Note: I am travelling until mid-May. Postings will be irregular.

A Reprieve in ISM Services, Will It Last?

Service sector activity quickened slightly in April with the ISM Services Index coming in at 51.6, up from 50.8 in March. The business activity index at 53.7 is still expanding, but at a slower pace than March when it registered a reading of 55.9. The other components that feed into the headline came in slightly higher than they did last month.

New orders rose slightly to 52.3. Employment was still in contraction, but is now contracting at a more modest pace, and Supplier Deliveries came in at 51.3, up from 50.6 last month. (…)

Source: Institute for Supply Management and Wells Fargo Economics

In terms of industry performance, 11 service-sector industries still report growth in April, but six industries are reporting a contraction with farming at the top of the list of those reporting decline and a respondent from that sector placing blame squarely on tariffs.

In a somewhat counterintuitive development, transportation and warehousing is still seeing expansion in activity. We suspect this may reflect a last-ditch effort to move supplies and products ahead of the tariffs. On that basis, the expansion in this sector may be short-lived.

While the Services ISM signals current activity is holding up, the tariff impact was evident in growing wait times and higher costs. The prices paid index hit its highest reading since early 2023 in April with 17 of the 18 industries included in the survey reporting higher prices paid during the month. At 65.1 the prices-paid component is near the top-end of the prior expansions range.

Service-providers are by no means immune to tariffs, even if the impact is less direct than for manufacturers. That said, tariffs are not the only source of concern. The administration’s policies on grants, funding and public-health policy were also mentioned by purchasing managers. This is leading some to halt hiring, with the release noting “hiring freeze due to uncertainty of government grants.” (…)

The employment component rose 2.8 points to 49.0. While that is still consistent with net layoffs in the services sector, it’s an improvement from the month prior. Last week we learned total employment expanded at a decent clip in April. The labor market is holding up, but for how long remains a key question for growth this year.

• S&P Global: Slowest growth for 17 months amid subdued demand and slump in business confidence

In April, US service sector business activity growth was the slowest in nearly a year-and-a-half, according to the latest PMI® data from S&P Global.

Uncertainty over federal policies, especially trade, was reported to have limited demand growth and weighed on business expectations, which slumped to its lowest level for two-and-a-half years.

Meanwhile, tariffs were reported by firms to have been a key driver of higher operating expenses through a rise in supplier charges. Service providers increased their own selling prices in response, with inflation the strongest since January.

The S&P Global US Services PMI® Business Activity Index remained above the critical 50.0 no-change mark in April to signal an increase in service sector activity. However, with the index dropping to 50.8, the lowest reading since November 2023 and down from 54.4, growth was marginal and much slower than March’s three-month high.

Slower activity growth was linked to similarly weaker gains in new work during April. While firms reported some sales success from the start of new projects, demand growth was somewhat limited by economic uncertainty arising from federal policies, most notably in relation to trade. This led to hesitancy in spending amongst clients, according to panelists. The uncertain trading environment had an especially notable impact on foreign demand, with new business from abroad slumping in April to the greatest degree since November 2022.

Uncertainty around trade policy also hit the confidence of service providers in April. Overall, sentiment was at its lowest level for two-and-a-half years and amongst the weakest since the height of the pandemic in 2020.

The uncertain business outlook tended to weigh on hiring activity. Although growth in staffing levels was registered for a fourth time in the past five months, the rate of expansion was marginal and well below the survey’s historical trend. Where higher employment was noted, this was attributed in some instances to mild capacity pressures as highlighted by a rise in backlogs of work for a second successive month. Reflective again of the increasingly challenging trading environment, the rise in work outstanding was however only marginal.

Input costs continued to rise at an elevated pace during April, although the rate of inflation eased considerably from March’s one-and-a-half year high to its weakest of 2025 so far. Suppliers were widely reported by panelists to have pushed up their prices in response to tariffs, while an upturn in wage expenses also added to an increase in overall operating expenses.

Despite evidence of slowing demand growth, service providers chose to increase their own selling prices to a stronger degree in April. Efforts to pass on increased costs to clients was the principal reason reported by panelists for the uptick in output price inflation to a three-month high.

