As an example of how fragile geopolitics can be, India conducted military strikes on nine sites in Pakistan on Wednesday in response to a deadly militant attack on Hindu tourists in Indian Kashmir. India’s strike killed at least one child and wounded two other people in what Pakistan has called a “blatant act of war.” Pakistan’s ambassador to the US stated his country has not seen a “shred of evidence” to suggest they were behind the Kashmir tourist attacks and called on President Donald Trump to step in and help alleviate rising tensions with India. In coming days, the financial markets are apt to react negatively to this escalation of fighting between two longstanding enemies, both with nuclear powers.

On a positive note, President Trump and newly elected Canadian Prime Minister Mark Carney held a friendly press conference after their White House meeting this week and Treasury Secretary Scott Bessent and chief trade negotiator Jamieson Greer will meet China’s top economic official in Switzerland later in the week in what could be a first step toward resolving a trade war between the world’s two largest economies. Still, stocks fell just ahead of the Federal Reserve’s June meeting under the assumption that no policy change will materialize. We agree.

The White House continues to suggest trade deals will be announced soon, but to date, none has emerged, and in the absence of news, stocks have weakened a bit. Nevertheless, the last week has been a time of good news on the economic front and of improvement in the market’s technical indicators.

The ISM manufacturing index was relatively unchanged in April, edging down 0.3 points, to 48.7, but with six of its 10 components lower in the month. The ISM nonmanufacturing index rose 0.8, to 51.6, with only one weak component – imports – which fell from 52.6 to 44.3. While imports declined in both surveys, exports strengthened in services and fell in manufacturing. Prices paid were higher in both surveys, but particularly in the nonmanufacturing survey. On a positive note, new orders rose in both surveys. See page 3.

The April employment index rose in both ISM surveys, from 44.7 to 46.5 in manufacturing and from 46.2 to 49.0 in nonmanufacturing. This follows significant weakness in both surveys in March. However, business activity, or production, declined in both surveys, from 48.3 to 44.0 in manufacturing and from 55.9 to 53.7 in the nonmanufacturing survey. See page 4.

The initial estimate for first quarter GDP showed a decline in economic activity of 0.3% (SAAR), with the weakness due almost entirely to net trade as imports surged in anticipation of higher tariffs. Net exports declined a huge 4.8% (SAAR) in the quarter and government consumption fell a modest 0.25%. But aside from trade, economic activity was strong. Gross private domestic investment increased 3.6% and personal consumption expenditures increased 1.2% on a quarter-over-quarter basis. On a nominal dollar basis, gross private domestic investment rose 5.4% YOY led by investment in technology and software. See page 5.

The first quarter’s net trade balance in goods and services showed a deficit of $1.26 trillion, the result of imports of $4.54 trillion and exports of $3.28 trillion. This means imports represented 12.2% of GDP and exports represented 10.9% of GDP, leading to a 4.2% reduction in GDP driven by falling net exports. This was the largest negative contribution to GDP since the negative 4.3% in the first quarter of 2022. See page 6. However, note that April’s ISM surveys suggest imports fell significantly in April which implies trade may not continue to be a major negative factor for second quarter GDP.

In the month of April employment grew by 177,000 jobs although prior months were lowered by a total of 58,000. However, while federal government employment fell 8,700 in April, gains in local government employment resulted in total government employment increasing by 10,000. Employment gains were broadly based in the month but were particularly strong in healthcare, food services, transportation and warehousing. Our favorite employment indicator is the year-over-year growth in jobs, and this was clearly positive in April. The establishment survey showed job growth of 1.2% YOY (slightly below the 1.7% long-term average) while the household survey indicated jobs grew 1.52% YOY (above the 1.51% long-term average). See page 7.

Economists have been discussing the recent disparity between hard and soft data, and the dichotomy between the two is clearly displayed on page 8. The University of Michigan consumer confidence survey plunged to recessionary levels in recent months, but employment statistics are showing job growth that is at or above average levels. Moreover, in April average hourly earnings were $31.06 and grew 4.1% YOY, just fractionally below the historic 4.2% pace. Average weekly earnings were $1,049.83, in April, growing at 4.4% YOY, which was well above the long-term average of 4.0% YOY. In sum, employment and wage trends are healthy, which suggests that like many political polls, consumer sentiment data appears overly negative and biased.

