Hi, everyone, I'm Liz Ann Sonders, and this is the June Market Snapshot. On this short video, I'm going to provide a summary of our Mid-Year Outlook, which just published a few days ago. It can be found within the Learn tab on schwab.com, and the visuals in this video are just a subset of what you'll find in the written report.
[High/low chart for "Back to the future of high tariffs" for U.S. average effective tariff rate is displayed]
Now, as we approach the midpoint of 2025, the US economy continues to confront a pretty complex interplay of policy decisions around tariffs, also around immigration, labor market dynamics, and of course fiscal pressures. As has been well-documented, in early April, the Trump administration implemented significant tariff increases. But since then, we've had escalations, de-escalations, delays, court decisions, and appeals. As you can see here, leading into early April, the average effective tariff rate in the United States was less than 3%.
[High/low chart for Trump 2.0 tariffs is displayed]
As of today, and that's a moving target, that rate is up to more than 15%, which is the highest since the late 1930s depression era.
[High/low chart for "Seeing the 'stag' and the 'flation'" for OECD simulation of 10% bilateral tariffs between U.S. and trading partners illustrating GDP level in three years is displayed]
Now, in terms of the economic impact, the OECD is projecting that US GDP will slow from 2.8% last year to 1.6% this year. And as you can see, this is more than in other major countries except for Mexico.
[High/low chart for Inflation average annual impact in first three years is displayed]
As far as the inflation impact, the OECD expects US inflation to approach 4% this year due to higher import costs, which is the… would be the second largest jump across major economies as shown here. Now, the good news for now is that inflation readings have been more benign than expected, including this week's Consumer Price Index.
[High/low chart for "Hard data not looking soft yet" for Bloomberg "Soft Data" Surprise Index is displayed]
Now, were this stagflationary outlook to unfold, recession risks would rise. Keep in mind, though, that the last time recession risk appeared to be elevated but didn't come to fruition, was in the aftermath of the Federal Reserve's aggressive tightening campaign that began in 2022. Then like now, there developed a significant compression in what's called soft economic data, that survey-based data, things like consumer confidence, business confidence.
[High/low chart for Bloomberg "Hard Data" Surprise Index is displayed]
On the other hand, the hard data, again, then and now was more resilient. We have had the view that the most likely scenario to unfold in this cycle would be some convergence between soft and hard data, and that appears to be unfolding.
[High/low chart for "Low hiring, low firing" for JOLTS jobs openings is displayed]
We continue to believe that the labor market holds the key to so much— economic outlook, Fed policy outlook. The present environment can best be characterized as one in which companies have cut back on hiring plans, and this can be witnessed via the trajectory of job openings as you can see here. They've been trending down over the past few years.
[High/low chart for JOLTS layoffs is displayed]
But on the other hand, layoffs have been more range-bound over the past couple of years, and as you can see, remain below the pre-pandemic average. In other words, we're presently in what seems to be a limited hirings/limited firings type of backdrop.
[High/low chart for "CEO optimism fades rapidly" for CEO Confidence Index is displayed]
Now, one reason for limited hirings includes weak CEO confidence seen here. Now, stating the obvious, trade policy instability has put a significant dent in CEO's outlook.
[High/low chart for y/y % change in Equipment & intellectual property products is displayed]
As shown here, there has been a strong link historically between CEO confidence and capital spending. So barring a quick reversal in CEO confidence, many capital spending plans are likely to remain on hold, importantly, though, other than AI-related spending, which is likely to remain robust.
[High/low chart for "An EPS hook up, an EPS hook down" for S&P 500 1Q25 y/y earnings growth is displayed]
Now, notwithstanding dour CEO sentiment, first quarter earnings growth was stellar. Heading into reporting season estimates were for growth to be about 8% for the first quarter. Yet when all was said and done, actual earnings for the quarter, were nearly double that estimate. This is for the S&P 500.
[High/low chart for S&P 500 y/y earnings growth for 2Q25, 3Q25 and 4Q25 is displayed]
The rub is that there has been no extrapolation of strong first quarter earnings into the remaining three quarters this year. Yes, growth is still expected this year in terms of earnings, but cuts to earnings estimates have helped put upward pressure on still high valuations. However, we could be facing another beneficial set up of analysts having lowered the bar too far, possibly allowing for yet again a beat again in the second quarter.
[High/low chart for "Crowd goes (just a little) wild" for Ned Davis Research Crowd Sentiment Poll is displayed]
Now, strong earnings were not enough to keep investor sentiment from plunging into the early April market lows. Shown here is one of our favorite sentiment indexes, in part because it's an amalgamation of a number of individual indicators, all of which we look at blended into one index. Now, as the market began its lift from the early April lows, along with it came improvement in sentiment.
[Table for Ned Davis Research Crowd Sentiment Poll and S&P 500 annualized performance is displayed]
And this rebound from despair territory back into neutral territory has put it in a zone that is historically the strongest for the S&P 500, as you can see in the table here. The healthy dose of skepticism that still is in the marketplace has been one of the reasons why stocks have been able to climb the famous wall of worry, and we think that sentiment could stay in the support column for a while longer.
[List of "Takeaways" is displayed]
So these are just some snapshots of what we covered in the Outlook Report. You will find even more there, including more on recession and labor market indicators, consumer credit conditions, we write about Fed expectations, small business spending plans, and then write a bit about sector performance, and also Magnificent 7 performance. We wrote about the relationship between bond yields and stock prices, and commented a bit more on valuations. So definitely check out that report for lots more. And thank you, as always, for tuning in. I'll be back again next month.
[Disclosures and Definitions are displayed]
