Navigating the Tariff Storm: Where Will U.S. Stocks Bottom?

April 2025 finds U.S. markets grappling with tariffs, policy gridlock, and economic headwinds. Can investors pinpoint a market floor amid the uncertainty?

Fund Managers Pessimistic, Yet Holding Firm

Fund managers are dour, with Bank of America(BofA)'s April survey ranking as the fifth most bearish in 25 years. However, mass sell-offs are absent—neither institutional nor retail investors are aggressively unloading stocks. Foreign investors added $2.1 billion to U.S. equities over the past three weeks, though inflows have slowed since late 2024. They hold $16.5 trillion, or 18% of U.S. stocks.

Historical Lows Signal Potential Rebounds

BofA highlights that past sentiment lows, based on growth expectations, cash holdings, and equity allocations, often foreshadow rallies:

· March 2001: A 19% bear market rally (April-May 2001).

· October 2022: A bear market low, sparking a new bull run.

The next rebound—whether a fleeting bear market uptick or a sustained bull market—hinges on policy and earnings per share (EPS).

Tariffs Threaten Earnings Growth

U.S. tariffs on China, peaking at 145% for some goods and over 70% for most, risk a supply shock. Despite exemptions for select electronics, 2024 trade data confirms high effective rates, potentially driving inflation through shortages and stifling growth. EPS impacts remain a key concern.

Hard Data Risks Negative Shifts

Retail sales may falter. March 2025 data showed strong growth, led by auto sales, reflecting pre-tariff stockpiling. However, April’s hard data could reveal a reversal as tariff effects materialize.

Labor Market Masks Underlying Weakness

Trump's immigration policies could cut the workforce by 2.25 million, per LH Meyer, keeping unemployment steady while concealing job market fragility. Sustaining current unemployment demands 200,000 monthly job gains; labor outflows could otherwise distort economic signals.

Policy Solutions Remain Elusive

The Federal Reserve is focused on curbing inflation, but Chair Powell cannot escape the trade war's impact. Market expectations reflect caution: an 11% chance for May, 60% for June, and near-certainty by July. Trump's tax cuts, nearing approval, face revenue shortfalls: tariffs miss the $600 billion annual target, and immigration crackdowns could slash taxes by $260 billion by 2026, per Yale Budget Lab.

Fiscal Pressures Mount

The fiscal picture reveals issues: revenue heavily relies on households, while spending pressures are widespread. Rising U.S. debt interest costs and discretionary outlays (e.g., defense, education) lack funding sources to cover them. Proposals like seizing foreign assets or increasing wealth taxes aim to close the gap but face obstacles.

Earnings Outlook Dims

Policy relief is distant, but near-term EPS declines loom. Leading indicators, such as the U.S. ISM manufacturing new orders-to-inventory ratio, point to weakening global stock EPS.

Valuations Reflect Tech's Dominance

The S&P 500's $S&P 500 Index (.SPX.US)$forward P/E has fallen to 19x, still elevated historically. The equal-weight index, at 15x, underscores the outsized role of tech giants, which inflate valuations. Most stocks now trade near historical averages, while the "Magnificent 7" tech leaders, now dubbed the "Lagnificent 7," alter.

S&P 500: Two Scenarios

While economic outcomes are unpredictable, current conditions suggest possible S&P 500 levels:

Scenario 1 (Recession): Zero EPS growth and a 16-18x P/E point to an S&P 500 of 4,000-4,400.

Scenario 2 (Growth): 7-8% EPS growth with a 19-21x P/E suggests 5,000-5,500.

Volatility Persists, Quality Offers Refuge

BofA advises selling into rallies in Q2. High-quality stocks offer the best defense against volatility, with inflation-protected income likely to drive superior returns. From Russell 3000 stocks (excluding financials and real estate), BofA’s top 10 dividend payers—ranked by 10-year earnings and dividend stability—favor consumer staples (e.g., $Hershey (HSY.US)$ , $Packaging Corp of America (PKG.US)$ , $Gentex (GNTX.US)$ ) and industrials (e.g., $C.H. Robinson Worldwide (CHRW.US)$ , $General Dynamics (GD.US)$ , $Automatic Data Processing (ADP.US)$ )

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