Personal income reported for March was strong with headline income increasing 4.3% YOY and disposable personal income rising 4.0%. The key statistic – real personal disposable income – rose 1.7% YOY, up from 1.5% in February. The savings rate fell from 4.1% in February to 3.9% in March, which was not surprising since personal consumption expenditures rose 4.3% YOY. Spending on durable goods rose 7.2% YOY and vehicle sales increased 8% YOY. The personal consumption deflator rose 2.3% YOY in March, a nice improvement from the 2.7% seen in February. More impressive was the core PCE deflator which increased 2.6% YOY but was down from the 3.0% seen in February. Most economists are expecting inflation to pick up in April as tariffs become a factor, but we would point out that WTI crude oil prices are falling and will continue to lower headline CPI. In short, inflation releases may be a source of positive surprises in coming months.

Technical Outlook

After excellent rallies off the April lows, the popular indices were challenging their 50-day moving averages last week, and to date, only the S&P 500 and the Nasdaq Composite have bettered these levels. This is positive; however, we expect the 200-day moving average lines to be resistance for all the indices in the near term and do not anticipate these levels to be exceeded in coming months. To move significantly higher from current levels investors may require a combination of catalysts such as a good second quarter earnings season, the passage of the reconciliation bill later this year, and possibly a Fed rate cut. Nonetheless, the recent improvement in breadth statistics is impressive and though the Nasdaq Composite and Russell 2000 are 12% and 19%, respectively, below their record highs, the S&P and DJIA are now less than 10% below their record highs. The NYSE cumulative advance/decline line made a new record high on May 5, 2025 and this suggests that the long-term bull market remains intact.

Gail Dudack

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Reuters News posted a recent headline that caught our attention as well as that of many other readers: “Stocks set for worst 100 day start since Nixon as Trump injects semi-permanent uncertainty.” The writer may not know this, but this headline is comparing the current global economic environment to that seen in early 1973. The first quarter of 1973 was the initiation of an infamous oil embargo when the Arab world, organized as OPEC, imposed a ban on oil shipments to the US and other Western nations. This ban led to soaring oil prices, mile-long gasoline lines, and a long-lasting inflationary cycle that resulted in the CPI hitting 12.2% YOY in November 1974. It was also the beginning of the Watergate scandal which led to President Nixon resigning in 1974. Of course, this reporter is only looking at the decline in the S&P 500 and trying to make a point. But like any comparison, it is hollow unless it is put into an economic and historical perspective.

In 1973, the oil embargo and the Watergate scandal were not problems President Nixon could truly control and the uncertainty of both issues, one economic and the other political, lasted more than 12 months, or as the reporter noted, led to a “semi-permanent uncertainty.”

We do not believe the current environment qualifies as semi-permanent uncertainty. The current tariff negotiations are under the management of the President and his Cabinet, and it is likely that a number of important trade agreements will be announced over the course of the next 100 days. When this occurs, tariffs are apt to come down or be eliminated. Although China is the main target of the tariffs, China has already waived the 125% tariff on ethane imports from the United States imposed earlier this month. It was one of a group of products that have been granted exemptions but has not been front page news. And in terms of 1973 and oil prices, oil prices are currently going down, not up. And as we saw from 2020 to 2022, rising oil prices are inflationary and become a tax on consumers and corporations in a variety of ways. The exact opposite should be true in coming quarters. In sum, after reading this Reuters report we see little comparison to this quarter and 1973 and became more optimistic about the overall economy and stock market.

Our growing optimism may seem unwarranted given the current status of sentiment indicators. See page 3. Nevertheless, in the past few months there has been a significant discrepancy between soft data (sentiment), which shows extremely weak consumer confidence, and hard data (economic activity) which shows solid employment and consumption. The media has been highlighting the “recessionary” levels in sentiment, and we have been worried that a recession could be manufactured by a media that appears laser-focused on the negatives. However, we expect this disparity between hard and soft data will be resolved in coming months. With that in mind, it makes this week’s employment report for March an important data point. In time, sentiment and economic trends are likely to converge. But in our view, sentiment could rebound quickly if (or once) the administration announces a series of trade deals and Congress passes “the big beautiful bill” promised by President Trump.

