Last week: Moody’s downgraded its US rating - US inflation lower, UK GDP up 0.7% - China sealed an accord with the US
WEEKLY TRENDS
WEEKLY TRENDS
- Joining Fitch and S&P rating previous downgrades, Moody’s downgraded the US on Friday evening (one notch from Aaa to Aa1, so in effect losing the AAA rating) over the growing burden of financing the federal government’s budget deficit and the rising cost of rolling over the existing debt
- Prior to this announcement, the week had been largely positive for US stocks (+7% for the Nasdaq), long Bond yields were slightly up (+10bps) and despite the US April CPI being at its lowest since Feb 2021 (+2.3% yoy), markets reduced the FED rate cuts expectations to 2 cuts this year (-25bps in Sep and -25bps in Dec)
- The US and China agreed to lower tariffs on each other for 90 days, starting May 14th (30% from 145% for the US, 10% from 125% for China)
- Note that Cyclicals outperformed Defensives stocks for the 4th week in a row
- All eyes now on the mega ‘Trump tax proposal’ debate ($4000bn tax cuts)
MARKETS
Equities
Q1 corporate earnings released (WoW stock performances):
Cisco (+3%), Richemont (+11%), Walmart (+1%), Siemens (+1%)
NB: US/China deal led Hapag-Lloyd (+26%); Coreweave data centres specialist (+47%); Coinbase joins the SP500 19th May (+27%); UnitedHealth CEO resignation (-23%); Alstom (-13%); Merck (-7%)
Analysts:
Be Semiconductor (JPM ‘o/w’ target €121), Haleon (MS ‘o/w’ target £425), Airbus (MS ‘o/w’ target €195), Swiss Life (Barclays ‘o/w’ target CHF809)
ABB (GS ‘neutral’ target CHF48), Amundi (JPM ’neutral’ target €72)
Rates
US curve (2-10 years) steepening stable at 50bps. (Bond yields slightly higher across the board). 2 FED rate cut now discounted (Sep and Dec).
HY corporate spreads lower by 25bps at 320-330 bps (EU/US)
Commodities
Oil price higher (+2.5%) 2nd correction higher, after the 8% drop the previous weeks, due to the US-China tariffs deal (Note Iran sanctions could be lifted, leading to a potential 400k barrels/day additional production growth
Gold price lower (-3.5%) impacted by a stronger USD and higher yields
US
April CPI at its lowest since Feb 2021 (+2.3% yoy)
UK
Q1 GDP at +0.7% (+1.3% yoy)
Under the watch
‘Trump’ mega tax proposal debate this month ($4000bn in tax cuts and $1500bn in spending cuts over a decade)
Nota Bene
Large US Tech companies (Amazon, Alphabet, Microsoft and Meta) spent $72bn altogether on purchases of property and equipment in Q1
SP500 operating margins increased to12.4% in Q1 (highest since 2021)
CALENDAR
Macro Data releases:
EU April CPI (19 May)
UK April CPI (21 May)
Q1 corporate earnings:
US Home Depot (20 May)
EU BAT, Diageo (19 May), Vodafone, Swiss Life (20)
WHAT ANALYSTS SAY
BlackRock, 12 May 2025
Author: Wei Li, Global Chief Investment
Still selective as trade conflict cools
· We still see tariffs causing further contractions in quarterly activity but the cumulative impact may be more limited. We eye opportunities from mega forces.
· We’re looking for early signs of tariffs pushing up inflation in U.S. CPI data. Sticky inflation will limit how far the Federal Reserve can cut rates. The U.S.-China deal represents a major de-escalation in the trade conflict.
· Three key takeaways? First, it reaffirms that the hard economic rules we’ve been flagging will shape policy. Second, tariffs will likely bring more supply-driven contractions in quarterly activity, but the cumulative impact on overall 2025 activity could be more limited. Third, the deal gives a sense of where the U.S. effective tariff rate will settle. We stay risk on, monitoring corporate earnings reports for selective opportunities.
