The market enjoyed a much-needed snapback last week. In order to build on this nascent rebound, more progress on tariffs, inflation and earnings need to cross the tape — like oxygen to a mountain climber.
Technology stocks were the real bright spot (up 8.1% last week), as confidence returned to the artificial intelligence (AI) trade after waning for several weeks under the weight of extreme tariffs levied by both the United States and China.
According to FactSet, as of April 25, 36% of the companies in the S&P 500 have reported actual results for the first quarter so far. Of these companies, 73% have reported actual earnings per share (EPS) above estimates, which is slightly below the 5-year average of 77% and the 10-year average of 75%. But in aggregate, companies are reporting earnings that are 10% above those estimates, and that is above the 5-year average of 8.8% and well above the 10-year average of 6.9%. (Note: These historical averages reflect actual results from all 500 companies, not the actual results from the percentage of companies that have reported so far.)
This week will provide us with some key insights into the labor market with the release of JOLTS (Job Openings and Labor Turnover Survey) data for March, ADP Employment Data for April, Weekly Jobless Claims for the week ending April 26, Continuing Claims, Non-Farm Payrolls and Unemployment Rate for April. The latest consensus estimate is that the economy added 125,000 jobs in April, considerably fewer than the prior consensus estimate of 228,000. The jobs data is key at this point because recent consumer sentiment surveys show widespread fear that a wave of layoffs is coming due to government funding cutbacks, plus AI and automation replacing some workers and fear of an economic downturn.
There are some early signs that the labor market is going to endure some tighter conditions. According to a Newsweek article published on April 1, 2025, “employees at more than 110 companies can expect layoffs in April, according to recent WARN notices. The Worker Adjustment and Retraining Notification [WARN] Act requires companies to provide notice before implementing mass layoffs, and many employers have sent out alerts that they plan to let employees go this month.”
Some other signs of a slowing economy are showing up in the hard data. Existing home sales in the United States experienced a significant decline in March 2025, dropping by 5.9% to a seasonally adjusted annual rate of 4.02 million units, the lowest level since the 2008 financial crisis, reflecting high mortgage rates and affordability issues. Inventory levels have increased, but most barriers are due to higher borrowing costs.
Additionally, the Conference Board’s Leading Economic Index (LEI) for the United States has been turning down lately. In March 2025, the LEI declined by 0.7%, its third consecutive monthly drop. This decline reflects weakening consumer expectations, falling stock prices and softer new manufacturing orders. In the past six months, the LEI has contracted by 1.2%, indicating slowing economic activity ahead. These indicators often provide early warnings of economic downturns, but they do not yet suggest an imminent recession.
The 10 components of The Conference Board Leading Economic Index are: (1) Average weekly hours in manufacturing; (2) Average weekly initial claims for unemployment insurance; (3) Manufacturers’ new orders for consumer goods and materials; (4) ISM Index of New Orders; (5) Manufacturers’ new orders for nondefense capital goods, excluding aircraft orders; (6) Building permits for new private housing units; (7) S&P 500 Index of Stock Prices; (8) Leading Credit Index; (9) Interest rate spread (10-year Treasury bonds less federal funds rate) and (10) Average consumer expectations for business conditions.
This is a forward-looking predictive index that anticipates turning points in the business cycle by around seven months. Ideally, the Federal Reserve would get in front of these warning signs and early trends and stop worrying about how the tariffs are going to trigger widespread inflation on 11% of total U.S. GDP.
In contrast to our Fed, the European Central Bank (ECB) has wasted no time getting in front of the current global economic slowdown. The ECB has cut interest rates seven times in the last year.
These rate cuts are part of the ECB’s strategy to support the eurozone economy amid challenges like trade-related uncertainties and subdued growth. The most recent euro cut lowered the deposit facility rate to 2.25%. Now that inflation has fallen, growth worries have taken center stage. The economy in the 20 euro-zone countries grew by a modest 0.2% in the fourth quarter of 2024, and inflation was 2.2% in March.
The current rate of inflation in the United States is 2.4%, amid a clearly cautious atmosphere of consumer sentiment within a consumer driven economy. The Atlanta Fed GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the first quarter of 2025 was -2.5 percent as of April 24, down from -2.2 percent on April 17, yet the CME FedWatch Tool shows an 89.6% probability the Fed holding the fed fund rate at 4.25-4.50% next week. There seems to be a disconnect between where a rate cut seems to be a no brainer to cushion consumer and business confidence at the May 7 Federal Open Market Committee (FOMC) meeting.
Looking at the current situation, it would serve consumer confidence and markets well to know that the Fed is taking preventative action next week instead of its usual reactionary measures when it comes to monetary policy. A quarter-point cut is not going to move the needle much in terms of borrowing costs for both businesses and individuals. What it will provide, however, is clarity, confidence and leadership.