Note on page 3 that Conference Board confidence indices are currently lower than they were at the October 2022 low. The trigger for the 2022 low was high inflation and the Fed’s late, but aggressive, interest rate hikes. But as we just indicated, oil prices are now falling and current Federal Reserve policy is tilted dovish, therefore, sentiment seems too pessimistic.

In terms of the economy, recent releases point to a still sluggish housing sector and March data was in line. Existing home sales fell 2.4% YOY in March to 4.02 million units and the median price of an existing home rose 2.7% YOY to $403,700. New home sales increased a healthy 6% YOY, but prices fell 8% YOY to $403,600. This pricing is unusual since new home construction is typically priced higher than existing homes, so this price drop in new homes is interesting and suggests home prices are coming down further. Both existing and new home inventories rose in March, but healthy new home sales led to months of supply falling from 8.9 months to 8.3 months. Existing home inventories, on the other hand, rose from 3.5 to 4.0 months. At the end of the quarter homeownership fell from 65.7% to 65.1% with the largest homeownership decline seen in the Midwest. See page 4.

Nearly a third of the S&P components will be reporting first quarter earnings results this week and next week’s consensus estimate changes could be important in terms of defining an earnings trend for the year. But last week, the S&P Dow Jones consensus earnings estimate for calendar 2025 fell $2.83 to $261.40 and the 2026 estimate fell $2.67 to $299.61. The LSEG IBES estimate for 2025 fell $1.87 to $264.15 and the 2026 estimate declined by $1.92 to $302.19. The LSEG IBES estimate for 2027 is $341.00, down $1.43. In short, earnings forecasts continue to fall dramatically. See page 6.

From a valuation perspective this means the S&P 500 trailing 4-quarter operating earnings multiple, after reaching a recent intra-month low of 20.7 times earnings in early April, is now 23.1 times and above both the 5-year and 50-year averages of 21.5 and 16.8 times, respectively. When using recently lowered 2026 S&P Dow Jones estimates, the 12-month forward PE multiple is now 18.45 times and back above its long-term average of 17.9 times; but when added to inflation of 2.4%, the sum comes to 20.85, which remains within the normal range of 15.0 to 24.1. This is a positive. See page 5.

Although most economic releases indicate a stable and resilient US consumer and economy, there are a few worrisome issues. The dollar continues to trade below $100 for the first time in three years and this will make imports expensive and exports difficult. In short, dollar weakness could be a bigger negative for US trade than Trump’s proposed tariffs. And since there have been liquidity issues in the Treasury markets, we are watching the SPDR Bloomberg High Yield Bond ETF (JNK – $95.27) for signs of stress in the fixed income arena. JNK fell to an intraday low of $90.41 in early April, which was a concern; however, it has rebounded smartly and is now testing the 200-day moving average at $96.03. This is good news. See page 7. From a technical perspective, after impressive rallies off the April lows, the indices are now challenging their 50-day moving averages. These averages are directly above recent closing prices at levels of 5,613 in the S&P 500, 41,501 in the DJIA, 17,631 in the Nasdaq Composite, and 2,021 in the Russell 2000. See page 8. It will be a test of strength to see if these first lines of resistance can be bettered in coming days. We expect the 200-day moving average lines to be important resistance in coming months, or until second quarter earnings season and the reconciliation bill is passed by Congress, later this year. Nonetheless, the recent improvement in breadth statistics is impressive and the S&P and DJIA are now less than 10% below their record highs. The Nasdaq Composite and Russell 2000 are 13.5% and 19.1%, respectively, below their record highs. The 10-day average of daily new highs is 59 this week and new lows are averaging 61. This combination of daily new highs and lows below 100 is neutral, but a big improvement from last week when daily new lows averaged 342. On April 11, the 10-day new low index (823) was the highest since the September-October 2022 low (882). While we expect a trading range market to continue for several more weeks or months, the comparisons between current technical indicators and those at the 2022 low suggest a much higher market by year end.

