Investment Insights

 — Steve Orr 

Recent review

Does today’s economy look like past periods of turmoil? Let’s look at those past crises: 

• 2000 — The Dotcom Bubble Burst: The late 1990s saw wild growth in technology and internet-based companies. Investors were simply not paying attention to fundamentals. When the Greenspan Fed raised rates in early 2000, markets collapsed.
• 2008 — The Global Financial Crisis: A U.S. housing market collapse. A mortgage crisis. Fueled by complicated financial instruments. It took nearly six years to recover highs in equities, and nine years for GDP growth to return to trend.
• 2011 — Sovereign Debt and Credit Turmoil: Three years after the Great Recession, folks began watching riots in Greece — an early sign of things to come in Europe. Fears over sovereign debt across the pond caused global market turmoil. This made the pain from the 2008 housing crash even harder to go away.
• 2020 — COVID-19 Shutdowns: We remember this one too well. As governments worldwide imposed lockdown measures and global supply chains faced disruption, economic activity ground to a near halt. Massive fiscal stimulus, easy Fed policy and nifty U.S. technology companies helped the economy recover fairly rapidly once the virus was contained. 

Are we facing a similar set of issues? By historical standards, our assessment is probably not.

Trauma

Let’s look at the three Bear markets this decade. Two of them (April 2020 and April 2025) were created by government policy, not by the Fed. The third Bear market in 2022 lasted nine months. During that time, the market fell 23% while the Fed was raising rates 3% in five steps. At the same time, GDP growth was negative for two quarters.  

Remember that Trump announced 57 countries would have tariffs greater than 10%. China said they would retaliate, so their tariffs went higher. The other 56 will get a reprieve until July 9.  Now it’s sausage-making time for the administration. A fast trade negotiation should take around nine months to a year. History suggests the average trade agreement takes three years.

Supposedly more than 70 countries have called requesting negotiations. No word on those Heard Island penguins. How the administration is going to knock out deals with that many countries remains to be seen. An additional hurdle is the holds Democrat Senators are placing on Trump nominations. That makes it tougher for the administration to fill its Trade and State Department seats. 

We have said repeatedly that the landscape would look different six weeks and again six months from now. We think some deals will be announced by early July. The tariff deadline would then be kicked out to the fall for unfinished negotiations. The underlying goal of China isolation will continue. 

Impact

Recalling when the tariff levels were first announced, we thought the odds of a recession would be around 50% by year-end. The economy was clearly slowing prior to April 2 Liberation Day. The odds of a recession will likely fall depending on the speed and size of tariff deal announcements. Our base case remains slowing growth, with real growth falling below inflation. Tariffs would be only a minor boost to inflation, ending this year at around 3.5%.

So, the landscape looks marginally better today than a week ago. Stocks responded with a positive week, rising between 3 and 5%. Bonds were all over the place, as a number of players were forced to raise money when stocks and currencies dropped more than they anticipated. 

Happy time

Some folks look forward to Christmas or birthdays as their happy time. For us, it’s those eight weeks each quarter when public companies report their earnings. Generally, stock index performance is better during the earnings season than the rest of each quarter. This tendency combined with less tariff trauma news should provide investors with a bit of a reprieve. Week 1 (last week) and weeks 7 and 8 see 20 or less reports. Just over half of the S&P 500 reports in weeks 3 and 4, which corresponds to the next two weeks.

First quarter earnings kicked off last week with Delta Airlines and several big banks. Delta management cited tariff trauma as sales growth has stalled. It withdrew its 2025 earnings guidance. JPMorgan and Goldman Sachs saw earnings gains thanks to big jumps in trading revenue. Early summary: Tariff turmoil generated less travel revenue as business travelers stayed put; but trading markets swings gave traders opportunities. We would like to see Main Street doing as well as Wall Street.

We agree with Wall Street’s estimates that first quarter earnings grew around 7% versus 2024’s first quarter. FactSet reports that for the full-year 2025 earnings growth estimate consensus sits at 10.6%, down from 15% at the beginning of the year. Given our view that tariff uncertainty stretches through the summer, we would mark full-year earnings growth lower. Past trade spats and recessions have cut earnings around 30%. If that worse case emerges, then 2025 earnings will still grow around 7%, not too far below our forecast of 9%.