Since plummeting to an intra-session low on April 7, S&P 500 futures have increased by around 18%. They will be recording a bull market once more after a few more good days.
It is evident that traders believe the stock market overreacted to the possible harm that the Trump trade war could wreak a month ago. In that sense, Trump’s 90-day halt to his “reciprocal” tariff plan was quite beneficial.
Goldman Sachs, meanwhile, is still worried.
Alec Phillips, the chief political economist at the bank, recently issued a warning, stating that the U.S. President’s remarks on the trade agreement with the United Kingdom indicate that many nations would eventually have to pay significantly higher tariffs than they did prior to Trump’s reelection.
Additionally, in a podcast titled “On the precipice of another dip?” that was released on Thursday. Peter Oppenheimer, the senior global stock strategist, and Jan Hatzius, the chief economist at Goldman, seemed particularly cautious.
Hatzius restated that he believes there is a 45% likelihood of a recession in the United States during the next 12 months. He admits that recent data has been a combination of improved factual data, like the most recent payroll figures, and bad soft data, like sentiment polls.
He points out that experience demonstrates that hard data lags, often by 60 days or more, but that this time the lag might be higher because a lot of trade business was moved ahead to avoid tariffs. “A very significant risk of a recession,” however, remains, according to Hatzius.
The Federal Reserve may only be prompted to ease policy after the labor market has begun to worsen because it must wait to see if the tariffs result in a one-time price increase or more persistent inflationary pressure. From here, the Fed might decrease rates by 200 basis points in the event of a recession, Hatzius said.
According to Oppenheimer, traders hailed Trump’s reversal of his initial punitive tariffs, cheered “reasonably decent” earnings, and witnessed ordinary investors buying the dip. These factors all contributed to the recent strong stock comeback.
Oppenheimer points out that the time since the tariff commotion began is not included in first-quarter profits.
“If the hard data begins to deteriorate, particularly the U.S. labor market, I think the market will put a much more significant weight on a potential recession, and the market could well fall back from these levels, and that would be our central view,” Oppenheimer states.
“Bear in mind the U.S. market is back to a PE [price to earnings multiple] of 20…so it’s not particularly cheap,” he continues. According to him, the market may also be valued on a lower-than-average PE if earnings decline by 10% during a typical recession, bringing the S&P 500 SPX down to 4,600.
As the advantages of American major tech companies are diminished and the market narrows the record wide valuation differentials that have benefited the U.S. for 15 years, international investors will reduce their exposure to Wall Street, which will increase the pressure on U.S. equities. A record 70% of the world stock market is valued in the United States, and that percentage is probably going to decline.
Fortunately, Oppenheimer does not believe that we are currently experiencing a structural bear market, which is frequently preceded by large asset bubbles and imbalances in the private sector, as was the case in Japan in the late 1980s and the financial crisis in 2007–2008. Compared to, say, an event-driven bear market, like the one we just saw, these bear markets typically occur over a longer time period and have significantly greater declines, with drops of about 60%.
However, Oppenheimer emphasizes that stocks face an unbalanced risk to the negative in the near future.