Gail Dudack

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President Trump has outlined many goals for his administration, and they include finding an end to the Russia-Ukraine war, peace in the Middle East, and trade agreements that lead to a fair and level playing field for the US. However, these goals may be more difficult than President Trump imagined. Trump’s 100th day in office will take place on April 30, 2025, and it would not surprise us if the President expected the impossible and wanted to have all of these items completed by then. But it is not to be. It was always ambitious, but there were roadblocks and minefields in every direction. Even President Trump’s goals of maintaining a safe border and eliminating government waste and redundancy are being countered by partisan legal hurdles.

Obsessed

Mediating a truce between President Vladimir Putin and President Volodymyr Zelensky must be frustrating because neither leader seems willing to concede anything. If this is true, there can be no negotiation. And this annoyance is clear from a statement by Secretary of State Marco Rubio that if progress toward a peace accord cannot be made in coming days, the US might “move on” from efforts to end the conflict. If the US exits the negotiation process, it could either force a real negotiation to begin or unfortunately result in Ukraine falling to Putin. The fall of Ukraine would be a disaster for Europe and the Western world.

However, the media is not focused on Europe or the Middle East, it is obsessed with tariffs. Note the definition of obsessed: to preoccupy or fill the mind of (someone) continually, intrusively, and to a troubling extent. The world is so obsessed with tariffs that as a contrarian by nature, we believe it is troubling and therefore important to look at the larger picture. Financial history suggests that whenever a consensus opinion is totally one-sided, it is usually wrong. And in a display of how emotional (opposite of rational) the current marketplace is, comments by President Trump that he does intend to fire Jerome Powell (we doubted that would happen) and by Treasury Secretary Scott Bessent indicating he believes there will be a de-escalation in U.S.-China trade tensions (we hope so) resulted in a massive 1,016.57 jump in the Dow Jones Industrial Average. If this is all it takes to move the markets more than 2.5% in a day, imagine what would happen if some positive news does appear!

To date, economic data has been impressive. Last week we reported the positive news on the inflation front with the CPI, PPI, and import/export indices all showing a sharp deceleration in inflation. This week’s reports show an economy that is stronger than expected.

Total retail and food services sales grew 4.6% YOY in the month of March and 4.1% YOY in the first quarter. In March, motor vehicles & parts grew 8.8% YOY yet sales excluding vehicles grew a healthy 4.5% YOY. In March, furniture and home furnishings store sales soared 7.7%, health and personal care sales rose 7.2%, nonstore retail sales grew 4.8%, miscellaneous store sales increased 4.7%, and food services and drinking places rose 4.8%. Gasoline station sales fell 4.3% YOY. Real retail sales rose 2.1% YOY, which was the best year-over-year growth rate since February 2022, or the pre-pandemic era. See page 3.

Industrial production fell 0.3% month-to-month in March but increased 1.3% YOY. Manufacturing output expanded 0.3% in March following a 1% increase in February and mining output climbed 0.6%. A 5.8% drop in utilities output was the drag on total production in March, but this decline was due primarily to warmer-than-expected weather. Overall, output increased at a solid annual rate of 5.5% in the first quarter. Economists will be monitoring industrial production for signs of weakness due to uncertainty regarding President Trump’s tariff policy; but to date, US industrial activity is relatively robust. See page 4.

The residential housing market remains in a slump, but the National Association of Home Builders (NAHB) index for March was stable and the headline index increased a point to 40. Single-family sales rose 2 points to 45 and traffic rose 1 point to 25. As in almost every forecast with expectations, expected 6-month sales declined 4 points to 43. Housing permits and starts have been erratic in the last two and a half years due to higher and volatile interest rates. Nevertheless, new home permits fell a mere 0.2% YOY in March to 1.48 million units. Housing starts rose 1.9% YOY to 1.32 million units, which was the first year-over-year increase since August 2024. See page 5.

We were also encouraged by the first quarter earnings announcement from 3M Company (MMM – $136.33), which jumped 8.12% on a closing basis, after the company reported impressive first quarter results. This diversified technology company showed solid sales gains in the US and China as well as margin improvement. More importantly, the company stated it is not lowering 2025 guidance but is adding a “tariff sensitivity” to show how much tariffs could lower its current forecast. It expects earnings of $7.60 to $7.90 a share this year, but tariffs could lower this by 20 to 40 cents a share, or as much as 2.5% to 5%. In our view, this quantifying of the potential tariff impact could help lower the anxiety surrounding tariffs.

