Fast reading
- US GDP came in below expectations, contracting by an annualised 0.3% over the first three months of the year.
- The US earnings season saw robust results from leading ‘Magnificent Seven’ companies, however, some firms downgraded their earnings forecasts.
- US manufacturing contracted in April amid rising input costs.
It was a big week for US macro data this week, with GDP, earnings and the JOLTs1 report all going live.
In the event, it was something of a mixed bag: US GDP came in below expectations, contracting by an annualised 0.3% over the first three months of the year, while US job openings dropped sharply in March (but did so against a decline in layoffs). ISM PMI2 data showed US manufacturing contracted further in April with rising input prices.
Earnings were also mixed: ‘Magnificent Seven’ names, including Microsoft and Meta, posted record earnings, allaying fears of a wider meltdown, while Amazon and Apple beat expectations. Many earnings calls, however, have been marked by companies lowering their future earnings forecasts on the back of tariffs-driven uncertainty.
The investor’s view
In a week that marked President Donald Trump’s 100 days in office, Mark Sherlock, Head of US Equities at Federated Hermes Limited, notes that, since inauguration, sentiment has been dominated by executive orders, policy announcements and tariff uncertainty – which may now have reached its peak.
“While volatility may continue for another few weeks as individual tariff arrangements are agreed, we believe we’re past the worse and that the second half of the year may well prove more profitable for investors than the first,” he says.
“We anticipate a temporary pause in consumer and corporate spending as the ‘rules of engagement’ emerge, but we’d also point out that US small and mid-cap (SMID) companies are somewhat insulated from the US-imposed tariffs due to their domestic focus. If the tariffs do force a re-alignment of the global supply chain, we believe domestic small and mid-caps should benefit from increased economic activity and demand.”
On the question of volatility, Sherlock notes that, while it remains unnerving for investors, it is neither unusual nor necessarily unwelcome. “Data shows that since the inception of the Russell 2500 Index in 2004, investors have experienced average intra-year drops of 17.8%,” he says. “Importantly, however, year-end annual returns have been positive in 16 of the last 21 years. We remain confident in the underlying domestic economy in the US and the ability for SMID companies to generate exciting earnings growth over the next several quarters.”
Navigating the fog of the trade war was never going to be easy. Quite the contrary, we anticipated volatility, though not to this degree!
Stephen Auth, Chief Investment Officer for Equities at Federated Hermes, notes that navigating the fog of the trade war was never going to be easy. “Quite the contrary, we anticipated volatility, though not to this degree!” he says.
“For now, we’re sticking with our now-moderate equity overweight, waiting for a sign that the fog is beginning to lift, or at least get less dense. Good news: we believe we may be getting closer. With the near-term voyage ahead still fraught with pitfalls, the probability of a market-retest seems relatively high.”
Against this backdrop, he says, investors should continue to re-evaluate and have cash at the ready to add to equities. “In the meantime, we’re keeping our positions defensive with an emphasis on value-stocks, dividend payers and international equities.”
A view on China
In other news, James Cook, Investment Director for Emerging Markets at Federated Hermes, highlights China’s first-quarter economic growth, which outstripped expectations. This, he says, was underpinned by solid consumption, industrial output and a surge in exports driven by factories rushing shipments to customers frontloading to beat Trump tariffs.
He adds: “Before ‘Liberation Day’, China was at the end of an extended economic downcycle, showing signs of improvement due to policy shifts since September 2024 and a recovery in business confidence following the DeepSeek event.3 The MSCI China equity index had its best quarterly earnings in Q4 2024 in three years, delivering low teen earnings growth for the year. Chinese equities were valued at a near-record high discount to global equities, with growing earnings and improving ROE. While boosting domestic consumption is a key priority, we believe the government will be forced to do more on the policy front to achieve its annual growth target of 5%.”
Figure 1: Whither trade? US/China shipping costs
Share:
1 Job Openings and Labor Turnover Survey (JOLTS).
2 The Institute of Supply Management (ISM) Manufacturing Purchasing Managers Index (PMI) provides a monthly gauge of the level of economic activity in the manufacturing sector in the United States versus the previous month.
3 On 27th January 27, 2025, DeepSeek, a relatively new Chinese start-up, announced it was able to develop an AI model at a fraction of the cost relative to estimates of major players in the industry. This was viewed as a watershed moment for earlier incumbents (see China’s Sputnik moment).
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