Higher prices paid for imports due to tariffs are also driving up service sector firms’ costs, feeding though to higher prices, notably in consumer-facing industries such as restaurants and hotels.

The resulting bottom line from the services sector is a heightened risk of stalling growth and rising inflation, or stagflation.

Ed Yardeni’s chart on services employment:

China Services Activity Slips, Adding Risk of Rapid Slowdown

The Caixin China services purchasing managers’ index fell to 50.7, the lowest level in seven months, according to a statement from Caixin and S&P Global on Tuesday. (…)

A sub-index measuring expectations for future activity fell to the second-lowest level since data began in 2005. It was only weaker in February 2020, when the Covid outbreak erupted, according to the statement.

Apart from the hit to sentiment, tariffs have also led to the slowest rise in new business orders since December 2022. And in a sign that demand for labor is slipping, services firms reduced their staff size for a second straight month in April due to concerns over costs, according to an employment subindex. (…)

Goldman Sachs Group Inc. estimates 16 million people — or more than 2% of the labor force — may be exposed to US-bound exports. (…)

Speaking of services:

Hollywood has been pleading with politicians for years to help stem the exodus of film and TV production to other countries. This weekend actor Jon Voight met with President Trump to make the case.

The president’s call for 100% tariffs on imported movies—which he issued in a social-media post Sunday—isn’t what Hollywood had in mind.

Entertainment-industry executives expressed confusion over how a levy could be applied to intellectual property with no specific monetary value. They said they feared retaliatory tariffs could damage their business overseas, where big-budget movies often earn most of their box-office receipts. Shares in Disney, Netflix and other media companies and movie-theater chains fell Monday.

More moves out of Washington could be coming. Voight said in an interview Monday that the tariff announcement was “the beginning, perhaps, of changes that will be effective” and indicated there might be more to Trump’s plan. 

Voight discussed with Trump crafting a federal policy that would give film-production companies tax incentives to conduct more of their business in the U.S., according to people familiar with the matter. 

Voight, Paul and Karol met with the Motion Picture Association of America, the trade group that represents studios and streaming companies, as well as Hollywood unions before going to Mar-a-Lago last weekend, Karol said.

The trio proposed to Trump that he bring productions back to Hollywood through policies including federal tax incentives and infrastructure subsidies. They said tariffs should only be used “in certain, limited circumstances,” according to a statement they released Monday.
(WSJ)

• Can Trump really put tariffs on films produced abroad? The law says no.

That’s because Congress nearly 40 years ago passed a law explicitly barring the president from regulating in any way the import or export of things like movies, books and music.

The Berman Amendment limited the powers granted the president, stating they “do not include the authority to regulate or prohibit, directly or indirectly, the importation from any country, or the exportation to any country, whether commercial or otherwise, of publications, films, posters, phonograph records, photographs, microfilms, microfiche, tapes, or other informational materials.”

Congress doubled down in 1994, strengthening and broadening the already clear language of the 1988 amendment. 

The issues raised by the Berman Amendment are not new for Trump. The prohibition came up during Trump’s first term, when he tried to ban the Chinese-owned social-media platform TikTok through an executive order.

Both TikTok’s parent company, ByteDance Ltd., and a group of TikTok users sued to block the order on the basis of the prohibitions stated under the Berman Amendment. Judges in both suits ruled against the president, stating that the law made it clear he didn’t have the authority to institute such a ban.

The matter later was taken up by Congress, which drafted its own ban and included specific language very narrowly crafted for TikTok’s situation that allowed lawmakers to sidestep the Berman Amendment. The law passed with bipartisan support last year, but Trump has since made a 180-degree turn on the issue and moved to prevent the ban from taking effect.

On Monday, the White House appeared to backtrack on the issue of a tariff on films.

“Although no final decisions on foreign film tariffs have been made, the administration is exploring all options to deliver on President Trump’s directive to safeguard our country’s national and economic security while Making Hollywood Great Again,” said White House spokesman Kush Desai.

Other than that:

Nucor loves the tariffs that President Trump has imposed on its competition from imported steel. But the company also warned about the ways that Mr. Trump’s global tariffs will increase its costs for both equipment and raw materials, specifically pig iron and direct-reduced iron, or DRI.

