Even before the tariff announcements, investors were at the crossroads of conflicting hard and soft data. Hard data—quantifiable metrics like employment numbers, retail sales, earnings growth and industrial production—have been stable so far. Optimists would even define many of them as strong. In contrast, soft data, such as consumer sentiment surveys and the ISM Manufacturing Purchase Managers Index (PMI), measures of perceptions and expectations, are deteriorating quickly as stress about tariffs, inflation and their impact on spending flourish.
The growing divergence between these two data types has made interpreting the true health of the economy more difficult, forcing investors to navigate not only what is happening, but what people think is happening. April 2—'Liberation Day'— did not serve as a risk-clearing event and instead exacerbated negative market sentiment on future growth.
Vibes are negative and time will tell as to whether the economy deteriorates into a recession. As of today, the hard data has held up. In 4Q’24, about 75% of S&P 500 companies beat earnings projections.
Yet a recalibration of earnings expectations could be in order. For the upcoming earnings season, the Health Care and Technology sectors are expected to lead the way in both earnings and revenue growth. The S&P 500 is currently expected to see earnings grow 8.0% and revenue grow 4.2% year-over-year.
At the same time, inflation remains a primary complication, particularly for the Federal Reserve. Though headline Consumer Price Index (CPI) readings have come off the 2022 peak of over 9% to around 3.5%, the University of Michigan’s consumer sentiment survey still places 1-year forward inflation expectations near 9%. This has the potential to negatively impact consumption and household spending, as well as drive up wage demands.
Another key factor is the Federal Reserve. Over the latter half of 2024, the market increasingly priced in rate cuts for the back end of 2025, hoping the Fed would shift policy more dovish if and when inflation receded. However, prevailing inflation expectations and tariff uncertainty remain stubbornly high, which likely lowers the odds of dovish pivot from the Fed any time soon.
The ongoing dynamic of a data dependent Fed with deteriorating survey data could trigger short-term volatility in both stocks and bonds until a clearer path on inflation emerges.
As the trickledown impact of tariffs is gauged across corporate America, mentions of “tariffs” on S&P 500 company earnings calls have risen above 2,000 in the last quarter, blowing past the prior heights seen during the last Trump administration. This resurgence highlights the concerns about potential supply chain disruptions and higher input costs, factors that could weigh on corporate margins, hamper profit growth and depress already cautious sentiment.
Adding to near-term uncertainty is the condition of the U.S. consumer. According to the University of Michigan’s Consumer Sentiment Index, overall sentiment has recovered from the worst of the pandemic era but remains subdued relative to history. Households continue to feel pressure from higher everyday costs.
Political polarization further complicates the outlook. Surveys indicate Democrats expect prices to rise significantly more than Republicans, who have a distinctly lower inflation outlook. Such disparate beliefs can lead to disjointed spending patterns. The bottom line: when consumer sentiment is already fragile, any new shock—whether from continued tariff escalation or a surprise inflation reading—could weigh on spending, potentially leading to weaker corporate profits and near-term GDP growth.
Interestingly, abundant pessimism and negative consumer sentiment may be a contrarian signal for the stock market. The University of Michigan Consumer Sentiment index registered a historically low reading for March 2025. Following similar consumer sentiment readings in the lowest decile, the S&P 500’s forward 12-month returns averaged 16.9%, well above the 10.5% long-term average.
Extreme pessimism can be priced into equities quickly, setting a low bar for upside surprises. If inflation moderates faster than expected or if the news on trade negotiations improves, investors positioned to weather short-term volatility could capture meaningful gains based on this historical precedent.
Considering these cross-currents, 2025 paints a delicate and precarious picture for investors. Near term, the trifecta of elevated inflation expectations, a hawkish Fed stance, and tariff escalations suggest the rise in volatility could persist. Sectors highly sensitive to consumer spending—retail, leisure, and travel— have already taken a notable hit and could be the first to see growth estimates deteriorate significantly. On an equal weight basis, Discretionary stocks have underperformed Staples stocks since the S&P 500 last hit an all-time high on February 6.
Despite ongoing market turmoil, the longer-term foundation of the U.S. economy remains intact—for now. That said, it feels as if the economy has a shot clock. The longer that reciprocal tariffs stay in place, the more likely earnings are going to take a hit. Meanwhile, any signs of improved trade relations or easing inflation could lift equities (and investor sentiment). In our view, ‘Liberation Day’ may ultimately be remembered more for renewed tariff turmoil than market clarity—unless it results in broader trade concessions. If tariffs persist, today’s vibe-cession could tip into a full recession, with corporate profits bearing the brunt.
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