Quick Bite –Are We There Yet?
April has seen global share, bond and currency markets buffeted by extreme uncertainty driven by Trump’s tariff announcements and opaque policy strategies. There is consensus that damage has been done to the global economy, and that was reflected in the post “liberation Day” sell-off in global equity markets. But how do we know if the sell-off is over? Can the market have bottomed while the economic consequences of Trump’s Tariff Tantrum (“TTT”) are still unknown? Are markets so prescient that they will anticipate both the damage done to company earnings, and the fair market multiple to place on those earnings? Does Team Trump even know where this is all heading?
April has been a very volatile month – but we’re almost back where we started!
Source: Trading Economics
The most immediate question for markets is whether there is fresh downside to come. Some see evidence of a “Trump Put” – i.e. if markets fall enough, Trump will reverse course and sooth the markets, or at least will trot out Secretary Bessent to provide a voice of reason. A shift in trade policy is the most obvious route for recovery in risk assets, and there has been a version of that dynamic since 9 April. So it is possible that even though the economic impact is yet to be felt, we could already be beyond the peak of new tariff “shocks” and policy uncertainty.
At present, there is quite a divergence between the “soft” economic data and the “hard” data. Thus economic sentiment surveys have fallen sharply, but this is yet to be reflected in the actual economic data prints such as sales trends, growth figures, etc.
Source: Wells Fargo
In past equity corrections, markets tended to bottom near the trough in economic activity. But if there was a clear cause of the weakness, it was enough for the market to see the peak in pressure from that source to conclude that activity would bottom soon, and for equities to trough ahead of that. In episodes where the source was less easy to track, the market did not trough until economic growth itself started to bottom.
What matters now is whether the current Trump Tariff Tantrum episode is more like past shocks, or whether this will ultimately prove to be a scenario where the economic data needs to stabilize first. It is possible that simply being through the worst of the shock has allowed the market to set some fair value ranges around the process, even if the economic and financial damage is yet to be quantified.
S&P 500 Drawdowns of More Than 15% Since 1950
Source: Goldman Sachs
How can markets accurately gauge the potential economic harm of the “shock” if we don’t even know if the economy will fall into recession?
In our assessment, there is significant vulnerability for the market in a recession scenario, even if the worst of the underlying “shock” has passed. The 19% drawdown that we’ve observed in the S&P 500 would be relatively mild relative to past recessionary drawdowns and would have entirely taken place before economic damage is seen, which would be historically unusual.
Source: Goldman Sachs
We think the balance of risks still argue for expecting renewed declines in equity prices from current levels and for ensuring portfolios remain “fit for purpose” in the current environment e.g. not over-exposed to highly expensive growth assets and under-exposed to high yielding defensive assets, and ensure asset diversification extends to high yielding bonds, property assets, etc.
Markets tend to anticipate the economic data, but they do not possess the infallible crystal ball, and so they tend to bottom near the trough in economic activity. If the economic data is yet to incorporate the “TTT shock”, it seems unlikely that markets bottomed in April. And if a recession were to occur, the trough would likely be somewhat later in the year, perhaps in the third or fourth quarter, with GDP growth contracting in the last two quarters of the year.
If there is a recession and the 8 April low was the market bottom, the 19% drawdown in the S&P 500 would be relatively mild relative to past recessionary drawdowns and would have ended before economic damage has been seen. That combination would be historically relatively unusual.
Continued market recovery from here means believing that recessionary dynamics, where job losses accelerate and risk aversion rises, will not take hold, and requires confidence in the market’s ability to look through a further weakening in the economic data. A sustained recovery may still be some time away even if the market does not make new lows, especially with the market not pricing much cushion for downside growth risks.
Where should the market multiple be now?
We would expect some Price Earnings multiple contraction to occur, to reflect the shock and uncertainty of the tariff tantrum. But where should that multiple land? The S&P 500 average PE over the last 5 years is 20x, the 10yr average is 18x, 30yr average is 16x. The PE low in 2018 was 14x. At present, the US market PE remains around 20x, and yet earnings are likely to be revised lower.
How bad will earnings be hit in FY26? The 2025 second half outlook is especially difficult for consumer-facing companies. Consumer spending is still the key driver of the US economy at 68% of GDP. At present, as noted above, there is a disconnect between very weak “soft data” and still robust “hard data”. The likelihood is that hard data declines over coming months will hurt corporate profitability. Our view: the current US PER is too rich given anticipated earnings declines.
The Australian market PE around 17.5x at present. In our view it is probably somewhat high considering the Australian market’s lack of growth prospects.
