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Gabby Yoder of JPMorgan writing, we view the upcoming earnings season as important for the market as we work through downward revisions. We have widened our base case range to 5,700 to 6,200 to reflect increased volatility and uncertainty. Gabby joins us now for more. Good morning, Gabby. Good morning. There's plenty of uncertainty, let's put it that way. And companies are using different approaches to offer clarity and visibility to investors. Southwest was upfront, brutal, direct. We're in recession. What are you hearing elsewhere?
Well, so I actually think all we're talking about last week and how strong the performance was, and obviously there was a lot going on from a macro perspective in the discussions around trade, but actually we were getting pretty good earnings results. And particularly as it relates to the AI power demand side, I would say that was like an area of particular strength.
And I think in terms of the way that companies are approaching their guidance, look, this is obviously a very difficult environment for them, but we thought it was gonna be a lot like 2020 where they kind of just like, no guidance, you know, we don't know what's gonna happen, so we're just gonna pull this. And that's not really what's happening. Like you're getting them trying to work through these different scenarios. Like sometimes you're getting two different scenarios, maybe you're getting a muddle through. And it's been really interesting to hear which companies
and in our view become more de-risked if let's say they extrapolate April 2nd tariff rates throughout the year, like that to us is an attractive entry point for whatever company that may be. But like you're not really getting these massive guide downs in terms of the full year outlook and to us that's, you know, a lot of that is really driven by the AI
power demand story that happened last week but overall it's just been better than expected in terms of earnings. Some of the earnings themselves have been pretty decent to your point but I'm finding it difficult to draw a distinction between good underlying demand and just a rebuild of inventories worried about supply not being there. Yeah I mean I think that's a really difficult like line to thread in terms of what really is real demand but I think
for the most part, right, if we're thinking about the banks who reported earlier on, like overall, like the overall spend outlook, like you didn't see a massive bump in terms, it was like mid-single digit spend in terms of a consumer outlook. That's pretty in line with what we've seen over the past couple of months. And importantly, looking forward, you know, you didn't see really massive reserve builds in terms of the banks either. So their outlook doesn't feel like it's that bad.
uncertain as it relates to the consumer at the moment. I'm feeling a massive disconnect right now. We just spoke with Christian Keller of Barclays talking about how recession in the US is his base case. We were talking with Laura Calvacina of RBC who said if recession actually does transpire in the US, you're talking about 4200 to 4500 for the baseline S&P 500. You're talking about gains from here. 5700 is your low in terms of this range at a time where we're currently at 5525. Why is there such a disconnect between economists
and stock analysts? Well, because look, I think, in taking a step back and thinking about where we came into the year, like, we're coming off of a really strong base. Like, I think comparing this to like the 2018 period is a little bit difficult because it was a completely different economic backdrop, right? We're coming into the year and we're in like a pretty solid footing from both a consumer and a corporate standpoint. And so you do, like, there is a position of strength that we're coming from that, like, we can take somewhat of a hit.
Obviously, time is ticking in terms of how long this uncertainty persists. And the president heard this from some companies last week when he met with them saying, "Look, this is a matter of weeks in terms of empty shelves." And that is very important, right? The longer this goes on, the more uncertain and the uncertainty pervades, the less likely the upside becomes a reality. - How many companies are actually gaming out that anything even close to the tariffs as announced on Liberation Day are going to stick?
In other words, how many of the analysts, how much of the ranges and the outlooks that companies are coming up with are basically expecting to go back to something like that 10% baseline as well as subsectoral tariffs? - Well, so I would say the amount of companies that are going back to April 2nd is like kind of few and far between. And again, those are like kind of gems to us in terms of the opportunity set.
But what you are getting is you're getting some idea of what it's going to cost from a tariff perspective from companies. And this is across the board. Pharma companies, we've heard from a lot of healthcare companies, and we haven't even had those sectoral tariffs announced. And they're trying to figure out how much they're gonna have to spend. And so we're assuming it's based on the current environment, right, without having to really extrapolate.
