Jacob Sonenshine
The stock market's recent volatility may have a savior, but it won't be anyone in the current Trump administration.
The S&P 500 dropped by as much as 10% from a late February record to its intraday low this month. It's recovered some, but remains volatile.
The Cboe Volatility Index, or the VIX, which uses the options market to measure the degree to which stock prices could swing up or down, is still at 17. Yes, that's lower than the peak this year of 28, but it's still above the 15 level the VIX hit before the drawdown. It's also above a one-year low of just under 12, where the index tends to sit when the market is completely calm.
The reason is President Donald Trump's tariffs. They raise import costs, forcing companies to lift prices, in turn denting consumer demand. Businesses are concerned about their demand picture and may hold back on investments and hiring, putting near-term pressure on economic growth. The result would be that corporate profits would come in lower than analysts currently forecast, hence the drop in the market -- and the volatility.
These dynamics are part of a picture in which the market isn't totally convinced of a Trump "put" -- the idea that he prioritizes a growing economy and stock market. Backers of the idea think Trump will ultimately soften his hard-line position on trade versus China, Mexico, Canada, and the European Union. But Trump recently warned that the economy could experience some pain. While he floated the idea this week that he might roll back some of the recently announced tariffs, Trump then pledged tariffs on automobiles, and pharmaceuticals.
Overall, trade policy remains unpredictable. The widely cited trade-policy uncertainty index recently hit its highest reading ever, according to Evercore. On April 2, the clouds could part some as Trump will announce which tariffs are on or off, but that may be merely the start of negotiations between the U.S. and its partners. The talks may take twists and turns -- and so may the policy. That will weigh on business investment and economic growth.
"Expect April 2nd to be more of a starting point for negotiations," 22V Research's Dennis DeBusschere wrote in a report. "We don't have a reason for the VIX...to improve relative to an uncertain backdrop from here."
That's why it's the Federal Reserve -- not the Trump administration -- that needs to come to the rescue to vindicate bullish stock investors. The Fed signaled last week through its "dot plot," or the average member's expectation for the federal-funds rate in the future, two rate cuts this year. That may sound confusing, given that tariffs are inflationary, but a slowdown in the economy is a counteracting force, which could put a ceiling on the inflation, which most recently was below 3% year over year. The Fed's target is 2%.
And as long as inflation continues to remain close enough to the Fed's goal, the central bank will cut if necessary to keep the economy growing, something the Fed is still doing.
"The relatively dovish March FOMC suggested the Fed put was alive and well should U.S. economic growth slow," Yuri Selliger, fixed-income analyst at Bank of America, wrote in a report.
Even if the economy's growth is slightly slower, corporate sales can keep growing. Analysts expect aggregate sales for S&P 500 component companies to grow 5% annually over the coming two years, according to FactSet. Mix in mild -- not drastic -- cost increases for products, employee pay, and other expenses, and profit margins can inch slightly higher. Plus, companies are using cash flow to buy back stock, so earnings per share can grow 13% annually for the next two years.
That could bring the index higher, assuming it isn't too expensive right now. The S&P 500 trades at just over 20 times aggregate expected earnings for the next 12 months, below the peak this year of just over 22 times. Even if the multiple drops a bit more, strong-enough earnings growth could provide an offset, lifting the market over the coming couple of years.
Stay invested.
Write to Jacob Sonenshine at jacob.sonenshine@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
March 25, 2025 14:57 ET (18:57 GMT)
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