Despite signs of a weakening U.S. labor market, including a recent record-downward revision to job growth figures, investor bullishness remains at record highs. However, it’s pure optimism that has pushed stock market valuations to expensive levels, with the S&P 500 trading at over 22 times forward earnings. While market psychology and momentum can drive prices in the short term, fundamentals will eventually prevail. Prudent investors should prioritize buying high-quality companies at attractive valuations, a strategy that currently requires patience.
Macro / Economy
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15%+ Tariffs Are Not Reason to Cheer
The market is cheering the “better than feared” trade deals with the likes of Europe and Japan. Yes, 15% is better than 30%. But 30% would be an embargo – not a tariff. 15% will not be good for global trade. Growth will slow; consumption will fall; resulting in fewer jobs. Trump’s terrible tariffs will be at least ~12% more than what we had at the beginning of the year. This consumption tax will need to be paid by someone… just a question of who. The market is not pricing this in….
S&P 500 Hits Stall Speed
Another week comes to close – as we draw near the end of the second quarter. For the past two weeks or so – investors are reluctant to push prices much higher. From mine, the index is not only expensive – trading near a forward price-to-earnings (PE) ratio of 22x – the downside risks don’t handily offset the (possible) upside reward. For eg, it would not surprise me to see the S&P 500 trade up to a zone of 6,200 (adding another 5% or so). However, equally I see a possibility for a 10% to 20% move lower given the risks to earnings growth, inflation (from tariffs), employment and geopolitical tensions.