28 Apr 28th April 2025

Index Movement Last Week

S&P500	+4.6%
Nasdaq	+6.4%
Aussie ASX200	+1.9%

A big week for the bulls that culminated in a nice move on Friday after the Wall Street Journal published a rumour Trump will drop the China tariff to 50-60%.

I’m going to have a change of tact this week and see if I can build a positive tariff story. Can I convince myself that Trumps policies are good for the economy and therefore US stock prices?

Trump’s main goal is to reduce the deficit. To do so he is trying to reduce spending and increase revenue. That is a good thing. If he can acheive it.

DOGE has already found several areas to cut spending and they have also cut around 120,000 government jobs. That’s a positive.

As to tariffs, this is a very hard one to predict as there is no prior play book to reference. It will take a long time to really know the impacts, but what it is settles around 10%? Isn’t that very much like our GST? And our GST did not send the economy into recession.

Companies are already talking about how they will pass the tariffs on. It will probably come as a combination of price increases and some margin compression. But US companies are coming from a record high margin figure so have room for some compression.

So maybe it won’t be too bad after all?

That is certainly how credit and equity markets are pricing it right now. A recession is off the table and interest rate futures are predicting 2 cuts this year.

Now, if Trump can follow through with reduced income taxes, giving people more money to spend and afford the tariffs, then maybe nothing much really changes at all. Except the budget deficit looks a lot more healthy.

Can he pull it off? It’s easy to say no as his actions seem too erratic, but as an investor our job is to work out how best to profit from the situation we have.

So where are we?

Current Valuations

The S&P500 closed Friday at 5523. The February high was 6147. The absolute low during the depths of selling was 4835, so we are presently sitting pretty much right at 50% of the pullback that ended April 8th.

The question now becomes – which way next? Are we heading back to the 6147 high or is this just a dead cat bounce and we are going back to 4835?

Let’s do a maths lesson

The February 6147 high reflected peak confidence in the future. That high price occured at a PE of 22. The long term average PE is 19 and a recession PE is more like 14.

Present forecasts are for 2025 earnings to be $267 and 2026 to be $305.

We can take those earnings estimates and consider a range of variation to them, then cross-reference them by a series of possible PE rations to work out a fair value for the S&P500.

To be a buyer of the S&P500 here, you either have to believe earnings will come in significantly higher this year than predicted by the analysts, or that investor confidence in the future will improve.

But stocks do tend the look out beyond the near future so what if we use the 2026 numbers?

Obviously things look better as we are starting from a higher earnings figure.

My observations on this data set –

At Friday’s close of 5523, the S&P either reflects very high confidence that the earnings target will be acheived or that earnings will come in 10% to 20% higher than predicted.

The current figure also reflects medium confidence (PE18) in the 2026 numbers or high confidence the 2026 numbers are too low.

What today’s price definitely says is there is no chance of a recession in either 2025 or 2026.

Where do I stand on this – two points

First – I think the market has gotten ahead of itself in the short-term. There is still too much uncertaintly around tariffs to be placing a 20+ PE on this market. Therefore I see very little short-term upside here and am more of a short-term bear and think we have another one or two wobbles to come before it is resolved.

However, if I look out to the end of the year, then I see the tariff uncertainty removed. We will know where we are and therefore can command a higher PE multiple. The current earnings season is strong. We have had 36% of companies report so far and 73% have beaten. The best bit is on aggregate, they have beaten by 10%. That puts us on the path of earnings being 10% higher than predicted for the year and means it is very possible we see a new high before the year is out.

This is my base case assumption. There will be a new high above 6147 this year, but it won’t be until the end of the year. The next couple of months will continue to be volatile.

So your game plan is either to just ride it out and wait until the end of the year, or to lighten up on exposure here, taking advantage of the bounce we have seen and look to add again on the next dip.

It will be a big week of earnings, so buckle up. Things are about to get interesting

• Tuesday: Visa (V), Starbucks (SBUX), Spotify (SPOT), UPS (UPS)
• Wednesday: Microsoft (MSFT), Meta (META), Qualcomm (QCOM)
• Thursday: Apple (AAPL), Amazon (AMZN), Microstrategy (MSTR), Eli Lilly (LLY), Mastercard (MA)

Warning

Stock values can go down as well as up. It is possible to lose 100% of your investment in a stock. Any advice given by Capital 19 is general advice only and does not take your personal circumstances into account and might not be suitable for you.