The 90-day cut to U.S.-China tariffs shows a hard economic rule shaping policy: supply chains can’t be rewired quickly without disruption. That’s reflected in both nations’ explicit goal of avoiding economic “decoupling.” We still think tariffs will up inflation and hurt growth, with recession-like effects in coming quarters. Earnings estimates often suffer steep cuts when activity slumps. The U.S. average effective tariff rate could land around 10-15%, we estimate, higher than at the start of 2025 but a more manageable economic disruption. We stay positive on developed market (DM) stocks and see mega forces creating select opportunities.
We see three key themes in Q1 earnings reports.
First, moving production to the U.S. or countries on better terms with the U.S. has, for the first time, been discussed on all Q1 earnings calls so far, per Alphasense data. Some are now giving timelines.
Second, many firms look set to accept higher input costs as supply chains adjust. The latest external estimates see tariffs denting net earnings by around 5%.
Third, 60% of companies updating their spending plans are now guiding below consensus forecasts – up from 40% at the start of the year but still below the 71% hit in the pandemic. Yet opportunities persist in certain sectors. Big tech is reaffirming or upping AI-linked investment, for example.
In Europe, infrastructure and defense spending plans have led us to upgrade European equities to neutral. Yet execution of those plans is key – and the new German chancellor’s limited coalition support highlights potential obstacles. Europe’s Stoxx 600 has performed broadly on par with the S&P 500 since the April 2 tariff announcement and European earnings estimates for 2025 have fallen to 3.5% from 8% in January. Yet that masks divergence. Financials are up over 20% this year, thanks to persistently high yields and strong company and household balance sheets. We’ve preferred Spain since the start of 2025 due to strong growth and exposure to financials, utilities and infrastructure – sectors that benefit from mega forces. Spanish stocks are also less exposed to U.S. tariffs: only 5% of its exports are U.S.-bound, less than the EU average, trade data show.
UBS Global Wealth Management, 12 May 2025
Author: James Mazeau, Economist, Chief Investment Office
Factors in support of US equities
Corporate profits better than expected
75% of S&P 500 companies have published their Q1 results. Corporate profits are expected to rise by 9% for the first 3 months of the year, better than the initial forecast of around 5%. Nearly 60% of companies have exceeded their sales estimates and 70% have announced better-than-expected profits. Forecasts should also be reasonably good. Among the highlights were better-than-expected results from technology mega-caps, against a backdrop where AI fundamentals remain intact, and the ‘resilience’ of consumer spending. Although trends are expected to weaken in the coming months, as products subject to higher tariffs begin to hit shelves, markets are likely to overlook economic weakness in the short term, given signs of progress in trade negotiations. We can expect a return to 10% earnings growth in 2026.
Negotiations on customs duties: more positive news on the horizon
Despite potential deals with India, Japan and South Korea and deals with the UK and Chinas, uncertainty remains, but tensions should probably no longer be so extreme. Various agreements or sectoral exemptions should be reached before the end of the 90-day suspension period in July. In addition, the effective rate of US customs duties should stabilise at around 15% by the end of the year.
Latest employment data show short-term resilience
The recently published US employment report showed that 177,000 jobs were created in April, higher than market forecasts but lower than the 185,000 jobs created in March, which had been revised downwards. The unemployment rate remained stable at 4.2%, with a relatively modest rise in average hourly earnings of 0.2%. This report corroborates other recent employment data, notably the fall in job vacancies and the rise in new jobless registrations, suggesting that the labour market continues to perform well overall, despite some signs of weakness. This should allow the US Federal Reserve to resume monetary easing in the 2nd half of the year, cutting interest rates by 75-100bps this year to support US economic activity. The US economy should avoid a full-blown recession, although growth is expected to slow this year.
New periods of volatility
However, uncertainties remain high and economic data is likely to weaken in the months ahead, pointing to further periods of volatility. As investors adopt a less pessimistic stance following the latest rally, there may be fewer factors to propel equities to new highs in the short term. Gradual entry into the equity market can be an effective way of positioning oneself for medium- and long-term gains, while managing timing risks, while capital preservation strategies can be a way of managing short-term downside risks.
