What’s Really Pressuring Stocks
Stocks dropped again last week on tariff worries and some disappointing tech earnings and the chaotic flow of scary headlines continued unabated, and sentiment remains very negative and calls for continued declines in stocks are getting louder and more frequent. To be sure, the outlook for stocks has changed for the worse in the near term.
Prior to the onslaught of tariff headlines that hit markets in early February, stocks enjoyed a near-perfect setup of stable growth, Fed rate cuts, AI enthusiasm and expected fiscal positive momentum. That perfect setup has been damaged; however, it’s important to understand why it’s been damaged and given the noise in the financial media about various headwinds, that’s not entirely clear.
The reason stocks are dropping is the spike in uncertainty and fear that uncertainty will lead to a whole host of negatives. Essentially, the new market logic is this: Whiplash tariff headlines will continue for (at least) another month (until the April 2nd reciprocal tariff announcement), while similar policy chaos can be expected on 1) Averting a government shutdown, 2) Extending the debt ceiling and 3) Tax cut extensions.
All of that uncertainty will cause consumers and businesses to essentially “hole up” and wait for clarity. That restraint on spending and investment will then cause an economic slowdown and a decline in S&P 500 earnings. And since the S&P 500 is still trading over 21X earnings, it’s very vulnerable to a 10% decline from here before we get to more solid valuation footing.
Finally, since the Fed can’t fix Washington’s policy chaos, they can’t help much even if they cut rates an additional time. Let me be clear: If all that happens, this market will decline 10% (or more). And until there’s some movement towards stable policy, the best we can hope for is a churn sideways between around 5,700 and 6,000 in the S&P 500.
But while I appreciate these fears, I do want to again reinforce that it’s fear driving this market, not actual bad data. Economic data this week was “fine” (Powell himself said the economy remained on solid footing even if there is a slight loss of momentum). Corporate earnings are holding up “fine” (and we’re not seeing wholesale cuts to EPS estimates yet). And for all the chaos, the “bark” of tariffs remains worse than the “bite” (excerpting USMCA goods seriously reduces the impact of Canadian and Mexican tariffs).
Here’s the point: I appreciate the negative scenario, and it’s right to be more cautious on this market and brace for continued volatility. But that negative scenario is not a forgone conclusion and actual facts on the economy and earnings and hanging on. As such, I think the right tactical strategy is to hold onto positions. Please refer to my 5 keys to the market, which I am writing every Thursday, with the first installment last Thursday.
Finally, while the outlook for Washington is reasonably dark right now (and deservedly so), there is a positive path here of 1) Tariff clarity and 2) Passage of pro-growth measures. If that happens (and it can happen quickly), then Washington will go from a headwind to a tailwind, and a switch to more cyclical sectors will be warranted. For now, we will look at making some switches to reflect the 5 keys to the market not a defensive move because of tariff talks. It is impossible to try to time a 10% correction, so we will try to position for the next move up.
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