Highlights for This Week Include:

• While the initial estimate of first quarter GDP showed a decline of 0.3%, it was almost all due to trade sector distortions. Importantly, final sales to private domestic purchasers (consumer and business spending) rose 3.0%, which is in line with the growth rate of the last year and consistent with a growing economy.
• April’s manufacturing business surveys suggest that tariff uncertainty is slowing economic activity, but the surveys remain consistent with positive economic growth.
• The first quarter earnings season is off to another solid start, and we note that earnings provide the key support for stocks and are also an important support for the labor market.
• Stocks made an impressive reversal into April’s month-end, consistent with a fluid, uncertain environment. While encouraged by the reversal, we remain cautious with our outlook toward risk assets.
• We also continue to recommend that investors stay focused on their long-term investment plans, where stocks play a key role in maintaining a well-diversified portfolio’s purchasing power.

Trade Distortions Most Likely Overstate Economic Weakness Implied by First Quarter GDP Report

While the initial estimate of first quarter GDP showed a decline of 0.3%, it was almost all due to the trade sector, as businesses were front-running tariffs by focusing on getting goods into the country as fast as possible. This generated a record 4.8% drag from net exports. A stronger inventory build offset some of the larger trade drag.

The distortions caused by tariff concerns most likely overstate the weakness in the economy. Importantly, final sales to private domestic purchasers (consumer and business spending) rose 3.0%, which is in line with the growth rate of the last year. Consumer spending was stronger than expected, up 1.8%. Business capital expenditures were also better than expected, increasing 9.8%, reflecting strong tech equipment spending due to AI investment and pull-forward in demand in front of tariffs. The key unknown going forward is the damage that the trade war, and broader U.S. policy uncertainties, will do to final sales, with business and consumer surveys reflecting significant uncertainty on the economic outlook.

The March personal income report showed income gains accelerated slightly in March, rising a firm 0.5% m/m, driven by wage gains. This suggests support for future spending once uncertainty is behind us.

The first of the month brings an important early look at manufacturing conditions for the previous month, provided by the ISM Manufacturing PMI business survey. The April reading is especially important because it came after Trump’s reciprocal tariff announcement in early April. The Manufacturing PMI registered 48.7% in April, 0.3% lower compared to the 49% recorded in March (a reading above 50% indicates an expansion in activity while below 50% indicates contraction). The survey suggests U.S. manufacturing activity slipped marginally further into contraction in April after expanding only marginally in February.

This reading reflects the uncertain environment but not a collapse in activity. The ISM noted that the overall economy continued to expand for the 60th month after one month of contraction in April 2020 (a Manufacturing PMI above 42.3 percent, over a period of time, generally indicates an expansion of the overall economy).

Earnings Season Off to Another Solid Start While Stocks Stage Impressive Rebound

The first quarter earnings season is off to another solid start, with earnings beating estimates by 9.3% in aggregate and 70% of companies topping projections. First quarter expectations are for revenues to grow by 4.3% and earnings to grow by 8.5%. The six largest mega-cap tech companies are once again expected to outgrow the rest of the market with earnings growth of 29.1% compared to 3.3% for the rest. Earnings growth provides the key support for stock prices and is driven by economic growth (the major reason why we focus on the economic outlook). In addition, healthy corporate profit growth ultimately supports the labor market.

Stocks ended the month of April on an impressive run, with the S&P 500 Index experiencing one of its largest monthly reversals, initially falling around 14% before rallying back about 15% and ending the month down by just 0.7%. It’s important to note that the cyclical Technology, Communication Services, and Consumer Discretionary all outperformed the broader market in April. Corporate bond yields have also moved lower recently in a sign of a risk-on environment.

The market’s April reversal reflects a fluid situation, and for now, we advise a cautious stance toward risk assets. Importantly, we emphasize that stocks remain a critical part of a well-diversified portfolio and are key to maintaining portfolio purchasing power. We continue to recommend that investors stick with their long-term investment plans.

An Update on Tariff Uncertainty

Tariffs are a policy decision that can be modified. Comments and actions suggest that the Trump administration is working toward options on tariffs that help the market and economy find a positive path forward from the current uncertainty. While concluding trade deals on a tight timeline is difficult, many options are available, including further delaying reciprocal tariff pauses based on progress in negotiations. Providing more exemptions is also an option to address areas of highest concern, like autos.