A little over one-third of US companies have reported earnings. While earnings have been overall positive — companies are reporting about 10% profit growth over this time last year — there has been a significant rise in both uncertainty and cost cutting. Citing tariffs and overall policy uncertainty, CEOs are cutting travel, slowing hiring, and delaying major investments (such as factories and warehousing).
This week is a big data week with the unemployment rate, manufacturing and non-manufacturing PMIs, job openings, first quarter GDP, and personal consumption expenditures (the Fed’s preferred measure of inflation). All of these have a direct bearing on the Federal Reserve’s reaction to an economic slowdown, and we have have seen investors dramatically price and re-price the Fed’s interest rate policy over the past several weeks. At the moment, markets expect the Fed to hold rates steady until their June meeting, at which point they expect the beginning of steady interest rate cuts through the end of next year. My take is that the Fed will not be able to cut as much nor as fast as markets are hoping, largely due to tariff-inflicted price increases (leading to stagflation).
The active reduction in costs and delaying of significant investment by companies are tell-tale signs of a recession. Policy uncertainty is playing a significant role here. Without a clear understanding of the future policy landscape (will there be tariffs or not? can we hire non-US workers or not? etc), business owners/leaders are much more likely to just hunker down until policy becomes steadier and clearer. At any rate, despite decent earnings growth, I am reiterating my view that our current environment is recessionary and investors should prepare accordingly.
Chart of the Week
Durable goods orders posted a big upside surprise last week. Investors expected 2% growth and instead saw 9.2% growth last month. In another environment this might be good news, but this was almost certainly an effort by consumers and businesses to get ahead of the tariffs, so we would expect to see a signficant decrease in orders in coming months.
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