And so there is like a cost structure around it and there's obviously a revenue headwind that they're trying to take into account. So wrapping their heads around how they're getting there is like important for us to help us think through the year ahead. But I wouldn't say there was like a ton of companies that took April 2nd and extrapolated, but they're at least incorporating, I think, that 10% universal. When you think of the potential upside,
to your figures, what would it take? Is it policy? Is it the Fed? Yeah, it's policy. I mean, I think the Fed, you know, if you were like a couple weeks ago and you got asked like what would be the bull, like what would cause the bull case, I think it would have included the Fed and it would have included some policy pivot from the administration. I think
a Fed pivot at this point wouldn't necessarily be short-term positive, right? Because it would be because the Fed saw weakness. So I think really the only like bullish outcome is that you see this pivot from the administration and the market obviously seems to be sniffing that out in terms of what we're seeing from a PE perspective. We're at like close to 20 times again and again, only down,
2% since Liberation Day. So there is an element of that, but I do think that's where the bull case is now. They're talking a lot about these 18 deals they can get with other trading partners, but when you're talking about a bullish case, you're really talking about one, right? It's China. What do you need to see? Well, I
Well, I mean, I think in terms of what the market's probably thinking, it's closer to like 30 to 50% in terms of the effective tariff rate there. I think that would bring down the overall tariff rate, like effective tariff rate for the US, something between 10 to 15%, which is like digestible and something that, like if we think about, again, going back into expectations for the beginning of the year, that's probably where it would have been, right? Like 10 to 15, maybe worst case scenario, still a massive increase.
in terms of where we were prior, but I think at least more digestible than the 25 to 30 percent that we had on Liberation Day. This week is going to be chock full of things other than tariff talk, which is going to be exciting for people looking to sink their teeth into something that's more concrete with numbers and that reflect things that have already happened. I want
I wonder how you look at some of the economic data that we're going to be getting. A labor market report that a lot of people preemptively are dismissing is backward looking and not really important. Jolt's data, ISM manufacturing. How much does it matter to you based on what you just said, which is we are coming from a very different place economically than we were in 2018? Well, I think
look, I think it's important, but I think it's also juxtaposed to what's happening in terms, like we're going to be focused mostly on earnings. Like you said, we have 40% of market cap reporting and some of the biggest names. And I think that's going to be, like what has been the story for the S&P 500 over the past couple of years is this AI story, which nobody seems to be talking about anymore.
So you're getting these like very, you know, high growth, high quality companies at a discount at the moment, obviously aside from what we saw last week, but still trading at a discount. And so that's really where our focus is, right? Because part of our bullish thesis is that you continue to see that spend and that's pervasive through the rest of the market in terms of AI CapEx. So we're going to get a lot of information there. And I think that's what we're going to be focused on from an equity market standpoint this week, aside from
The thing that conflicts with that, as you know, is that they are secular growths, but they're also facing an international backdrop which is increasingly fragmented. I'm thinking more like Apple, directly Apple. I'm just going to bring up the name directly. They're facing a big situation in China. They're going to have to spend a lot of money moving supply out of China into places like India. For those kind of companies, how difficult is this moment for them?
Well, look, I think this isn't the first time they've seen this. These tensions have been going on in terms of trade as it relates to particular industries like semiconductors since 2018. It was continued throughout the past couple of years under the Biden administration as well. So this isn't new news. And obviously, a lot of that rerouting had already taken place post-2018.
So look, it's not easy, it's still difficult, but they have, you know, their global supply chains, they at least have negotiating power as it relates to, you know, other countries and suppliers. So they at least are coming from a position of strength in that standpoint when I'm talking about these large diversified companies. And so I think it's not easy, but if anyone's going to be able to navigate it, I would think it would be these larger companies. That one's a must watch. Apple reporting on Thursday. Abby, good to see you, as always. Thanks for being here. Abby Yoder there of J.P. Morgan.
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The former senior Trump trade advisor Kellyanne Schor writing, I do not expect to see a full-blown US-China trade deal this year. Kellyanne joins us now for more. Kellyanne, welcome to the program. What can be achieved in the interim between now and year-end?
Good morning. Thanks for having me. Well, we're certainly in a he said, she said when it comes to U.S.-China relations. And I'll put that to the side just for a moment. I think in the short term, the administration is looking to ink potentially up to 17 deals. Now, those won't be full-blown trade deals, but they will be agreements in principle and will
We'll get the details of those written by lawyers in the months to come. But that is part of the negotiation strategy with China. And that is to lay the groundwork where the U.S. has deals with a number of key trading partners going into a broader discussion with China so that they have more of a leg up. China is taking a very similar strategy and it's charm offensive with a number of countries around the world. But this U.S.-China relationship is going to get worked out over years and not months. Kellyanne, how do the Europeans fit in?
