Riders on the storm
May 20, 2025
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2 min read
May 2025 highlights
Riders on the Storm: The tension between weak soft data and resilient hard data persists. While tariff de-escalation likely helps to lift the soft data to a degree, the risk of the hard data converging to the soft data persists as uncertainty remains, the Fed passively tightens, and slack continues to build in the labor market. The tug-of-war between de-escalatory optimism and persistent growth risks likely keeps markets in a wide-range trade.
Ship of Fools: The de facto bilateral trade embargo between the US and China led to growing fears of supply shortages as trade flows ground to a halt, as seen in container data for shipments from China bound for the US. Reduced policy volatility and de-escalatory optimism has led to a stabilization and even an uptick in shipments. The feared fallout of empty shelves seems to have been taken off the table, but the risk to real growth and softer revenue and earnings growth remains.
Light My Fire: Tariffs don’t inherently raise prices, but they do raise costs. How those costs are absorbed are a function of corporate decision making. With the dollar providing little buffer to increased import costs, tariffs will likely have to be absorbed by companies either raising prices, which risks demand destruction and softer revenue growth, or eating the increased costs and suffering margin compression. Either choice risks softer economic and earnings growth.
Five to One: While recession may no longer be the consensus base case given the de-escalation to date, the outlook remains one of slowing growth and rising unemployment before conditions improve. Recession risks can’t be completely ignored, but fortunately, initial conditions have an important impact on the depth and duration of any potential recession. With household and corporate balance sheets at some of the healthiest levels in decades, the residual recession risk appears to be one of a milder income statement recession as opposed to a deep and protracted balance sheet recession.
When the Music’s Over: Markets are forward-discounting mechanisms, with investors voting in advance on their expectations of potential economic and earnings growth impairment. At the lows, markets were largely discounting that potential mild income statement recession, but while the rally since off the April lows has fairly priced out a more extreme nonlinear tail risk, markets are arguably overlooking the more normal left tail risk of a continued linear cooling in the US growth outlook. The lows may be in, but we’re not ready to call the all clear just yet.
