Market Insights Recap — Week of April 7, 2025

Hello, I'm Steve Orr, Chief Investment Officer at Texas Capital's Private Bank.

And another quick update on tariffs and the market reaction. The two-day selloff in stocks to end last week was the third worst in modern history. Number one is still the shutdown of March 2020, closely followed in magnitude by November 2008. It's worth noting that seven of the top 10 two-day drops all occurred back in the fall of 2008. More important, the economic and earnings landscape in 2008 and in March 2020 were very different than today. Now back in 2008, the financial system was teetering and the global economy was weak. In March of 2020, there were fears that company earnings would drop by more than half and that some industries would just never come back. Today, the global economy is in expansion mode. Not fast, but steady. Central banks around the world are cutting interest rates, and more governments are pursuing expansionist policies. So it's a very much improved landscape for markets today.

The administration's tariff proposals have thrown earnings estimates into doubt for this year and next. Most business clients we talked to just want to know what the rules are. Similar to the stock market, they just want certainty. So the stock market's drop does not fit the economic landscape at the moment. Is the market correctly predicting a recession in six to nine months? We think the odds are materially higher for a recession later this year. And if all tariffs were to stand as presented last week, we think the odds of a recession would be around 50% by year-end. Our base case, though, is for slowing growth, with real growth falling just below inflation. Tariffs would be only a minor boost to inflation, ending this year around 3.5%. Slightly higher prices in a slowing economy remain our base case. Not quite stagflation, but close enough. We do think the tariff landscape is going to look different by the afternoon of the 9th, as the administration is talking to countries. 

The landscape changes even more a month from now, as stuff in transit could get tariffed and more negotiations take place. Negotiations and deals with countries should lower volatility in all markets and help build a floor near current levels for stocks. In that regard, markets are approaching a more reasonable level for earnings. The price to earnings multiple at current earnings estimates was 18.8 times last week, much closer than the 10-year average of 17.4 times and well below last year's 22 times. In March, stock markets tried to price a gradual slowing in the economy, driven by cooling excitement over the growth of artificial intelligence and the Magnificent Seven. Note, though, that most of those growth plans for data centers and new developments and artificial intelligence models haven't stopped. They're just ignored by the media. Since Trump's announcement last week, the S&P 500 is down 12%, and since its last all-time high in February, down 19%. We call that extremely fast drop the wham phase. We think we're near the bottom. And the start of the whimper phase. In the whimper phase, stocks just grind along with little rallies here and there and drops for several months. Ultimately, traders drive stock prices down near that first low one more time, and the retest of that first low usually is on very light volume, and it ends in a whimper. That would put a sort of mid-summer near the Fed's June 18 and July 30 meeting dates. So circling back to tariffs, if they were to go into full effect, we think earnings would be trimmed around 20% this year, so only growing around 7%. Now several retailers and automakers have come out saying they're going to hold the line on price increases. That helps consumers, but it cuts margins and earnings later this year. 

In the meantime, there will be head fakes and temporary rallies. This is not yet time to buy the dip. Enjoy 4%-plus on your cash for now. To summarize, we remain skeptical that all the tariffs are going to take effect. Between country negotiations and lawsuits here at home, the tariff landscape will be less harsh than anticipated. Finally, earnings will still grow this year and we should skirt a recession. Let us know how we can help you; 'til next time.