Climbing the Wall of Worry

By Crest Capital Advisors on May 5, 2025

Dow: 3.00% to 41,317.43
S&P 500: 2.92% to 5,686.67
Nasdaq: 3.42% to 17,977.73
Russell 2000: 3.22% to 2,020.74
Bitcoin: 97,670
10 Year Yield: 4.31%
Outperformers: Industrials 4.32%, Communication Services 4.19%, Technology 4.01%, Financials 3.60%
Underperformers: Energy (0.65%)

US equities were higher for the week, with the S&P 500 notching its first back-to-back weekly advances since January and the index ending the week on a nine-day streak of gains (the longest since November 2004). The S&P is now back to levels above the early April drop following Trump’s “Liberation Day” tariff announcements. Treasuries were weaker across the curve, reversing some Monday/Tuesday weakness as solid economic data helped trim the market’s rate-cut expectations – more on this below.

This week’s market mood was helped by further signs of de-escalating trade/tariff tensions. On Tuesday, President Trump signed an order confirming some expected temporary relief for US automakers. Treasury Secretary Bessent and Commerce Secretary Lutnick this week both talked up ongoing negotiations, with the latter telling CNBC one trade deal was done and just awaiting final approval. Mexico’s Sheinbaum said she had a very positive conversation with Trump and that work on improving her country’s trade relationship with the US will continue. And while they are speaking, they are not speaking about US-China talks continued to play out, China said it was “evaluating” recent US overtures, and media reports Friday suggested Beijing may be considering opening talks on fentanyl as a way to jump-start broader negotiations.

This week also had a slew of earnings, with the focus being on several Mag 7 (read largest S&P market cap companies reporting) reporting which supported the narrative that the Q1 earnings season continues to outperform expectations.

Economic Data Dump

This past week was one of the busier weeks we’ve had in quite some time, with major releases around inflation, GDP, and employment. Let’s take a quick stroll through some of the highlights.

First, we received the preliminary read of Q1 GDP on Wednesday and learned the economy contracted by (0.3%) quarter over quarter. This was below consensus for an expansion of +0.3% and the lowest print since Q1 2022. The annualized Q1 GDP was 2.0% vs consensus of 2.3%.  The report noted the decrease was primarily driven by imports and a decrease in government spending. However, it’s more than entirely due to net exports (because we imported so much more than we exported in the quarter). In fact, this was the largest ever drag on growth from net exports as a result of the pre-tariff import surge. See the chart below:

But gross domestic purchases grew by a booming 8.0%, final sales to domestic purchasers by 5.7%, and disposable personal income by 6.4%. It’s not a recession until payroll growth rolls over. More on this topic below.

Real GDP fell -0.3% in the first quarter, but a better measure of underlying domestic demand—real final sales to private domestic purchasers (GDP less inventory change, net exports, and government spending)—grew at a 3% annualized rate. Real final sales to private domestic purchasers have been steady for the last two years. The only caveat is equipment spending (driven by information processing equipment) surged 22.5% in Q1, to front-run tariffs, so 3% growth is a bit overstated.

Almost overshadowed by Wednesday’s GDP report was a rare mid-week release of the Fed’s preferred price index (The Personal Consumption Expenditure or PCE report). Here we received some great news on the inflation front as the report showed outright deflation for March on a headline basis, and almost no inflation at all for the Core (Ex-Food/Energy). Headline PCE is now at just 2.29% year-on-year, basically right at the Fed’s target.

And finally, we capped the week with a surprisingly solid monthly employment report. US nonfarm payrolls rose a solid +177,000 month-over-month in April. Revisions to prior months were -58,000 however, so a bit of an offset. The unemployment rate held at 4.2%, and the underemployment (U-6) dipped lower to 7.8%. No evidence of a cascading problem here. Unless or until we get significantly weaker employment data, the recession scenario will remain off the table, and the Fed will maintain its snail pace toward additional rate cuts.

Bottom line: These are all “good-to-ok” reports, but they are also all backward-looking so there is a bit of a discount given the tariff uncertainty remains. If it were up to us, we would want some insurance that the unemployment rate doesn’t spike from here, but the Fed has indicated they want to move carefully given they continue to expect consumer prices should also be increasing after the tariff shock. (Even though the headline PCE is all the way back to 2.29%!!!)