Goldman Sachs Briefings, 16 May 2025
Authors: David Kostin, Chief US equity strategist ; Jan Hatzius, Chief economist
US stocks are forecast to rally
US stocks are expected to rise in the coming months as the Trump administration overhauls the country's tariff policy with its largest trade partners. Goldman Sachs Research estimates the S&P 500 index will increase about 10% to 6,500 in the next 12 months.
David Kostin, Goldman Sachs Research's chief US equity strategist, raised his S&P 500 forecast following developments in trade discussions between the US and China to incorporate lower tariff rates, better economic growth, and less recession risk than previously expected. Our economists estimate the US has about a 35% chance of recession in the next 12 months and that GDP will expand 1.5% in 2025.
The outlook for the “US exceptionalism” investment theme — the expectation for US GDP growth and market returns to outshine other regions — has been the subject of major discussion for investors as trade tensions ripple through the global economy.
Padi Raphael, global co-head of Third Party Wealth Management in Goldman Sachs Asset Management, says that sentiment toward that theme differs somewhat around the world. US investors aren't shying away from their domestic market, she says, but at the same time there's heightened interest in some international markets and in Europe in particular. European investors have an increased bias toward repatriating assets to their home markets.
Generally speaking, in Asia, “US exceptionalism and the brand recognition around US companies is still very strong” among many investors, Raphael says. “My recent conversations with investors from Asia have not reflected any kind of loss of the shine of the US as a destination for investing,” she says.
The forecast for FED rate cuts
Our economists now expect the Fed to begin a series of three 25-basis-point cuts in December rather than in July, and to implement them at every other meeting rather than sequentially. The Federal Open Market Committee meets roughly every six to eight weeks.
Jan Hatzius, Goldman Sachs Research's chief economist, writes in the team's report that the rationale for interest rate cuts in our economists' forecast has shifted. Previously, the rationale had been insurance: pre-emptive action when the central bank sees potential weakness in the economy.
Now the team expects that the Fed will instead start cutting with a view to slowly returning interest rates to a more conventional level “as growth remains somewhat firmer, the unemployment rate rises by somewhat less, and the urgency for policy support is reduced”.
The team's estimate for the terminal rate — the point at which the Fed will stop cutting interest rates — is unchanged at 3.5-3.75%.
Equities
Q1 corporate earnings released (WoW stock performances):
Cisco (+3%), Richemont (+11%), Walmart (+1%), Siemens (+1%)
NB: US/China deal led Hapag-Lloyd (+26%); Coreweave data centres specialist (+47%); Coinbase joins the SP500 19th May (+27%); UnitedHealth CEO resignation (-23%); Alstom (-13%); Merck (-7%)
Analysts:
Be Semiconductor (JPM ‘o/w’ target €121), Haleon (MS ‘o/w’ target £425), Airbus (MS ‘o/w’ target €195), Swiss Life (Barclays ‘o/w’ target CHF809)
ABB (GS ‘neutral’ target CHF48), Amundi (JPM ’neutral’ target €72)
Rates
US curve (2-10 years) steepening stable at 50bps. (Bond yields slightly higher across the board). 2 FED rate cut now discounted (Sep and Dec).
