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On Monday, Evercore ISI provided insights into the current state of the U.S. economy, highlighting its resilience amidst challenging trade policies. While the U.S. gross domestic product (GDP) saw a slight contraction of 0.3% in the first quarter of 2021, the underlying demand has remained robust. April’s payroll employment figures exceeded expectations, and S&P 500 companies are reporting solid earnings at a $257 annual rate.
Surveys conducted by Evercore ISI among retailers, restaurants, and homebuilders showed an uptick this week, driven by factors such as weather conditions, holiday spending, and tariff-induced pre-buying. Despite this positive trend, the survey index stood at 48.4, indicating that the economy is still in a struggling zone. This suggests that growth in the second quarter may be modest. The short-term outlook for retail sales is optimistic, with a surge in vehicle sales expected to contribute positively. InvestingPro data reveals the S&P 500’s resilience, maintaining dividend payments for 33 consecutive years with a current yield of 1.2%.
Trade policy uncertainties, however, continue to cast a shadow over the economic outlook for the second half of the year. Retailers have started to signal potential price increases, and many companies have withdrawn their full-year financial guidance due to the unpredictability of the trade environment. Consumer and business sentiment surveys have also shown a decline. According to InvestingPro’s Financial Health metrics, the S&P 500 maintains a "GREAT" overall score of 3.31, with particularly strong profit and growth indicators. Unlock more detailed market insights and exclusive analysis with an InvestingPro subscription.
The labor market and consumer spending appear to be holding steady, but warning signs are emerging. Small business hiring plans have been on the decline, the ratio of job openings to unemployed individuals has slowed, and unemployment claims have seen an increase to 241,000 this week.
Inflation concerns are also on the rise, with the core Personal Consumption Expenditures (PCE) price index, which excludes food and energy, climbing at a 3.5% quarter-over-quarter annualized rate in the first quarter, mainly due to goods inflation. Wage growth is showing signs of slowing, and the impact of tariffs may further pressure inflation.
In contrast to the U.S., the Eurozone reported strong real GDP growth in the first quarter, with Germany and Spain leading the charge. However, the imposition of U.S. tariffs is likely to dampen the region’s future economic growth. Additionally, China’s manufacturing Purchasing Managers’ Index (PMI) has fallen into contraction, signaling potential challenges ahead. The S&P 500 currently trades at a P/E ratio of 4.09, with a market capitalization of $600.44 billion, reflecting the complex global economic environment.
In other recent news, Deutsche Bank (ETR:DBKGn) and Citi have both revised their year-end targets for the S&P 500, citing concerns over tariffs and earnings estimates. Deutsche Bank lowered its target from 7,000 to 6,150, with analysts reducing the 2025 earnings per share (EPS) estimate from $282 to $240, indicating a 5% decline from the previous year. Similarly, Citi adjusted its S&P 500 target from $6,500 to $5,600, reflecting a new EPS estimate of $255, down from $270. Both firms highlighted the impact of tariff policies and market uncertainties as key factors in their revisions. Meanwhile, the SPDR S&P 500 ETF Trust experienced its largest premium to underlying assets since 2008, closing about 90 basis points above its net-asset value after a significant trading session. This surge was attributed to traders rapidly covering bearish trades, leading to extreme market moves. Additionally, the selection of a new Pope following Pope Francis’s passing is noted for its potential impact on global markets, as the Vatican’s influence extends to various economic and social issues. Lastly, market analyst Marko Kolanovic expressed concerns about a potential market downturn, drawing parallels to past financial crises and suggesting caution amid current market conditions.
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