May 4, 2025

QuickTakes

MARKET CALL: ‘Mission Control,

We Have Thrust’

Today, we are lowering our subjective odds of a recession from 45% to 35% following last week's news that China and the US might be moving toward starting trade negotiations. We also remain impressed with the resilience of the US economy following Friday's employment report. However, we are not raising our 6000 year-end target for the S&P 500.

Our QuickTakes dated April 24 was titled "Strongest Buy Signal Ever?" We reiterated that "[w]e still believe that the latest correction in the S&P 500 bottomed on April 8, a day before Trump basically postponed 'Liberation Day.'" A week ago in MARKET CALL, we briefly mentioned that a bullish Zweig Breadth Thrust might be in play.

On Friday, the S&P 500 notched its first nine-day winning streak since November 2004 (chart). While the index had many seven- and eight-day streaks in recent years, the nine-day consecutive winning streak had proved elusive for the past two decades—until Friday. The S&P 500 now exceeds its close on Liberation Day, just before Trump announced his reciprocal tariffs on the world after the close. It also exceeds its 50-day moving average and is only 7.4% below its record high. Its 18.9% correction lasted from February 19 to April 8.

The Nasdaq also rose above its 50-day moving average last week and is only 10.9% below its record high (chart). Its 24.3% bear market lasted from December 16, 2024 through April 8, 2025.

On a year-to-date basis, the S&P 500 is down only 3.3%, with MAGS down 11.7% and XMAGS up 0.9% (chart).

The S&P 500's correction wasn't solely about Trump's tariffs. Investors questioned whether the Magnificent-7 and other technology companies were spending too much on AI infrastructure, especially after DeepSeek was introduced on January 24. The S&P 500 Data Center REIT took a deep-six dive, but has rebounded since April 8 (chart).

Meanwhile, both the Investors Intelligence and AAII Bull/Bear Ratios remain very low, which means that sentiment remains bullish from a contrarian perspective (chart). The former was at 0.88 last week, while the latter was 0.35.

All this raises the following question: Is it time to raise our year-end target for the S&P 500? Once again, there has been a big earnings hook in the latest quarter's earnings reporting season (chart). Q1's S&P 500 earnings growth rate estimate fell to 6.0% y/y in early April. It is up to 9.7% now. However, managements' guidance must have been weak given the rapid declines in earnings estimates for the remaining three quarters of 2025.

S&P 500 forward earnings peaked at a record high a couple of weeks ago and may stall for a while until Trump's tariff tiffs are resolved (chart).

The forward P/E of the S&P 500 has rebounded sharply from 18.1 on April 8 to 20.5 currently (chart). It's hard to imagine that it will bounce all the way back to this year's 22.0 peak. Given the near-term lackluster outlook for earnings and the significant recovery in the forward P/E, we've decided to maintain our 6000 year-end S&P 500 target.

Meanwhile, the price of crude oil is falling as the Saudis increase their production to thwart more shale production in the US and Canada (chart). This is especially bad news for Russia, which needs oil revenues to fund its war machine.

Profit taking and progress in trade talks will likely weigh on the price of gold for a few weeks (chart).

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