US Strategy Weekly: Too Much Tariff Fear

To date, the media-driven panic that the newly installed Department of Government Efficiency (DOGE) would generate waves of joblessness due to staff and agency cuts and “Trump tariff wars” would trigger a US recession appear to be unfounded. Nevertheless, monthly employment data will be important in the months ahead and results for May will be released later this week. A small increase in job openings in the JOLT report has triggered optimism that May’s report will be favorable and with the S&P 500 less than 3% from its record high, the equity market needs a good report.

DOGE fears have been exaggerated, in our opinion. As of April 2025, there were a total of 2.99 million federal government employees, which represented less than 1.9% of total nonfarm payrolls. A 10% reduction in staff would be significant, but not recessionary, in our view. However, it is highly unlikely that such a cut could ever materialize in the political world. Still, similar job cuts are common in the private sector. This year Microsoft Corp. (MSFT – $462.97) projected a cut of over 6,500 jobs, or 3% of its global workforce. Amazon.com, Inc. (AMZN – $205.71) has reduced its workforce by roughly 27,000 since 2022. Meta Platforms, Inc. (META – $666.85) said it is aiming to lay off another 5% of current employees through performance-based cuts. Chevron Corp. (CHV – $ 139.55) is cutting up to 20% of its global headcount. Kohl’s Corp. (KSS – $8.37) is slashing its corporate workforce by 10% and Southwest Airlines Co. (LUV – $32.60) plans to lay off 15% of its corporate staff in a cost-cutting effort. DOGE has attempted to make less dramatic cost-cuts in order to make the federal government more efficient (and more importantly free of waste and fraud) but has been obstructed by legal battles.

Tariff fears may prove to be equally unfounded. Tariff negotiations are ongoing, but political and media pressure are making it more difficult for President Trump and his administration to negotiate effectively, and we expect President Trump will end up with less than he had hoped for. But either way, the result of the tariff negotiations are more likely to add to GDP than detract from it.

The recent revision to first quarter GDP is a perfect example. The second estimate for GDP in the first quarter showed a decline of 0.2% (seasonally adjusted annualized rate), up from the original estimate of negative 0.3%. However, this decline does not really represent a decline in domestic economic activity but rather a massive increase in imported goods in the first quarter, i.e., a large inventory buildup ahead of April’s anticipated tariffs. GDP would have been positive if trade were excluded, or even if international trade in goods were excluded. See page 3. And, once the tariffs were in place the trade deficit also changed. April’s trade deficit fell to $87.6 billion, down 46% from March, and down 10% from the April 2024 trade deficit of $97 billion. In April 2025 exports grew 10% YOY and imports grew 2.3% YOY. In short, trade is apt to generate less drag on GDP in the second quarter. And while the OECD recently lowered global growth for this year from 3.1% to 2.9%, we expect US growth estimates will begin to rise after second quarter GDP is released for the US.

Overall, recent economic releases have displayed solid economic activity. In the month of April, personal income rose 5.5% YOY, a big rise from 4.8% YOY in March, and real personal disposable income rose 2.9% YOY, up from 2.1% in March. These are impressive numbers and are well above their long-term averages of 5.2% and 2.7%, respectively. But note, government transfers rose 11% YOY in April. Still, this increase in household income continues to support consumption. Personal consumption expenditures rose 5.4% YOY, in line with the pace seen in recent months. Yet despite solid consumption, the savings rate increased to 4.9% in April, up from 4.3% in March. This was the highest savings rate since May 2024. See page 4.

The 11% increase in government transfer payments was unusual and it was the direct result of the Social Security Fairness Act which was signed into law on January 5, 2025. This Act ended the Windfall Elimination Provision, and the Government Pension Offset Provision which reduced or eliminated Social Security benefits to over 2.8 million people who receive a pension based on work not covered by Social Security because they did not pay Social Security taxes. These workers include some teachers, firefighters, police officers, employees covered by the Civil Service Retirement System and people covered by a foreign social security system. The jump in Social Security payments in April reflected the retroactive payments related to this Act. See page 5. As a result of these transfer payments, social security represented 6.5% of total personal income in April, up from 6.1% in March.

The PCE deflator was also good news. April’s headline index fell from 2.3% YOY to 2.1% YOY and the core PCE deflator fell from 2.7% YOY to 2.5% YOY. Note that favorable news on the inflation front is a global trend. Eurozone inflation for May fell to 1.9% YOY and core inflation fell to 2.3% from 2.7%. The ECB meets this week, and after seven consecutive rate cuts in the 12 months, the consensus is looking for another ECB rate cut this week. See page 6.

Technical indicators are another bright spot. The 25-day up/down volume oscillator is at 2.01 this week, neutral after being in overbought territory for 9 of eleven days in May and reaching a high of 5.10 on May 16. The 5.10 reading was the highest overbought reading since August 18, 2022, which was shortly after the market rebounded from its June 16, 2022 low. This is all favorable. The recent overbought reading is reflective of a bull market cycle since this indicator is confirming that volume in advancing stocks is driving stocks higher. See page 9.

However, it is highly unusual for this oscillator to become overbought before the equity market makes a new cyclical high. Typically, we wait for this indicator to confirm a new high in the equity indices and look for a minimum of five consecutive trading days in overbought territory. Similarly, the NYSE cumulative advance/decline line also made a new high on May 16, ahead of the indices making a new high. See page 10. Some of this can be explained by sector performance. On pages 12 and 13 we rank year-to-date performances of ETFs, industries, and S&P sectors and both tables show the S&P 500 index lagging behind more than half of the eleven S&P sectors with the exception of technology, healthcare, energy, and consumer discretionary. But note that 41% of the weight of the S&P technology sector is in only three stocks: Microsoft, Nvidia Corp. (NVDA – $141.22), and Apple Inc. (AAPL – $203.27). And 47% of the weight of the consumer discretionary sector is in three stocks: Amazon, Tesla Inc. (TSLA – $344.27), and Home Depot Inc. (HD – $373.08). In sum, the majority of stocks have been outperforming the S&P 500 index this year and while this is rare, it is bullish.

The only concern we have in the near term is valuation. With the S&P 500 closing on its recent high PE multiples have also been rising. After reaching a recent intra-month low of 20.7 times earnings in early April, the SPX trailing 4-quarter operating earnings multiple is now 24.8 times. Using 2025 and 2026 S&P Dow Jones estimates, the 12-month forward PE multiple is currently 20.2 times and back above its long-term average of 17.9 times. When this forward PE is added to inflation of 2.3%, it comes to 22.5, which is not seriously overvalued, but it does show the market to be at the top of the normal range of 15.0 to 24.1. In sum, we are near-term cautious and long-term bullish.

Gail Dudack

Click to Download