Market Thoughts: And so it goes

Europe took the tariff deal offered. Uncertain “certainty” set against escalating threats. Politicians continue to decry the European Commission’s negotiating transgression. It’s best to figure out early who to blame – human nature. And so it goes.

The “good” news about the flurry of rapid fire trade deals? Headlines are better than feared. The devil’s in the details. There haven’t been enough specifics to understand the promises made, let alone the ones that can’t be kept. Europe committing on behalf of its private sector to purchase $750bn of U.S. energy products over the next three years, a case in point.

Yale University’s Budget Lab has become the market’s de facto estimator of where we’ll land the U.S. effective tariff rate. Let’s call the starting point 2.5%, where we were right before the tariff war began. As of this writing, Yale estimates U.S. levies will land around 18%.

That level is close to the 20% high hit in the years after the Smoot-Hawley Act. The Tariff Act of 1930 was enacted to protect domestic companies from imports as the U.S. slipped into recession. It made things worse. We got a Great Depression instead. A scary narrative that’s been circling.

Things rapidly escalated back then. Trading partners retaliated fiercely. The global economy shut down. Policymakers don’t want to rhyme with history. Exporters need access to U.S. consumers. It comes with a higher duty tax. They’re saying yes to the (tariff) dress. A shotgun wedding.

Memory of Smoot-Hawley exacerbated April’s selloff. Great Depression redux. We looked to be leaning in that direction. Today, not so much. That’s lending support to markets. Investors are trying to work out how the price of tariffs will be spread across exporters, importers and global consumers. A little pain for everyone goes a long way towards salvation.

As a trading block, the U.S. imports most from Mexico and Canada. Combined they’re 28% of imports. Europe comes in second at 19%. China third, at 13%. Those figures are based on total 2024 U.S. goods imports of over $3.2 trillion, from the U.S. Census Bureau. Painful if squeezed, but not economically fatal. Unless things escalate.

It looks like trading partners aren’t planning to meaningfully reciprocate. No Great Depression. The interesting question: over time, will behavior change? It depends how tariffs are spread across stakeholders. Consumers are pulling back. U.S. importers stockpiled inventories pre-tariffs. Exporters benefited from it. Now what?

We wait and see. It’s why the Federal Reserve and European Central Bank hit pause on monetary policy. Protectionism is weighing on demand. Where, when, how much? A slow bleed in the macro data continues.

Markets appear priced to perfection. The current earnings season shows better than expected results are rewarded. Microsoft’s an example. It’s also healthy to see that when names disappoint, investors are selling. Pull up a chart on Novo Nordisk. There’s a bigger strategic direction, vision and leadership concern about Novo that’s added to the selloff.

The outlook for broad market revenue and earnings growth continue to be revised higher by analysts. With over half of the S&P 500 having reported, expectations are for topline growth of about 5% and earnings to grow 7.5-8%.

We’re not seeing support broaden across the market. Laggards for the most part continue to lag – meme-mania and short squeezes aside. That’s a trend to keep an eye on. The growing valuation gap embedded in the S&P 500 will close in one of two ways. Laggards play catch up, or leaders decline.

With rising hope of a digestible tariff outcome, uncertainty’s diminished. Analysts are pulling back on cries of imminent recession. Inflation is inching higher. We saw that again in June personal consumption expenditure data, the Fed’s preferred inflation measure.

Demand and labor markets continue to cool. Wages, salaries and real disposable income are treading water. The trend’s wobbly, not yet alarming. That said, there’s little bad news priced into market multiples. From time to time, too much of a good thing can be bad for you.

“And so it goes, and so it goes, and you’re the only one who knows.” Billy Joel

Unless explicitly stated otherwise, all data is sourced from Bloomberg, Finance LP, as of 7/31/25.