Image Source: Pixabay

There is no doubt that this coming week will be all about trade policy. However, we still have a couple of economic reports to contend with, and Q1 earnings begin on Friday. First, let's look at the incoming economic data.

Tuesday: NFIB Small Business Optimism Index (101.3 Expected)

The Street expects a small increase over last month, and I doubt the data will include responses after last week's policy announcement. We’ll probably have to wait until next month to get the full response of small business owners to these new policies.

Small business optimism soared after the election, as owners looked forward to reduced regulations and taxes. It remains above the long-term average, but it probably won’t stay there for long if there is no policy relief.

Thursday: Consumer Price Index (CPI) Inflation (+2.6 Year-Over-Year Expected)

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This will clearly be the most important data point of the week. CPI is expected to fall to 2.6% year-over-year, from the previous reading of +2.8%. The sharp fall in oil prices after the tariff announcement may put downward pressure on headline inflation for awhile.

However, core prices are expected to increase at a faster rate (at +0.3% for the month, after the previous reading of +0.1%), so don’t be surprised to see year-over-year core inflation heat up while headline inflation cools down. It's just another headache in this very complicated market dynamic.

Friday: Preliminary University of Michigan Consumer Sentiment (54.0 Expected)

Consumers are as pessimistic as they have ever been, and it's been a self-fulfilling prophecy so far. Sentiment has fallen 10%+ for the last two months, and April's forecast is for another decline to be seen in the range of 5%.

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Earnings

12 S&P 500 companies are to report earnings this week. Q1 really kicks off on Friday, as JP Morgan, Blackrock, Morgan Stanley, and Wells Fargo will report results.

For those looking for clarity on forward guidance when these companies start reporting, I wouldn’t get your hopes up. On the contrary, I expect companies to either increase the range of their forward estimates, or to remove them all together.

S&P 500 companies have reported a combined $248.66 in EPS over the last 12 months (TTM), while the Street expects to see $278.96 in EPS over the next 12 months (forward), for a 12.2% growth rate.

The problem with forward estimates is that they aren’t reliable during times of high uncertainty. Expect major revisions to come.

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Now that Q4 earnings are in the rear-view, we can review the progress. Earnings grew 17.1%, well above the recent average of 11.5%.

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Sales grew 5.2%, slightly below the recent average of 6.5%. Meanwhile, 73.5% of earnings results came in better then expected (vs. the average of 76.2%), and results came in a combined 6.9% above expectations (vs. the average of 8.3%).

The forward PE is still about 7% above the long-term average, while the trailing PE is still 9.5% above average. The price to earnings growth (PEG) ratio is now at 1.5x.

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Barring a trade compromise, I don’t expect the market to bottom until we get into the 4630-4820 zone, as highlighted in the chart above. And who knows if that will even be enough to hold it.

But there is a lot of confluence around there. The midpoint of the rally off the 2022 lows is around the 4800 mark. The 4820 level would match the size of the 2022 bear market in terms of points, along with the “valuation reset” targets I mentioned in prior posts.

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I would like to see the Volatility Index (VIX) spike above the August 2024 high at the 65 mark. That could be a signal of at least a short-term capitulation.

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Interest rates on the 10-year Treasury fell below 4% this week, as investors either anticipate slower economic growth, and/or this was a flight to safety from the volatility of stocks.

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Credit spreads are starting to show signs of stress, as both high yield and investment grade bond spreads are now above the 2024 highs after the Japanese yen volatility spike. They remain in decent shape as of the time of writing, but they are trending in the wrong direction.

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The US dollar experienced a wild week, as it fell by 2.5% on Thursday -- although, it did regain quite a bit at the end of the week. The US administration clearly wants lower interest rates and a lower dollar. Be careful what you wish for.

Bottom Line

The only thing that matters is trade policy. If we get some hope that this “solution” can be reversed or amended, then markets will go up. But if not, it's probably going to be ugly for a while. The inflation numbers will bring a variety of possibilities. I suspect that will be the next battle, but we’ll cross that bridge when we come to it.

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