Despite the good inflation data, the Fed is very likely to hold rates steady in May, even though we think they should be cutting (Whatever happened to long and variable lags from action to transmission?). But in terms of all those rising recession odds from various Wall Street banks, we think these calls may still prove to be premature. Employment holds the key. Here’s a chart of the monthly payroll growth over the past 3 and a half years.

Make It 10 Straight!

Relentless media coverage amplifying investor fears has fueled an unprecedented stretch of bearish sentiment, marking 10 straight weeks of market anxiety. While economic fundamentals may not fully justify such prolonged negativity, the cycle of fear-driven reporting has created a feedback loop where pessimism dominates market psychology. As a result, sentiment has remained stubbornly bearish, despite indications that conditions may not be as dire as the headlines suggest. Some highlights….

Bullish % Respondents: This week’s 20.9% reading is among the 70 lowest readings ever!

Neutral % Respondents less than 20% for the 4th time in 5 weeks. Bearish % Respondents >50% for a record 10th straight week!

And yet, we continue to climb the wall of worry. Classic bull market behavior.

The Case for Active Management

So far in 2025, active managers in the large-cap core space continue to hold on to their outperformance over the index, with 58% currently beating the S&P 500. This marks the second-highest reading over the past 5 years and ranks third overall going back to 2007. The more the Mag 7 names lag the broader market, the greater the likelihood that active management will continue to outperform. However, if market leadership quickly reverts to the names that have driven returns over the past 10–15 years, then active managers are likely to underperform once again.

Chart of the Week

In viewing this chart of GDP per capita, it does not appear to us that things are going that well for the countries that are “ripping us off” in trade deals, or that things are going that poorly for the country “getting ripped off”.

GDP Per Capita

Q1 Earnings Season Update

This week, around 180 companies reported earnings, making it one of the busiest weeks of the season. So far, aggregate earnings growth for Q1 is tracking close to 11%, with figures excluding the Energy sector running even higher. Sales growth is also exceeding initial expectations, suggesting that corporations performed well in Q1 despite widespread concerns about tariffs. That said, most tariffs took effect in the second quarter, so those concerns are likely to persist—but for now, companies appear to be holding up well.

Economic Funnies

Crazy Stat(s) of the Week

•    As of Friday’s close, the S&P 500 is up 9 days in a row, exceeding the last time we had 8 days in a row just after the yen carry trade weakness of August 2024. The market hasn’t been up 9 in a row since November 2004, and looking ahead to possibilities on Monday, it hasn’t been up 10 in a row since September 1995!

•    It took exactly a month for the S&P 500 to round-trip its -14.7% post-Liberation Day crash. In the panic driven selling aftermath of the tariff announcements, nobody predicted this. It may have been the craziest, dumbest, wildest month of market coverage we’ve ever seen. But this is why we counsel our clients to maintain perspective and not react emotionally. 

Quote of the Week

“The intelligent investor is a realist who sells to optimists and buys from pessimists.”        

–        Benjamin Graham

Calendar of Events to Watch for the Week of May 5th

Next week, we move past the focus on Mag 7 earnings reports and onto another peak week of earnings reports, but with a bit more of a consumer lean to the key prints. Here, we might expect some dispersion in results as tariff uncertainty creates winners and losers. The US Economic Calendar will me significantly lighter than this past week, but we’ll still get notable data around trade deficits, Services PMI, and Unit Labor Costs.

But the highlight is likely to be Wednesday’s Fed meeting although expectations for a rate cut have dropped to just ~3%.

Monday 5/5 – The ISM Services PMI for April is expected to come in at 50.2, down a few ticks from 50.8 last month. April BEA Domestic Auto Sales is a report we typically don’t assign much interest to but markets may be more interested with all the tariff overhang. April vehicle sales data will be out in the morning.  

Tuesday 5/6 – The March Trade Balance is expected to show a net deficit of -$130.9 billion, up from last month’s -$122.7 billion.

Wednesday 5/7 – The main event of the day will be the conclusion of the latest Federal Reserve Open Market Committee (FOMC) meeting. Investors are expecting no changes to interest rates at this meeting however the accompanying press release and Chair Powell’s press conference always move markets.  

Thursday 5/8 – Q1 Unit Labor Costs are expected to show a 4.2% quarter-over-quarter increase and Productivity is expected to increase by 1.6%. Weekly jobless claims data will continue to get scrutiny.

Friday 5/9 – No major US economic reports due out today. Looking overseas, China will release export/import data as well as CPI and PPI.

Source: MarketWatch / FactSet (May 2025)