Back To Normal

Good Afternoon. Markets recouped all the losses since the liberation day with the S&P 500 rising for nine consecutive days, recording the longest winning streak since November 2004. This is a surprise for many, and the Financial Times even had a premium blog article two days ago titled Surprise US market comeback. However, if you recall my tariff analysis on April 6th, I had mentioned that markets are overreacting and recovery will be faster when clarity comes, and also why I think the full-fledged tariff war is unlikely. In the curated insights section below, I have listed one more positive fact related to the tariff impact.

Below are the key highlights for the week:
 
Overall Strong Earnings:
Multiple important companies reported earnings this week, including four Mag 7s. Overall earnings continue to be strong as the tariffs did not impact this quarter's earnings. Oil companies reported weak earnings, mainly due to falling oil prices. Also, McDonald's missed earnings and revenues show that the lower-income consumers are feeling the effects of uncertainty.

Source: Bloomberg

Mixed Macro Data:

1. As expected, March PCE headline inflation came down to 2.3%, and core PCE was at 2.6%. This is excellent progress towards the Fed's 2% target, but starting next month, the effects of the tariff will start reflecting in the data, and it will be critical to see the real effect of the trade war on inflation.

2. April payrolls rose 177K, topping expectations by 33%, but marked a slowdown from March’s revised 185K. The unemployment rate was at 4.2%, and remained unchanged.

3. US GDP fell by 0.3%, the first drop since Q1 2022. This was mainly due to increased imports due to tariff fears, which shot up the US trade deficit by 41%. Hence, this fall in GDP does not show any negative underlying trend.

   

   Source: Financial Times

Recession Expectations Still Low:
Bloomberg reported that the survey results were conducted between April 25 and 30, and they showed that the number of economists with negative sentiments increased. Still, only 26% of the respondents expect a recession in the next 12 months. I generally don’t believe in surveys as sentiments shift with the current news flow, which may not reflect in the hard data. As mentioned above, this quarter's negative GDP was due to technical factors rather than underlying economic issues. Hence, we only need one more quarter of negative growth to meet the definition of recession. However, the tariff impact is very uncertain, and hence, even if we meet the definition of a recession next quarter, I am not sure if it can be considered a typical recession. Hence, it will be important to follow the hard macro data on a weekly basis and track the developments on tariff deal front.

Good News on Tariff:
In yet another good news on tariffs, China expressed willingness to negotiate with the US for the first time, paving the way for the two largest economies to start working towards resolving the trade issues.

Next Week:

The most important event for the next week will be the FOMC meeting scheduled on May 7th. The Fed is expected to leave the Fed funds rate unchanged as the hard macro data is still strong, and financial markets seem to be getting back to normal. The CME Fed Watch tool is showing 97%+ probability of no change in rates. It will be interesting to see the changes made to the FOMC statement and the press conference commentary.

For the week:

• The S&P 500 is up 2.92%, the Nasdaq is up 3.42%, and the Dow 30 is up 3.00%.

  

  Source: Barchart

CNN's Fear & Greed Index now stands at 43 (Fear) out of 100, up 8 points from last week. Details here

The top five trending stocks on Reddit are SPY, Tesla, Palantir, Reddit, and DTE Energy. Read More

Here is a summary of this week’s key economic releases:

Target Rate Probabilities for May 7th FOMC Meeting:

CME FedWatch

Buffett on Volatility: Warren Buffett dismissed recent market swings, calling the past 30–45 days “really nothing” at Berkshire Hathaway’s annual meeting. Read

Buffett to Retire: Warren Buffett signaled the end of an era in Omaha, announcing he’ll recommend Greg Abel as Berkshire Hathaway’s CEO by year-end. Read

Large Bank Rating Review: The Fed’s incoming top banking supervisor plans to review confidential health ratings of large banks, after noting that two-thirds were rated unsatisfactory last year. Read

IBM Investment: IBM plans to invest 150% of its current five-year U.S. outlay to strengthen the domestic economy and cement its position as a global computing leader. Read

Crypto Trading Boost: Morgan Stanley is working on adding crypto trading to its E*Trade platform—a significant move by a US bank to bring the asset class to retail investors since regulatory barriers began easing under the Trump era. Read

China Evaluates Trade Talks: China is evaluating trade talks with the U.S., following multiple outreach attempts by senior U.S. officials, according to its Commerce Ministry. While Beijing signals its willingness, analysts warn that a full deal will be complex and slow-moving. Read

Crypto News: Deribit, the world’s largest crypto options exchange, is considering a US entry, citing a more favorable regulatory outlook under Trump, per Financial Times. Read

Cedence Beat: Cadence raised its annual revenue and profit forecast, driven by strong demand for its chip design tools amid the AI boom. However, rising tariff risks in China remain a headwind. Elevated AI workloads continue to fuel demand for its complex semiconductor design software. Read

Coca-Cola Beat: Coca-Cola beat revenue and profit estimates this quarter, driven by strong demand and price increases. However, it flagged potential headwinds from U.S. tariffs, which could raise costs and dent consumer sentiment. Read

Visa Beat: Visa's fiscal Q2 earnings beat estimates, with payment volumes holding strong despite macro uncertainty. Read

Meta Beat: Meta's ad sales eased Wall Street's trade war worries, with Q1 revenue surpassing estimates by over 3%. Read

Microsoft Beat: Microsoft beat expectations on sales and profit, signaling resilient demand for cloud services despite tariffs and macro headwinds. Revenue rose 13% in FY Q3. Read

Apple Beat: Apple slightly beats estimates despite tariff overhang. Production shifts to India to offset risk. Cook flags higher US expansion costs. Buyback cut by 8% due to trade tensions. Read

Amazon Beat: Amazon’s Q1 revenue rose 9%, with profits beating estimates. Q2 guidance was solid but seen as cautious amid tariff uncertainty. AWS grew by nearly 17%; it was just shy of expectations. Read

Mastercard Beat: Mastercard beat Q1 estimates as consumer spending remained resilient, despite macro uncertainty driven by Trump’s trade war. Read

McDonald’s Miss: McDonald’s US sales dropped sharply in Q1, signaling weakening consumer sentiment and growing pressure on restaurants to attract diners. Read