Well, a U.S.-Europe deal has eluded multiple administrations for decades now. I do think that there is a genuine effort between the administration and some European leaders to see what they can do in terms of stopping the bleeding with respect to these 20% reciprocal tariffs.
But the European Union is a very advanced and entrenched regulatory system, and it's going to be very, very hard for them to pivot and to change and to concede on some of the requests that the Trump administration has. So I'm not particularly optimistic. Kelly, what are those requests that the Trump administration is telling the Europeans they have to see in order to get a trade agreement?
Well, they haven't made those demands public except for this national trade estimate, which President Trump and Jameson Greer have held up on multiple occasions and said, here are the list of non-tariff barriers. But they are longstanding and well-known. So they are talking about the VAT tax, but some of the regulatory barriers in agriculture, in automotive.
some of the EU subsidy programs, the digital services taxes that a number of EU countries maintain. There are quite a few barriers to trade that are going to make it very, very challenging. And tariffs really are just the tip of the iceberg. When it comes to China, what needs to happen for one of them, either Beijing or Washington, to blink? Because right now, it's just a tremendous amount of noise.
Yeah, certainly. And drama is certainly a feature of U.S.-China trade negotiations. It was during Trump 1. I fully expect it to remain a part of Trump 2.0. I do think that behind the scenes, both sides are looking for a political off-ramp that saves face. These 125% and 145% tariffs are not sustainable in the short or medium or long term.
So I do expect to see some sort of de-escalation in the coming weeks or potentially months. But in terms of a full-blown trade deal, I don't know that that's possible anytime soon, if at all. Now, I do think both sides will at some point sit down and try to work out some of their shared differences. But at the end of four years, I think the U.S. and China are going to do less trade with one another and not more. But you're talking about an
off-ramp potentially we could see before they sit down. When do you think that off-ramp would be? Well, I was hopeful that the two sides could have found something in the first couple of weeks. But you've got, on the one hand, President Trump saying that I only want to do this at the leader level. On the other hand, you have President Xi who's saying I'm not going to do this at the leader level, appoint someone else.
And so both sides are engaged in this game of chicken, arguing that the other side has more to lose than they do. Now, back in Trump 1.0, we had the G20 and these other international forum that were happening around the same time as the trade war, which gave the two leaders a political opportunity to meet on the sidelines.
We don't have that in the short term. So it is either going to be President Trump saying, OK, I'll appoint someone or some back channeling, potentially some track 1.5 or track 2 diplomacy between CEOs going back and forth to try to work things out.
Kellyanne, you pointed out that we're about two and a half months into President Trump's three-month window to make trade deals with virtually every nation in the entire world. And it points to how unfeasible, infeasible this is. How much is this just a period of time to reset the narrative before having another extension and then another extension before there is a realistic timeframe for how long it takes trade deals to be inked?
Yeah, and this is where there's a distinction between these full-blown trade deals versus these agreements in principle.
And I do think that it is possible to reach agreements in principle, which is basically an outline of some of the key components of what will be in those deals in a short period of time. But if you want to have drafted text that captures these trade deals, that's going to take months and months and months of time and a ton of work by various lawyers. Now, that said, if you're still dealing with 17 or 18 countries, that's still a lot to do between now and July 9th.
So I do think for countries where substantial progress has been made, the president is likely to extend that period of time, although he has not said that he will do that.
And then for countries that are maybe not as far along, the president's going to feel some pressure to turn those tariffs back on so that his threat means something and to try to squeeze some countries at the end of that 90-day period. So I think we'll see a mix. On April 2nd, there was a big question around what the ultimate goal was of this new tariff regime. Was it revenue raising? Was it penalizing?
national security issues or potential trade partners that hadn't been doing the right thing, or was it fairness? Now that we've seen some of these negotiations, do we have a better sense of the overarching framework of what the goal really is?
Yeah, and I think that different tariffs have different goals. So clearly one of the North Stars of the administration is addressing this substantial $1.2 trillion trade deficit. And that to me is what this 10% global baseline tariff is about.
