Many people head off on holiday over the Easter weekend. Whether at railway stations, in airports or on the roads, the first wave of travellers is coming. Given the rather hectic situation of the world at the moment, this breather is coming at just the right time. That is also and especially true for people who are active on the capital markets, which in the last few weeks have set a pectic pace not seen for a long time. Evidence for this theory can be found by glancing at the CBOE Volatility Index, or VIX for short. This barometer expresses the price fluctuation range that is priced into options on the leading US index, the S&P 500. On 8 April the VIX ended the trading session at 52.33% – the highest closing figure since the start of the pandemic in early 2020. The sharp rise in the index, also known as the “fear barometer”, was accompanied by an earthquake on global stock markets.
On 2 April US president Donald Trump tried to shift the tectonic places of global trade when he announced new tariffs for a total of 57 trading partners of the USA. “Blood will flow,” the economists of J.P. Morgan commented on this sweeping attack on trade policy. In fact, the markets are going through real carnage at the moment. As well as shares, cyclically sensitive raw materials, particularly oil and copper, also plummeted. A little while later the sell-off hit the market in US government bonds, with the 10-year Treasury dropping more than 4% within three days. At the same time, the yield on this benchmark bond rose by almost 50 basis points to just under 4.50%. This development, which was accompanied by increasing weakness in the US dollar, may have led the White House to rethink. At any rate, Trump suspended the reciprocal tariffs for 90 days. China was omitted from this step: indeed, the president actually increased the charge on imports from the Middle Kingdom to 125%. Beijing had previously defended itself against the pressure from Washington by imposing special tariffs on US imports, and it promptly countered the latest move by the United States by raising tariffs on imports from the USA to 125%.
Although the markets responded to Trump’s about-turn with relief, it is probably too early to sound the all-clear. In addition to the spat with China, after all, the tariffs on cars already introduced by the US and the baseline 10% tariff remain in force. Even if imports from China fall drastically, J.P. Morgan reckons the USA will face additional cost burdens of around USDbn 300. “What’s more, the political environment for planning investment remains unfavourable,” the economists of the big bank state. Although the danger of a recession is still very real, the US central bank’s hands are to some extent tied. The Fed had adopted a wait-and-see approach even before the latest tariff chaos, preferring first to gauge the effects of the trade policy on the economy and inflation. The Fed will gather for its next two-day meeting on 6 May. According to the CME FedWatch tool, there is a more than three in four chance that it will leave its base rate in the 4.25% to 4.50% range.
By the time the next meeting of the Open Markets Committee begins, the hot phase of “earnings season” on Wall Street will already be over, with companies presenting their results for the first quarter of 2025 in the next few weeks. In light of the constant disruptive noises coming from the White House and the latent risk of a recession, analysts have put a red line through their estimates. According to FactSet, the average predicted earnings in the S&P 500 for the first quarter fell by 4.2% from New Year’s Eve 2024 to 31 March. While such a downward revision is perfectly normal, over the past five years the consensus figure had only fallen by an average of 3.3% over a quarter. Overall, expectations on major US groups remain high: FactSet puts the consensus for earnings growth in 2025 at more than one tenth. In the coming year, the profit driver is expected to rev things up again (see graph). This calculation, which is decisive for the valuation of the US equity market, is now under scrutiny. Should many companies disappoint or adjust their forecasts downwards in response to the confused political situation, things on Wall Street could get even more uncomfortable. Traders are likely to welcome the volatile environment, given that it offers them any number of opportunities to chase short-term returns. It's a good thing, then, that Leonteq is in the process of filling up the toolbox for this group of investors.
Source: Reuters; as at: 11 April 2025. Past performance is not a reliable indicator of future performance.
e=expected; source: FactSet; as at: 4 April 2025. Past performance is not a reliable indicator of future performance.