May 11, 2025

QuickTakes

MARKET CALL:

Let's Make A Deal

Dealmaking is in the air. American and Chinese delegations met this past weekend to discuss how they might deescalate their trade war. Russian President Vladimir Putin on Sunday proposed direct talks with Ukraine on May 15 in the Turkish city of Istanbul that he said should be aimed at bringing a durable peace and eliminating the root causes of the war. A fragile ceasefire was holding between India and Pakistan on Sunday. That's after hours of overnight fighting between the nuclear-armed neighbors. President Donald Trump said he will work to provide a solution regarding Kashmir. This past week, Trump announced an agreement with the Iranian-backed Houthi militias in Yemen to halt US airstrikes against the militants, who agreed to cease attacks against American vessels in the Red Sea. Trump is negotiating with Iran's government to stop Iran from developing nuclear bombs.

The stock market seems to have discounted the apparent simmering down of geopolitical tensions. It has been doing so since April 9. The S&P 500’s 18.9% correction since February 19 troughed on April 8; the next day, Trump postponed his April 2 Liberation Day reciprocal tariffs, except for China. The S&P 500 closed up 9.5% that day (chart). It is now up 13.6% since the trough and only 7.9% below its record high!

Wall Street's investment strategists are currently expecting the S&P 500 to end the year at 6,047 on average (chart). That would be essentially unchanged from last year. At the end of last year, the consensus expected the S&P 500 to rise to 6600 by the end of this year.

Meanwhile, industry analysts significantly underestimated S&P 500 operating earnings growth during Q1-2025. It is turning out to be almost twice as fast as they anticipated at the start of the latest earnings season (chart). However, they sharply lowered their earnings growth rates for the next three quarters on company guidance about the souring outlook for earnings as a result of Trump's trade war.

The good news is that the stock market is forward looking and now apparently looking forward to a relatively happy resolution of Trump's trade war, even with China. Industry analysts are still expecting a 13.6% increase in S&P 500 EPS next year (chart). S&P 500 forward earnings has stalled around the new record high hit in early April.

Meanwhile, investors have also turned more optimistic since April 8, as evidenced by the significant rebounds in the forward P/Es of the major stock market indexes (chart). This valuation multiple for the S&P 500 rebounded from roughly 18 to 20 since April 8, led by a rebound from 22 to 25 in the forward P/E of the Magnificant-7.

Frustrating the bears is that liquidity remains ample, as evidenced by the $2.9 trillion held in retail money market mutual funds (chart). That's plenty of buying power for dip buyers.

The stock market's two widely followed Bull-Bear Ratios remain surprisingly depressed given the V-shaped rebound in the S&P 500 since April 8 (chart). This is a bullish development from a contrarian perspective.

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