May 12, 2025

QuickTakes

Recalibrating Our Forecasts

As Stock Market Roars

Among our main concerns about Trump's Tariff Turmoil was that the drop in stock prices would have a significant negative wealth effect on consumers, especially retired and soon-to-be retiring Baby Boomers, who collectively own about $25 trillion in corporate equities and mutual funds (chart). We raised our subjective probability of a recession this year from 20% to 35% on March 5, and from 35% to 45% on March 31 as stock prices tanked in response to TTT.

We didn't cross over to the dark side subsequently, i.e., forecasting greater than a 50% chance of a recession. Instead, we lowered our recession odds back down to 35% on May 4. Now we are lowering it again to 25%. After today's stock market rally, the negative wealth effect is probably insignificant. We are also raising our S&P 500 year-end target back up to 6500 from 6000. (BTW: According to Polymarket.com, the odds of a recession dropped from 51% on Friday to 41% today.)

We are still predicting that S&P 500 forward earnings will rise to $300 per share at the end of this year. We now see the S&P 500 forward P/E at 21.6 at the end of the year rather than 20.0 as we previously had projected. We are raising our real GDP growth range to 1.5%-2.5% this year, up from our previous 0.5%-1.5% (chart).

In the April 7 Morning Briefing, we wrote: "We expected Liberation Day [April 2] to bring trouble. So for now, we aren't changing our outlook or our odds of a recession. Call us delusional optimists, but we aren't ready to bet against the resilience of the US economy in general or its consumers in particular. Of course, our big assumption is that Trump's tariff nightmare will go away sooner rather than later, one way or another." We predicted a V-shaped stock market recovery when that occurred, which it did two days later on April 9!

Now consider today's other developments:

(1) The S&P 500 is only 5.9% below its record high on February 19 (chart). It now exceeds both its 50-day and 200-day moving averages.

(2) Q2's Senior Loan Officer Opinion Survey (SLOOS) showed that bank loans remained generally available, with only slightly tighter credit conditions for C&I loans than in the prior quarter’s survey. Loan demand remained relatively moderate.

(3) Over the past 12 months through April, the US federal budget deficit totaled $2.0 trillion. Outlays rose to $7.1 trillion, while receipts rose to a record $5.1 trillion. Consistent with the strength of the labor market, payroll tax receipts rose to a record $1.7 trillion. Customs duties are starting to boost the federal government's tax receipts. During April, they rose at an annualized $195.6 trillion (chart).

(4) The dollar index (DXY) rallied today. It is a misleading index because it is a fixed-weight index that gives the euro a weight of 57.6%. The Fed released its daily data on the broad trade-weighted dollar for last week this afternoon. It didn't fall as much as DXY in recent weeks and is still on a solid uptrend, mostly because the dollar remains strong relative to the currencies of emerging market countries.

(5) Gold gave back a bit of its glitter today. It might give up some more if numerous ceasefire talks succeed. However, central banks are likely to remain the primary drivers of gold's ascent.

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