Pig iron imports last year were 4.7 million metric tons, much of it from Brazil, according to S&P Global Commodity Insights. DRI imports were 1.5 million tons, almost all from Trinidad, where it’s produced by a Nucor subsidiary.

Nucor’s expansion plans involve buying equipment from Europe, so that’s another tariff dent. (WSJ)

• Ford Pulls Outlook, Sees $1.5 Billion Hit From Trump Tariffs

The company’s total tariff impact is about $2.5 billion, $1 billion of which the company expects to offset through actions such as using so-called bonded transportation to shield parts from levies as they cross international borders, Chief Financial Officer Sherry House told reporters.

Ford’s tariff exposure is less than its Detroit competitors because the Dearborn, Michigan-based automaker domestically produces 80% of the cars it sells in the US. General Motors Co. last week slashed its profit outlook for the year and said its tariff exposure was as much as $5 billion. (BB)

• Another Ackman suggestion: “For the moment, Ackman said, Trump should put tariffs on China on hold for 180 days.”

Meanwhile:

DeepSeek. Temu. TikTok. China Tech Is Starting to Pull Ahead.

By Eric Schmidt, a former chief executive and chairman of Google,and Selina Xu who leads China and A.I. research in the Office of Eric Schmidt. (My emphasis)

(…) China is at parity or pulling ahead of the United States in a variety of technologies, notably at the A.I. frontier. And it has developed a real edge in how it disseminates, commercializes and manufactures tech. History has shown us that those who adopt and diffuse a technology the fastest wins. (…)

To win the race for the future of technology, and in turn the war for global leadership, we must discard the belief that America is always ahead. (…)

Silicon Valley failed to anticipate that China would find a way to swiftly develop a cheap yet state-of-the-art competitor. Today’s Chinese models are very close behind U.S. versions. In fact, DeepSeek’s March update to its V3 large language model is, by some benchmarks, the best non-reasoning model.

The stakes of this contest are high. Leading American companies have largely been developing proprietary A.I. models and charging for access, in part because their models cost hundreds of millions of dollars to train. Chinese A.I. firms have expanded their influence by freely distributing their models for the public to use, download and modify, which makes them more accessible to researchers and developers around the world.

Apps for the Chinese online retailers Shein and Temu and the social media platforms RedNote and TikTok are already among the most downloaded globally. Combine this with the continuing popularity of China’s free open-source A.I. models, and it’s not hard to imagine teenagers worldwide hooked on Chinese apps and A.I. companions, with autonomous Chinese-made agents organizing our lives, and businesses with services and products powered by Chinese models.

In the internet revolution, Western dominance of the market helped America’s digital economy swell to $2.6 trillion by 2022. That’s bigger than Canada’s entire G.D.P. For the United States to reap the benefits of the coming A.I. revolution, which is expected to have a larger impact than advent of the internet, the world needs to choose America’s computing stack — algorithms, apps, hardware — not China’s.

In a dozen years, China has gone from a “copycat nation” to a juggernaut with world-class products that have at times leapfrogged those in the West. Xiaomi — once best known as a maker of iPhone knockoffs — delivered 135,000 electric cars last year, while Apple gave up on its effort to produce an E.V. after burning $10 billion over a decade.

China is now racing to deploy robots at scale, outlining plans for mass production of humanoids; in 2023, the country installed more industrial robots than all other nations combined. Along the way, the country also cultivated an abundance of STEM talent, robust supply chains, incredible manufacturing heft and a domestic ecosystem so brutally competitive that the only way to survive is to never stop iterating.

This China-dominated future is already arriving — unless we get our act together.

We should learn from what China has done well. The United States needs to openly share more of its A.I. technologies and research, innovate even faster and double down on diffusing A.I. throughout the economy.

Despite recent cuts in research funding, the United States continues to have remarkable strengths in university and private-sector innovation. Meanwhile, China is still playing catch-up on semiconductors. Additionally, the country faces significant headwinds of its own including a real estate crisis, mounting debt and weak consumer spending. That said, we wouldn’t underestimate the Chinese government’s resolve in tolerating near-term economic pain in pursuit of technological supremacy.