But when it comes to these more advanced reciprocal tariffs, like that 46% on Vietnam, that 20% on the EU, that is about fairness and leveling the playing field and addressing some of the unfair trade practices, the unbalanced trade that the president has been talking about. National security tariffs are really those sectoral tariffs, so those on semiconductors, pharma, steel, aluminum, and autos.
And then this revenue point, which the president raises, to me is more about messaging. It's about selling that domestically to the American people, about why leaving tariffs in place, particularly why negotiations are ongoing, may not be the worst thing in the world because look at the tariff revenue that's coming in. But I don't see that as one of the primary goals. Over the weekend, the Treasury Secretary was asked about this whole strategy, putting tariffs on, pulling them back.
And the Treasury Secretary said, actually, it's called strategic uncertainty in game theory. You were an individual at the negotiating table. Do you think this strategic uncertainty is damaging or actually useful?
Well, I think it depends on where you're sitting. And as a negotiator, I used to say that, and I spent 10 years as a negotiator for the U.S. government, that I had the most fun working for President Trump because my trading partner sitting on the other side really had no idea what my leader was going to do, which actually gave me a fair amount of leverage at the table to try to advance U.S. interests. Now, sitting on the other side now representing companies, that uncertainty, that lack of clarity, that
that will we have tariffs tomorrow, won't we, is incredibly challenging in terms of making investment decisions and supply chain decisions. But that strategic ambiguity is really aimed at other trading partners, and the message is not for the business community. And so I think that tension makes it a bit challenging, particularly for domestic stakeholders, while the president works this out. Kelly, appreciate your time as always. Kellyanne Shaw, the former senior Trump trade advisor.
Amanda, thank you for having me.
Eventually. Can we put some details on eventually? So I think taking a step back, the market seems to be taking a bit of, I would say, a temporary reprieve from the fact that we haven't seen this soft data translate directly into hard data immediately. If you actually look at what these companies are saying, though, which even the companies over the last seven days of reporting haven't really baked in expectations
of shifts in trade policy. And so I think actually where we're looking for is the second half of this year. If you look at home builders, they're not expecting higher costs to hit closing until the third quarter or fourth quarter. Industrial companies aren't expecting higher costs until they work through inventory, possibly to the second half of this year. So,
Corporates are, I think, still figuring this out to a large degree. It's not surprising that we haven't seen it in the hard data yet. I think just because we haven't seen it in the hard data, though, doesn't mean that it's not eventually in train. We are bracing for that, but I would say it's probably going to be a second half of this year.
Some of the hard data, of course, flattered by front loading. We saw that in retail sales, and I think you see it in earnings as well to some extent. How are you distinguishing between genuine underlying demand and just a stockpiling, getting ready for supply not being there? So I've spent a lot of time in company earnings called transcripts, and they actually are even having a really difficult time figuring out what is front loading and what is actually real demand. I think it's going to be a matter of time before we see that play through. But even in the
autos, for example. We did see a really large jump in auto sales. I think you can kind of put the mosaic together and figure out that that is some front loading. But I think when we take a step back at corporate credit markets, high yield spreads, for example, have retraced 47% of the widening since mid-February.
It's been striking how quickly these markets are kind of mean reverting. So investors, I think, are getting these opportunities to put money to work at more attractive spreads, but they're becoming short-lived. They're snapping back. We don't think we've seen the end of that. We're around 360 in high-yield spreads. In order to bake in a real material growth slowdown, we would need to be 550, 650. A recession would be even above that.
