The fastest US stock market selloff since the depths of the Covid pandemic has left valuations looking cheap. But if a recession is inevitable due to the global trade war sparked by President Donald Trump’s tariffs, the definition of inexpensive becomes relative.
“What are you doing to me, Trump? We’re all navigating in the dark with recession risks rising,” said Adam Phillips, managing director of portfolio strategy at EP Wealth Advisors, whose firm is neutral US equities.
Historically, the S&P 500’s trailing price-to-earnings ratio slides to an average of 15.6 during routs that precede economic downturns, according to data compiled by Sam Stovall, chief investment strategist at research firm CFRA, a leading equity strategist and an expert on stock market history. It’s currently at 23 despite the recent selloff, meaning there’s still plenty of room for share prices to fall.
Federal Reserve Chair Jerome Powell said Friday that the impact of new tariffs is likely to be significantly larger than expected, creating a big challenge for the US central bank — and US stocks — given that Trump’s tariffs threatens to raise both inflation and unemployment.
“Trump is going to leave us all disappointed, and he won’t be the one to end this,” Phillips said. “Stocks are going to selloff even more until someone — either the Fed or Congress — comes to the rescue. But we don’t see that happening anytime soon.”
Friday’s strong jobs print for March was likely the “last curtain call” for a so-called “Goldilocks economy” since the data was before the economy got hit by Trump’s widespread tariffs and the reciprocal responses from around the world, according to Michael Feroli, chief US economist at JPMorgan Securities. The trade fight reduces any chance the central bank will cut interest rates as soon as May, he told clients in a note.
Growth appears to already be slowing. The Atlanta Fed’s GDPNow model sees real gross domestic product contracting at a 2.8% annualized rate in the first quarter. That makes the Trump administration’s annual economic growth goal of 3% of more look increasingly remote. GDP has risen more than 2% in nine of the past ten quarters through the end of 2024.
If the US economy enters a recession, the rest of the world risks a similar fate, which would undo prospects for exports to fuel corporate profitability. Analysts’ outlooks for the S&P 500 in 2025 have steadily fallen since the start of the year. They see profits for S&P 500 companies rising by 9.4% this year, down from nearly 13% in early January, according to data compiled by Bloomberg Intelligence.
Since World War II, there have been nine bear markets that have accompanied recessions, and on average the S&P 500 has declined 35% versus 28% in bear markets that didn’t come with economic downturns, CFRA data show. There have been just five bear markets without recessions since 1948.
“Everything is a huge question market now and it’s incredibly difficult to position stocks for when no one knows what is happening with tariffs,” said Julie Biel, a portfolio manager at Kayne Anderson Rudnick. “Valuations are still high, even after a massive selloff so do you buy now at cheaper levels or is more pain coming? We’re much more vulnerable to a recession.”
Written by: Jess Menton @Bloomberg
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