The United States imposed export controls on cutting-edge chips in order to stifle China’s A.I. progress. The country’s recent breakthroughs, however, illustrate that such sanctions instead fueled efforts by Chinese entrepreneurs to keep training and commercializing A.I.

At lunch during Selina’s trip to China, when U.S. export controls were brought up, someone joked, “America should sanction our men’s soccer team too so they will do better.” So that they will do better. It’s a hard truth to swallow, but Chinese tech has become better despite constraints, as Chinese entrepreneurs have found creative ways to do more with less. So it should be no surprise that the online response in China to American tariffs has been nationalistic and surprisingly optimistic: The public is hunkering down for a battle and think time is on Beijing’s side.

We’re no longer in the era when China is far behind us. If China’s capacity to innovate endures, if its A.I. companies continue to embrace openness, and if China stays on track to take over 45 percent of all global manufacturing by 2030, then the next chapter of the A.I. race will be an all-out dogfight on every axis possible. America will need every advantage it has.

• Trump Blocks Harvard From New Research Funding in Latest Blow

The Trump administration is declaring Harvard University ineligible for new research grants from the federal government in the latest escalation between the White House and the Ivy League school. (…)

The administration has already frozen billions of dollars in funding that supported projects including ALS and tuberculosis research, and Harvard sued several US agencies and top officials in response. (…)

• MIT Joins Deluge of Colleges Selling Bonds Amid Funding Threats

The Massachusetts Institute of Technology is the latest elite college to borrow money from the bond market as universities contend with threats to federal funding under President Donald Trump’s administration.

MIT is joining Harvard, Stanford and Princeton in selling taxable bonds in a deal that’s set to price Tuesday, according to a roadshow for investors. (…)

The flurry of debt sales come as the Trump administration has frozen federal funding for universities including Harvard, Northwestern and Cornell. Trump has hammered colleges for their handling of antisemitism after student protests roiled campuses following the Oct. 7, 2023, attack by Hamas on Israel and the Jewish state’s retaliatory response in Gaza.

The National Institutes of Health also proposed a cut to research funding for universities, which is being challenged in court. (…)

• Northwestern CIO Warns of ‘Destructive’ Tax on University Funds

Northwestern University is preparing for a potential tax increase on endowments, a move its chief investment officer labeled as “destructive” for higher education institutions in the US. (…)

An increase to the tax would starve Northwestern off much needed cash at a time the federal government has cut funds to a number of institutions across the country. (…)

Europe pledges half a billion euros to lure scientists as Trump battles universities

The European Union and France on Monday announced half a billion euros worth of incentives to lure scientists to the continent, seeking to profit from U.S. President Donald Trump‘s federal funding cuts and clashes with top U.S. universities.

“We call on researchers worldwide to unite and join us … If you love freedom, come and help us stay free,” French President Emmanuel Macron said at Paris’ Sorbonne University alongside European Commission President Ursula von der Leyen.

The money would fund research projects and help universities cover the cost of bringing foreign scientists over to help run them, officials said.

Von der Leyen announced the 500 million euros ($566.6 million) incentive package and said she also wanted EU member states to invest 3% of gross domestic product in research and development by 2030.

Macron pledged 100 million from France, though it was not immediately clear if this came on top of the EU pledge.

Trump has targeted U.S. universities since taking office in January by freezing federal funding, launching investigations, revoking international students’ visas and making other demands.

Trump, a Republican, has said higher education has been gripped by what he calls antisemitic, anti-American, Marxist and radical left ideologies. (…)

Robert N. Proctor, a historian at Stanford University, told Reuters that Trump was leading “a libertarian right-wing assault on the scientific enterprise” that had been years in the making.

“We could well see a reverse brain drain,” he said. “It’s not just to Europe, but scholars are moving to Canada and Asia as well.”

Meredith Whittaker, the president of encrypted messaging app Signal, declined to comment on geopolitical disputes. But she told Reuters it was inevitable top talent would gravitate to welcoming jurisdictions.

How about a tax on that too?

Note: I am travelling until mid-May. Postings will be irregular.

US Employers Add 177,000 Jobs, Solid Pace in Face of Uncertainty

Nonfarm payrolls increased 177,000 last month after the prior two months’ advances were revised lower, according to Bureau of Labor Statistics data out Friday. The unemployment rate was unchanged at 4.2%.