HY corporate spreads lower by 25bps at 320-330 bps (EU/US)
Commodities
Oil price higher (+2.5%) 2nd correction higher, after the 8% drop the previous weeks, due to the US-China tariffs deal (Note Iran sanctions could be lifted, leading to a potential 400k barrels/day additional production growth
Gold price lower (-3.5%) impacted by a stronger USD and higher yields
US
April CPI at its lowest since Feb 2021 (+2.3% yoy)
UK
Q1 GDP at +0.7% (+1.3% yoy)
Under the watch
‘Trump’ mega tax proposal debate this month ($4000bn in tax cuts and $1500bn in spending cuts over a decade)
Nota Bene
Large US Tech companies (Amazon, Alphabet, Microsoft and Meta) spent $72bn altogether on purchases of property and equipment in Q1
SP500 operating margins increased to12.4% in Q1 (highest since 2021)
CALENDAR
Macro Data releases:
EU April CPI (19 May)
UK April CPI (21 May)
Q1 corporate earnings:
US Home Depot (20 May)
EU BAT, Diageo (19 May), Vodafone, Swiss Life (20)
WHAT ANALYSTS SAY
- BlackRock: still selective as trade conflict cools
- UBS: supporting US equities
- Goldman Sachs: US stocks forecast to rally, FED is to cut by -75bps by July 2026
BlackRock, 12 May 2025
Author: Wei Li, Global Chief Investment
Still selective as trade conflict cools
· We still see tariffs causing further contractions in quarterly activity but the cumulative impact may be more limited. We eye opportunities from mega forces.
· We’re looking for early signs of tariffs pushing up inflation in U.S. CPI data. Sticky inflation will limit how far the Federal Reserve can cut rates. The U.S.-China deal represents a major de-escalation in the trade conflict.
· Three key takeaways? First, it reaffirms that the hard economic rules we’ve been flagging will shape policy. Second, tariffs will likely bring more supply-driven contractions in quarterly activity, but the cumulative impact on overall 2025 activity could be more limited. Third, the deal gives a sense of where the U.S. effective tariff rate will settle. We stay risk on, monitoring corporate earnings reports for selective opportunities.
The 90-day cut to U.S.-China tariffs shows a hard economic rule shaping policy: supply chains can’t be rewired quickly without disruption. That’s reflected in both nations’ explicit goal of avoiding economic “decoupling.” We still think tariffs will up inflation and hurt growth, with recession-like effects in coming quarters. Earnings estimates often suffer steep cuts when activity slumps. The U.S. average effective tariff rate could land around 10-15%, we estimate, higher than at the start of 2025 but a more manageable economic disruption. We stay positive on developed market (DM) stocks and see mega forces creating select opportunities.
We see three key themes in Q1 earnings reports.
First, moving production to the U.S. or countries on better terms with the U.S. has, for the first time, been discussed on all Q1 earnings calls so far, per Alphasense data. Some are now giving timelines.
Second, many firms look set to accept higher input costs as supply chains adjust. The latest external estimates see tariffs denting net earnings by around 5%.
Third, 60% of companies updating their spending plans are now guiding below consensus forecasts – up from 40% at the start of the year but still below the 71% hit in the pandemic. Yet opportunities persist in certain sectors. Big tech is reaffirming or upping AI-linked investment, for example.
In Europe, infrastructure and defense spending plans have led us to upgrade European equities to neutral. Yet execution of those plans is key – and the new German chancellor’s limited coalition support highlights potential obstacles. Europe’s Stoxx 600 has performed broadly on par with the S&P 500 since the April 2 tariff announcement and European earnings estimates for 2025 have fallen to 3.5% from 8% in January. Yet that masks divergence. Financials are up over 20% this year, thanks to persistently high yields and strong company and household balance sheets. We’ve preferred Spain since the start of 2025 due to strong growth and exposure to financials, utilities and infrastructure – sectors that benefit from mega forces. Spanish stocks are also less exposed to U.S. tariffs: only 5% of its exports are U.S.-bound, less than the EU average, trade data show.
UBS Global Wealth Management, 12 May 2025
Author: James Mazeau, Economist, Chief Investment Office
Factors in support of US equities
Corporate profits better than expected
75% of S&P 500 companies have published their Q1 results. Corporate profits are expected to rise by 9% for the first 3 months of the year, better than the initial forecast of around 5%. Nearly 60% of companies have exceeded their sales estimates and 70% have announced better-than-expected profits. Forecasts should also be reasonably good. Among the highlights were better-than-expected results from technology mega-caps, against a backdrop where AI fundamentals remain intact, and the ‘resilience’ of consumer spending. Although trends are expected to weaken in the coming months, as products subject to higher tariffs begin to hit shelves, markets are likely to overlook economic weakness in the short term, given signs of progress in trade negotiations. We can expect a return to 10% earnings growth in 2026.
