-to-buy-before-tariffs-take-effect?embedded-checkout=true or go to https://resources.carsongroup.com/hubfs/WMC-Source/2025/05-12-25-Bloomberg-Ultimate-Tariff-Buying-Guide%20-%2010.pdf

https://www.goodreads.com/author/quotes/1771.Sun_Tzu

The Markets

American companies did well in the first quarter.

During earnings season, publicly held companies tell investors how they performed during the previous quarter with a particular focus on earnings, which reflect company profits.

Currently, we’re more than halfway through earnings season, and companies in the Standard & Poor’s (S&P) 500 Index have reported solid performance results overall. “Both the percentage of S&P 500 companies reporting positive earnings surprises and the magnitude of earnings surprises are above their 10-year averages,” reported John Butters of FactSet.

As of last Friday, 72 percent of S&P 500 companies had reported earnings, and the blended earnings growth rate was 12.8 percent. If earnings stay at this level, we will see a second consecutive quarter of double-digit earnings growth for the S&P 500, reported Butters.

While first quarter earnings were strong, it’s unclear whether future earnings growth will be as robust. “During the month of April, analysts lowered EPS [earnings-per-share] estimates for the second quarter by a larger margin than average…Analysts also continued to lower EPS estimates for [calendar year] 2025,” reported Butters.

The reasons for changing expectations may be related to two words that have been popping up more than usual on earnings calls: “tariffs” and “uncertainty”.

“Several companies noted that the uncertainty surrounding tariffs is making businesses hesitant about investment decisions. That means they are delaying stocking up on inventory (or in some cases, overstocking), hiring, and dealmaking,” reported Sabrina Escobar of Barron’s. “All the uncertainty has made it hard for companies to make accurate projections for the year ahead.”

Last week, major U.S. stock indexes rose. “As of Friday, the S&P 500 index had risen nine days in a row, its longest streak since 2004. It jumped 10.2% in that span – 2.9% of that in the past week – a remarkable performance given the cloud of uncertainty hanging over American businesses,” reported Avi Salzman of Barron’s.

Yields on most maturities of U.S. Treasuries moved higher over the week.

HONEY, I SHRUNK THE ECONOMY! Last week, there were a lot of headlines about the U.S. economy after the Commerce Department shared information showing the U.S. economic expansion stuttered in the first quarter of this year. From January to March, the U.S. economy contracted, -0.3 percent annualized, as measured by gross domestic product (GDP) adjusted for inflation.

The reasons for an economic contraction weren’t obvious. Many companies were doing well, and business investment was solid. Consumer spending slowed but remained healthy. Government spending dropped a bit, but the fly in the economic ointment was imports from other countries.

“An enormous surge in imports was the big outlier in this GDP report. Normally, big increases in imports rarely coincide with outright declines in headline GDP because stronger imports usually mean more spending, not less,” reported a source cited by Megan Leonhardt and Matt Peterson of Barron’s.

Why are imports part of U.S. productivity?

You may be scratching your head, wondering why imports – goods produced in other countries – are included when determining the value of all goods and services produced in the United States. The short answer is: They’re not.

Broadly, U.S. GDP is measured by adding up:

• Personal consumption expenditures (consumer spending)
• Investment (business expenditures, household purchases of homes)
• Government spending (mandatory and discretionary)
• Exports (goods made in the U.S. and shipped elsewhere)

The final step is subtracting imports, which are goods that were made elsewhere. Imports are deducted because they’re in consumption, investment, and government spending numbers. To understand what was produced in the United States, imports must be subtracted. The St. Louis Federal Reserve offered an example of how that works.

“…if $10,000 in imported parts are used in the production of a car in a U.S. factory (an “American” car) and the car is sold in the United States for $30,000, then the $30,000 counts as personal consumption expenditures; but $10,000 is subtracted to account for the value of the imported parts, so the effect on U.S. GDP is $20,000.”

The GDP report raised some interesting questions

The report about U.S. economic performance raised some questions that have yet to be answered. Why didn’t U.S. GDP reflect the purchase of imports? What happened to the imported goods? It’s possible the surge in imports was overestimated. It’s also possible spending and investment were underestimated, opined the source cited by Leonhardt and Peterson.

 We may have answers over the next two months. Last week’s report was the first estimate of economic growth, and it may have included data that was incomplete or will be updated. We’ll see two more estimates before the end of June.

For now, it may be enough to know that first quarter GDP appears to reflect “the anticipated impact of tariffs rather than an actual downturn,” as Randall Forsyth of Barron’s reported.

Weekly Focus – Think About It

“It’s funny: I always imagined when I was a kid that adults had some kind of inner toolbox full of shiny tools: the saw of discernment, the hammer of wisdom, the sandpaper of patience. But then when I grew up I found that life handed you these rusty bent old tools – friendships, prayer, conscience, honesty – and said ‘do the best you can with these, they will have to do’. And mostly, against all odds, they do.”
– Anne Lamott, Author

Sources:

https://insight.factset.com/sp-500-earnings-season-update-may-2-2025

https://advantage.factset.com/hubfs/Website/Resources%20Section/Research%20Desk/Earnings%20Insight/EarningsInsight_050225.pdf

https://www.barrons.com/articles/tariffs-earnings-calls-stock-ccab0e3b or go to https://resources.carsongroup.com/hubfs/WMC-Source/2025/05-05-25-Barrons-CEOs-Are-Saying-These%20-%203.pdf

https://www.barrons.com/articles/stock-market-rally-risk-91fd1c10?refsec=the-trader&mod=topics_the-trader or go to https://resources.carsongroup.com/hubfs/WMC-Source/2025/05-05-25-Barrons-Stock-Market-Winning-Streak%20-%20%204.pdf

https://home.treasury.gov/resource-center/data-chart-center/interest-rates/TextView?type=daily_treasury_yield_curve&field_tdr_date_value=2025

https://www.bea.gov/sites/default/files/2025-04/gdp1q25-adv.pdf [report, Table 1)

https://www.barrons.com/livecoverage/inflation-gdp-economy-pce-data/card/why-the-u-s-economy-isn-t-as-weak-as-it-looks-0WgAY8LrRIT8X8X3fZQ1 or go to https://resources.carsongroup.com/hubfs/WMC-Source/2025/05-05-25-Barrons-Why-The-US-Economy-Isnt-as-Weak%20-%207.pdf

https://www.investopedia.com/terms/r/realgdp.asp

https://www.stlouisfed.org/publications/page-one-economics/2018/09/04/how-do-imports-affect-gdp

https://www.bea.gov/sites/default/files/2024-10/relia.pdf

https://www.barrons.com/articles/stock-market-economy-tariffs-0e9bf1d5?refsec=up-and-down-wall-street&mod=topics_up-and-down-wall-street or go to https://resources.carsongroup.com/hubfs/WMC-Source/2025/05-05-25-Barrons-Stocks-Are-Back%20-%2011.pdf

https://www.goodreads.com/quotes/159902-it-s-funny-i-always-imagined-when-i-was-a-kid