Meanwhile, analysts are rapidly lowering earnings forecasts for this year and next. Both S&P Dow Jones and LSEG IBES have finalized consensus earnings estimates for calendar 2024 at $233.36 and $242.73, respectively. The S&P Dow Jones estimate for 2025 fell $1.04 this week to $264.23 and the LSEG IBES estimate fell $1.48 to $266.02. Similarly, the 2026 consensus estimates fell $0.97 to $302.28 and $1.66 to $304.11, respectively. LSEG IBES has a new estimate for 2027 of $342.84, down $1.46, this week. Overall, IBES estimates have declined more than 1% in the past three weeks. See page 7. If this continues it is likely that analysts will overshoot the negative impact of tariffs on corporate earnings.

However, even as earnings forecasts decline market valuation is improving. Incorporating 2026 S&P Dow Jones estimates, the current 12-month forwardPE multiple is 17.5 times and below its long-term average of 17.9 times for the first time since November 2023. When this PE is added to inflation of 2.4%, it comes to 19.9, which is within the normal range of 15.0 to 24.1 for the first time since September 2023. See page 6.

Although economic data continues to display a stable and resilient US consumer and economy, there are several worrisome issues in the financial markets. The dollar has dropped below $100 for the first time in three years. This decline will make imports more expensive and exports more difficult and therefore it could be more negative for US trade than Trump’s proposed tariffs. Plus, there have been issues in the Treasury markets in terms of a lack of liquidity and therefore we are watching the SPDR Bloomberg High Yield Bond ETF (JNK – $93.50) for a sign of financial stress. It has been falling too, signaling a rise in high yield interest rates. The bond market has often been the trigger for equity market declines and both of these charts are worthy of our attention. See page 8.

There was little change in our technical indicators this week and our view of the equity market remaining in a one-to-three month trading range bound by the intraday lows of April 7 or 8 and the 200-day moving averages in the various indices is also unchanged.

Gail Dudack

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Being strong-willed and unpredictable may be excellent characteristics when negotiating deals with businessmen and adversaries, but the stock market and the financial media are having a difficult time understanding and coping with President Trump and his tariff policy. The stock market, on the other hand, after the initial shock of seeing how high and wide-ranging initial tariffs proposals were, appears to be stabilizing and recovering from its April 8, 2025 lows. This does not mean we would rule out another test of the lows in the near future. In fact, a retest of the lows would be a normal and healthy process. What would also be normal after the recent panic selloff is for the popular indices to remain in a trading range for three to six months as investors digest the long-term impact of Trump’s policies. In our opinion, it may take three to six months to see how trade negotiations and tariff implementation play out in the global economy and in corporate earnings.

The rough boundaries for an intermediate-term trading range in the equity market would be the intraday trading lows of April 7 or April 8 and the resistance at the 200-day moving averages in the various indices. For the S&P 500 this translates into a low of SPX 4835 (the April 7^th intraday low) and a high of 5750 (the current 200-day moving average). This represents a tradable 19% intermediate-term range. See page 12. However, by the end of the year, we believe the S&P 500 can better its 200-day moving average.

One of the more disturbing price trends in recent weeks has been the weakness in the dollar. While everyone frets over tariffs, which may or may not be implemented, the weakness in the dollar, if it continues, will make imports more expensive. Hopefully, the dollar will rebound once markets calm down and the unwinding of leverage is completed; nonetheless, holding at the $100 level is important for the long-term trend of the greenback. Conversely, bond market volatility has also made headlines, but the 10-year Treasury yield, now at 4.35%, appears to be stabilizing. The technical chart suggests the yield is currently at the midpoint of a 2-year trading range. See page 11.

Last week’s AAII survey showed bullishness rose 6.7% to 28.5%, erasing the previous week’s loss, and bearishness fell 3.0% to 58.9%. Last week’s 61.9% bearish reading represented a new high for this cycle and sentiment readings continue to exceed the bull/bear split of 20/50 which is rare and favorable. Equally important, the 8-week bull/bear spread is at minus 32.8% and the most positive since the October 2022 reading of minus 33.5%. See page 15.