Recession's not our base case, I should say. Just to put some numbers on that, on April 8th, the average yield on high-yield bonds was 8.7%. It is currently down to 7.8%, just massive snapback as everyone piled in. I want to understand the buying dynamics. How much you're seeing the buyer base for credit instruments shift, maybe away from the foreign buyer,
away from the Japanese, away from the Europeans, and toward a more domestic audience? So foreign investors own around one quarter of the U.S. corporate bond market. So it's not just treasuries or equities. They also own corporate debt. I would say the marginal dollar has been in place to reallocate to European credit for a couple of years now, ever since the ECB started hiking rates because you had some yield buildup in that market. I would say on the margins,
given some of the optimism around the fiscal support. There is incremental interest in putting money to work in Europe. It's tempered by two things, however. One, the growth backdrop in Europe isn't great either. And so we are expecting some headwinds from shifts in trade policy. You can see that and even some of the survey data from Europe. And two, the U.S. corporate bond market is the most diverse, deep, liquid market for corporate investors. So if you're looking for high quality spread product, there's not a lot of
availability in Europe. So I think by that extension, investors will still need to allocate a significant amount to the U.S. market. Which is the reason why you haven't seen the numbers fall off that much. I wonder how much of competition the credit market is getting from the Treasury market. The fact that the U.S. Treasury Department is going to be announcing their quarterly refunding estimate today and then on Wednesday their actual schedule of issuance. How much is that creating
A real challenge for you in understanding the dynamic going forward for how the fair pricing of credit really works. So related to this is part of the reason why we like actually moving down in quality in Europe and in U.S. corporate credit for this reason. The treasury market has been very volatile. We're expecting steeper curves. We're expecting a rebuild in term premium. For that reason, we think it's important for investors to capture the additional spread premium where they can in corporate credit.
credit to kind of offset some of that volatility and boost those total returns. Actually, parts of high yield have outperformed investment grade on a total return basis so far this year, and even the lowest quality portions of high yield have outperformed the equity market. So actually, the credit market, even though it's been a really volatile year to date, is still offering a bit of a reprieve in terms of total returns because of that spread pickup. If you move
down into the high end of high yield, you're not actually foregoing that much credit quality relative to, for example, the low end of investment grade. So we do like moving down in quality a bit to pick up that extra spread premium to kind of cushion those total returns. As for the competition point,
We're just bracing for a significant amount of treasury supply. That's been a theme for the past several quarters. We know that because of the deficits. But I do still feel that corporates recognize the difference between the sovereign risk and the corporate credit risk. There's still a really significant need for corporate credit allocations, but I think
really the name of the game is actually duration has been very volatile. We're better off allocating to credit for carry and income, so favoring that short duration and picking up spread when you can. Are you seeing investors abroad discriminate between the two? Between self-reward, between treasuries and say corporate credit in America? For sure. I think the allocation to corporate credit is really in its own bucket. I think the decision for investors really from our conversations has been twofold. Am I investing for total or excess returns? And so where are
Where am I aiming in the credit quality spectrum? Am I aiming for duration or not? And then also the relative value, as you alluded to, Lisa, across regions. The other tricky thing for Europe is that valuations haven't reset that much. So if you are allocating that marginal dollar to Europe, the valuations haven't given you a great entry point at this point. Certainly at times this month, this felt like all U.S. assets are trading in one bucket day to day. Which it has, except not when you look under the hood.
And what you've seen even in the flows is that, yes, foreign investors have been shifting away on the margins from treasuries, but not credit, because of some of these ideas. And that's why people can say we can still get around some of the corporate story in the U.S., but maybe not the government story right now. Amanda, it's good to see you, as always. Thanks for dropping by. Amanda Lynam there of BlackRock.
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Neil Dutter of Ram Mac joins us now for more. Neil, welcome to the programme, sir. Before we get into details, Neil, you wrote about it recently. I just want to sit on this just for a beat. The rug pull that we've seen to consensus, Neil, that you've written about, just frame that historically, how quick, how vicious this has been.
Well, as you know, I mean, I think one of the ways recession works is through that element of surprise. So people think things are going to be OK and then they're not. And that prompts the clearing out of inventories, investment, hiring and so forth. And it's been quite dramatic. I mean, remember, we went into the year looking for Q4, Q4 growth of around 2 percent. And now it's around half a percent. So you've seen a fairly meaningful downward revision to GDP growth expectations for 2025.
And if you go outside the COVID years, the last time anything like that's happened is 2009. So it's pretty dramatic. You've been tracking some weaker data, not just at the start of this year, but from the back end of last year as well, Neil. Just give us the trend of things at the moment and how you'll navigate payrolls on Friday, because I can tell you for a lot of people in the market at the moment, they seem to be willing to ignore strength and they'll triple down on weakness. What's your approach?