Negotiations on customs duties: more positive news on the horizon
Despite potential deals with India, Japan and South Korea and deals with the UK and Chinas, uncertainty remains, but tensions should probably no longer be so extreme. Various agreements or sectoral exemptions should be reached before the end of the 90-day suspension period in July. In addition, the effective rate of US customs duties should stabilise at around 15% by the end of the year.
Latest employment data show short-term resilience
The recently published US employment report showed that 177,000 jobs were created in April, higher than market forecasts but lower than the 185,000 jobs created in March, which had been revised downwards. The unemployment rate remained stable at 4.2%, with a relatively modest rise in average hourly earnings of 0.2%. This report corroborates other recent employment data, notably the fall in job vacancies and the rise in new jobless registrations, suggesting that the labour market continues to perform well overall, despite some signs of weakness. This should allow the US Federal Reserve to resume monetary easing in the 2nd half of the year, cutting interest rates by 75-100bps this year to support US economic activity. The US economy should avoid a full-blown recession, although growth is expected to slow this year.
New periods of volatility
However, uncertainties remain high and economic data is likely to weaken in the months ahead, pointing to further periods of volatility. As investors adopt a less pessimistic stance following the latest rally, there may be fewer factors to propel equities to new highs in the short term. Gradual entry into the equity market can be an effective way of positioning oneself for medium- and long-term gains, while managing timing risks, while capital preservation strategies can be a way of managing short-term downside risks.
Goldman Sachs Briefings, 16 May 2025
Authors: David Kostin, Chief US equity strategist ; Jan Hatzius, Chief economist
US stocks are forecast to rally
US stocks are expected to rise in the coming months as the Trump administration overhauls the country's tariff policy with its largest trade partners. Goldman Sachs Research estimates the S&P 500 index will increase about 10% to 6,500 in the next 12 months.
David Kostin, Goldman Sachs Research's chief US equity strategist, raised his S&P 500 forecast following developments in trade discussions between the US and China to incorporate lower tariff rates, better economic growth, and less recession risk than previously expected. Our economists estimate the US has about a 35% chance of recession in the next 12 months and that GDP will expand 1.5% in 2025.
The outlook for the “US exceptionalism” investment theme — the expectation for US GDP growth and market returns to outshine other regions — has been the subject of major discussion for investors as trade tensions ripple through the global economy.
Padi Raphael, global co-head of Third Party Wealth Management in Goldman Sachs Asset Management, says that sentiment toward that theme differs somewhat around the world. US investors aren't shying away from their domestic market, she says, but at the same time there's heightened interest in some international markets and in Europe in particular. European investors have an increased bias toward repatriating assets to their home markets.
Generally speaking, in Asia, “US exceptionalism and the brand recognition around US companies is still very strong” among many investors, Raphael says. “My recent conversations with investors from Asia have not reflected any kind of loss of the shine of the US as a destination for investing,” she says.
The forecast for FED rate cuts
Our economists now expect the Fed to begin a series of three 25-basis-point cuts in December rather than in July, and to implement them at every other meeting rather than sequentially. The Federal Open Market Committee meets roughly every six to eight weeks.
Jan Hatzius, Goldman Sachs Research's chief economist, writes in the team's report that the rationale for interest rate cuts in our economists' forecast has shifted. Previously, the rationale had been insurance: pre-emptive action when the central bank sees potential weakness in the economy.
Now the team expects that the Fed will instead start cutting with a view to slowly returning interest rates to a more conventional level “as growth remains somewhat firmer, the unemployment rate rises by somewhat less, and the urgency for policy support is reduced”.
The team's estimate for the terminal rate — the point at which the Fed will stop cutting interest rates — is unchanged at 3.5-3.75%.
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