And this was not the only “extreme” reference to 2022. The University of Michigan consumer sentiment survey for April showed that expectations fell from 52.6 to 47.2. This reading is even lower than the 47.3 recorded in July 2022 and the 47.4 reported in August 2011. Note that both of these prior readings appeared shortly before significant lows recorded in October 2022 and October 2011. Again, this suggests that the extremes seen in a variety of technical and sentiment indicators point to the market being at or near an important low.

Nevertheless, we have often pointed out that there is a huge disparity between Democrat and Republican sentiment in various surveys and underlying University of Michigan data shows that less than 20% of respondents surveyed this year self-identify as Republican. It could be that Republicans are fearful of self-identifying, or it could mean that the survey has a selective bias. This could be an important distinction since the University of Michigan current sentiment index for Republicans is still rising but the same index is falling for Democrats. See page 5.

According to the University of Michigan, the median consumer expectation for inflation in the next year rose from 3.3% in December to 4.3% in January, to 5.0% in March, and is preliminarily estimated to be 6.7% in April. This is a massive swing in inflation expectations. However, the Federal Reserve of NY’s Survey of Consumer Expectations (SCE) showed one-year inflation expectation was 3% in December, 3% in January, 3.13% in February and 3.58% in March. Meanwhile, the SCE shows the household’s 3-year median expectation for prices has been unchanged at roughly 3% in the same time period. We find the disparity between these surveys is striking and a bit disturbing. Analysts can only be as good as the quality of the data they are analyzing. The University of Michigan seems concerned about this disparity as well. It wrote “Partisan Perceptions and Sentiment Measures” on April 11, 2025 which stated that their survey has been consistent over time and concluded that “Proportions of the three political groups (Republican, Democrat, and Independent) in 2025 are generally within the historical ranges seen since 2017.” This is surprising since the accompanying chart in this document shows that Republicans were roughly 25-27% of respondents in 2017 and were well under 20% in 2025. (Actual percentages were not provided.) See page 8. In our view, we believe consumer surveys are much like recent presidential polls and may not be a true reflection of actual voters or consumers. Polls and surveys, however, can sway consumer, investor, or voter perceptions and this is dangerous. For this reason, retail sales reports will take on added importance in coming months.

But there was excellent inflation news this week. Import prices were up 0.9% YOY in March and prices for Chinese imports fell 0.3% YOY. Headline CPI decelerated from 2.8% YOY to 2.4% YOY and core CPI falling from 3.1% to 2.8% (rounded up). In short, headline inflation is edging closer to the Federal Reserve’s target of 2%. Moreover, the CPI is already below its long-term average of 3.7% and its 40-year average of 2.85% YOY. Plus, we noticed that in the March report the energy price index fell 3.3% YOY with WTI prices down 14% YOY. In April, WTI prices are down 25% YOY which suggests lower energy prices should continue to dampen headline inflation in next month’s report. See page 3.

All core CPI indices have been falling in recent months. In March, all items less shelter (1.5% YOY), all items less food and shelter (1.1% YOY), all items less food, shelter, energy, and used cars and trucks (1.8%), all items less energy (2.8%), and the Fed’s favorite index — all items less food, shelter, and energy (1.8% YOY) — are well below 3%. Even troublesome components like services (3.7%), health insurance (3.1%), medical care (3.0%), and motor vehicle maintenance and repair (4.8%), are down from recent levels of 5%-6% or higher. Only the other goods and services index (3.8%) rose in March from 3.3%. See page 4. ETFGI, a leading independent research and consultancy firm known for its expertise on global ETF industry trends, recently reported that net inflows to the ETF industry in the United States were strong in March and for the first quarter inflows set a new record of $298 billion. This exceeded the previous record of $252.23 billion set in the first quarter of 2021 and the third highest quarter of $232.18 billion in the first quarter of 2024. As result, by the end of March, assets in the US ETF industry were $10.4 trillion, the fourth highest in history, just slightly below the record $10.73 trillion set in January 2025. We found this report to be reassuring since it is the opposite of current media coverage suggesting that global investors are running from US assets. In recent days pundits began to question whether American exceptionalism is over. Thoughts of the end of American exceptionalism are depressing; however, actual data does not support these theories.

Gail Dudack

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