I hope that everyone had a great Memorial Day Weekend! We’ll start with two newsworthy pieces:
1. Now that the “One, Big Beautiful Bill” has passed the House and is on its way to the Senate, I’ll start shifting some Musing focus over the next few weeks to the overall bill and the potential market & spending ramifications. As the bill goes through reconciliation, I’ll be pretty quiet until there is some tangible output, as the overall physique of the bill will ultimately change (especially with this week’s tariff news).
For now, I would say that the tax cuts are a bit larger and a bit more front loaded than expected, and the spending cuts a bit more back loaded, making the bill more fiscally stimulative in the short-term than expected. Obviously, there is some bickering from both the Right and the Left. From the Right, the primary criticism is that Congress did not further the DOGE mission. This is not an austerity budget, which is what they wanted. On the Left, most of the criticism is the size of the cuts in social spending. There is also some criticism of tax cuts contributing to the deficit, but this is not gaining much traction, probably because almost all the tax cuts are simply an extension of the current rate, and, in my opinion, most people understand a continuation of the status quo is not really making things worse.
2. While the tariff news is positive from a stock standpoint, the tariff drama is far from over for several reasons. The administration has already appealed the decision, and a path to the Supreme Court seems likely. Additionally, the ruling didn’t say the President can’t implement these tariffs; it just said that using IEEPA to justify them is invalid. Point being, look for the administration to try other avenues to justify the tariffs or to increase non-tariff trade pressure. All-in-all, trade negotiations are likely to become more difficult in the short run, given that trade partners have less pressure to cut a deal.
What Happens from Here? There is a slew of other methods where Trump can reimpose tariffs. Those means would be: 1) along the lines of Section 338 of the 1930 Tariff Act, which would allow for up to a 50% tariff rate (this is the likely route), and/or 2) the Balance of Payments authority allows for Trump to impose tariffs on countries with large trade deficits but limits the rate to 15%, the authority is temporary as well and gives just 150 days before Congress votes on the measure. They’d likely not pass this, but it buys Trump and his team time to find another workaround.
This is What I’m Focusing On Tariff revenue is growing at a pace of $190B annually from Trump’s new tariffs. Including tariffs over a 10-year window is roughly equal to the 10-year cost of the tax bill. If these tariffs are removed and not replaced through other means, the US deficit will be larger than would otherwise be the case. I believe the tariffs will be reimposed through other methods, but the bias is another headwind for long-term bond yields in the short run.
Onward and upward.
Q1 2025 Earnings Recap
Overall, earnings had a party this past quarter – 78% of companies beat, which is much higher than the historical average. If you remember, heading into this earnings season, the market was pricing in ~8% year-over-year (“YoY”) growth. It came in at 14.0%, led by strong revenues. The critics would say that attention needs to turn to the second quarter, where the impact of tariffs is expected to play a more significant role.
Our thesis for this quarter and (likely) the next few would be that the AI narrative and the capital expenditures (“CapEx”) will continue to drive earnings. While the durability of this trend came under scrutiny at the start of earnings season, the largest companies have shown little indication of scaling back investment. Remember, the Magnificent Seven (“Mag 7”), which are basically tech-proxies and directly tied to the AI-movement, equate to 31.4% of the S&P 500. Said another way, a lot of the contribution to earnings for the S&P 500 seems quite stable.
For Brad Rapking, me, and the rest of the equity team, this was one of the more mentally draining earnings seasons as there was a ton of dispersion (cue UNH – if you need commentary here or on any stock, let me know). But I’d state, anecdotally, that there was an overall positive slant. The largest amount of dispersion was in the consumer areas of the market – no surprise there.
But things are not so challenging that we are seeing a coordinated slowdown, nor are we in an environment where the soft consumer sentiment numbers are hindering market share winners from continuing to win. I’d argue on the net, consumer earnings season has been better than expected, with some really good prints in a choppy macro. While there are certainly some challenging areas, trends have seemingly improved at least somewhat into April/May. And there’s no better verbiage than from the Visa earnings call – the CEO basically said that the strong spending environment has continued into April and May.
The chart below shows Year over Year (YoY) S&P 500 forecasted earnings growth by quarter. These series use Wall Street analysts’ median estimates before a company reports, replacing them with actual results once available. The series starts with 500 estimates and ends when all 500 companies have reported. The chart shows that Q1 2025 earnings (blue) are expected to grow by 12.98%. Note Q2 forecasts, in orange, are being revised sharply lower as companies provide their assessments of what tariffs mean for their bottom lines.
Data as of 05.12.2025
And, solely because of Q2 expectations, the overall 2025 earnings estimates have come down from their peak of $277 to $263 (-5.05%). Though I must state that it is still an increase of +9.6% from 2024 earnings, which is right in line with historical averages.
However, to keep things in perspective, as of today (this may not hold true in the future), it feels like the 20% correction that the market witnessed from 2/19/2025 – 4/8/2025 was overdone, given the de minimis decline in EPS estimates. I am knocking on wood as I type this, but we’ll see where the hard data goes from here.
If the consumer remains strong and spends like they have been, it’s tough for the market to get completely into trouble.
At the end of the day, I can’t say this enough: ignore soft data! This morning’s PCE data continues to show strength in consumer spending –> consumer spending is sustaining at 5%+ YoY despite soft data and this is no change in any trend. Although soft data is apocalyptic, you could build just as good of a case of consumer “overheating” as you could “slowing” right now. As long as consumers have jobs, which they do, it’s difficult for this trend to materially slow down.
Source: Raymond James as of 05.30.2025
Stay nimble.
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