Well, I think that makes sense because, I mean, you know, to me it's--to the extent that any number is strong, it's probably somewhat backward-looking. And if it's weaker, it just means that the economy was even softer than we thought going into all this. But, you know, take a step back and think about what happened last year. We saw very strong growth in consumer spending that was driven primarily by
or to a large extent by a decline in the savings rate. If you look at real incomes excluding transfers, it's up only 1.5 percent. So even if you assume the savings rate's stable, you're going to get weaker consumption. At the same time, non-residential business fixed investment contracted towards the end of last year. It only added about 30 basis points on average to growth in 2024. Believe it or not, John, that's actually less
than the contribution from health care services consumption. So it just tells you about the sort of cyclical momentum in the economy going into 2025. And, you know, this year I think what's been notable is the ongoing increase in completed unsold new housing inventory, which sort of begs the question about what home builders are going to do.
probably means they're going to cut back on residential construction. And I think in turn that probably means some slowing in residential construction employment. So, you know, I think the onus is really on the economic growth bulls.
And my sense is that things can get a little bit sloppy over the next couple of quarters. - Let's say, Neil, every single Fed official is watching right now in their quiet period. They're taking advantage of that and reading all of your reports and saying, okay, we're gonna cut by a full percentage point. We'll cut dramatically in the next couple of meetings in order to get ahead of this. How much would that help?
Well, I don't know that it would help that much, because I do think to some extent the train has sort of left the station. That doesn't mean I wouldn't encourage them to start thinking about recalibrating monetary policy. But I think it's important to keep in mind that, you know, think about the areas of the economy that are affected the most by the trade war.
It's stuff like consumer durable goods. It's stuff like housing. So those are the areas that the Fed can help, but I don't think they can offset a full impact of the trade war. So the Fed is just one part of this, but really to kind of
totally shift the narrative. I mean, you need to see the uncertainty sort of abate. - I feel like we've switched roles, Neil. It sounds like yours is really downbeat and I'm thinking, well, the companies are not sounding that downbeat. Corporate executives are coming out and saying we can manage through that. And their estimates have actually surprised to the upside in a large number of instances. Why does that not come for you and give you a sense that actually maybe it's not as bad as people are saying?
Well, I mean, you know, time will tell. I mean, I don't know that that's true. I just saw an article in The Wall Street Journal this morning talking about how companies are sort of shelving their capex plans. You know, the fact that we're talking about a large amount of companies pulling their earnings guidance, Lisa, I mean, if they're pulling their earnings guidance, they're not spending.
Point, you know, simple as that. So, you know, I don't really see that much optimism out there. If anything, CEO confidence has been waning because people got the sequencing wrong, right? I mean, when they bet on Donald Trump, they bet on tax cuts, deregulation and tariffs in that order.
And obviously we started with the last thing first. And that's kind of the big issue in my opinion. Because as you know, Neil, the last thing is the thing that Trump can do unilaterally by himself. You recently had a piece out where you talked about Trump's recent comments around Powell, soothing comments around China. And you said that Trump is starting to, quote, feel the market.
But at the end of the day, the tariffs are in place when it comes to China. How quickly, Neil, do you think that they need to start evaporating or this is going to get brutal very quickly? Well, I think we're already there. I mean, there's a lot of interesting comments that the market sort of runs with on any given day. But at the end of the day, just look at what's going on. We effectively have a trade embargo in place with one of our largest trading partners. And the primary debate right now seems to be whether are they talking or not talking.
Are they fake talking? Are they talking through back channels? I mean, it's a little bit ridiculous. Just focus on what's actually happening. We have an effective tariff rate in the 20s, and we continue to have fairly substantial tariffs on with China. That's effectively resulting in a zero in terms of bilateral trade. To me, that's important. And that's going to mean that, you know, inventories are going to be pretty problematic.
relatively soon, probably sometime over the next month. Neil, final take. Kevin Walsh, how close are we to installing a shadow Fed chair? Well, I mean, he has a habit of just, you know, you talk about the blackout period. Mike McKee mentioned that. I find it hysterical that he's out in the Wall Street Journal with an op-ed. But, you know, look...
I don't--I mean, I took a quick read of his op-ed. You know, I think it's ridiculous to really say that the Fed is the reason why we have profligate spending. I mean, remember, when interest rates were zero and the Fed was doing open-ended QE, the government at the time was going out on an austerity budget. And we talked about sequester and all that. So I think he has the cause and effect wrong. I mean, the reason why--I
No doubt, sir. I've run Mac.
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