The report suggests the labor market continues to cool gradually, a sign that businesses facing heightened uncertainty around tariffs and turmoil in financial markets didn’t significantly alter their hiring plans. Most economists anticipate the brunt of the impact from punishing levies will be seen in coming months. (…)

Payroll gains were broad based, led by an advance in health care. Transportation and warehousing employment rose by the most since December, suggesting a surge in imports and activity boosted demand for labor as businesses rushed to get ahead of tariffs. Manufacturing, meanwhile, shed jobs as the sector saw the steepest contraction in output last month since 2020.

The federal government cut jobs for a third month — the longest such streak since 2022 — reflecting efforts by the Elon Musk-led Department of Government Efficiency to downsize the federal workforce and reduce government spending.

The government leads all US industries in terms of layoffs announced so far in 2025, with the vast majority of the about 282,000 cuts being attributed to DOGE actions, outplacement firm Challenger, Gray & Christmas said in a report Thursday. Economists contend at least half a million US jobs could be on the line as federal spending cuts spread to contractors, universities and others who rely on government funding.

The participation rate — the share of the population that is working or looking for work — ticked up to 62.6% in April. The rate for those between the ages of 25 and 54, known as prime-age workers, rose to the highest level in seven months.

(…) The report showed average hourly earnings rose 0.2% last month, marking a deceleration from March. From a year earlier, they rose 3.8%. (…)

Cynics are saying the “R” word is not recession but rather resilience. But the early cracks are showing up:

• The prior two months jobs were revised down 58k.
• Employment growth was 0.1% MoM and has averaged +1.1% annualized in the first 4 months of the year.
• Wages rose 2.0% a.r. in April, down from 2.9% in February-March and 4.0% in the second half of 2024.

Q2 is thus off to a slow start from an aggregate income viewpoint, right when tariffs are about to hit.

The JOLTS report last week showed March job openings back to the Indeed Job Postings index but the latter keeps declining through April 25. Labor demand is clearly slowing and so are wages.

KKR:

This was a strong headline report. However, sector data suggests we are still not seeing the full impact of either DOGE cuts or tariffs on employment. Consider that Education/Healthcare employment still has not slowed (+70k, right around its last six months average) while Government added +10k jobs on net (still in positive territory, thanks to state and local hiring even as Federal jobs shed -9k workers).

Meanwhile, Construction and Manufacturing added a net +11k jobs, which is exactly in line with the last six months average, and we see some signs that prebuying activity ahead of tariffs drove labor demand (e.g., Trade/Transport ex-retail was +34k, up from
+3k last month), which we do not view as sustainable. (…)

The good news is that we see fewer signs of stagflation in the labor market, which should give the Fed more breathing room heading into next week’s CPI report. Average hourly earnings have slowed to +3.2% on a 3-month annualized basis, down from the low-mid four percent range in late 2024.

Meanwhile, unemployment is stuck at 4.2% for the second month in a row, +30 basis points above where it was a year ago but still too low to force the Fed into a more dovish posture.

Importantly, oil prices at $58 are down 27% from January levels and 30% from their July 2024 level, boosting discretionary income and, thanks to slowing wages, critically keeping a lid on services inflation while we await tariff inflation on goods.

  

The surprise could be that slower than feared overall inflation keeps consumers and businesses afloat and provide room for rate cuts if and when needed. Let’s not forget that the U.S. economy is mainly services (although the S&P 500 is mainly goods).

Trump Budget Seeks 23% Domestic Cut, Omits Economic Forecast

The president’s budget calls for $557 billion in non-defense spending next year, which represents a cut of $163 billion from current levels. National security funding would increase to $1.01 trillion, a 13% increase from the previous year. Any final spending plan for regular agency budgets will need some Democratic support to pass the Senate, one of the few opportunities the minority party has to exert some leverage while Republicans have unified control over the federal government.

Known as the skinny budget because of its lack of detail, the document is a new president’s first opportunity to outline his vision for the size and scope of the federal government.

But Trump’s version was even thinner than usual, omitting baseline economic and interest-rate projections, which are typically a feature of budget proposals submitted by the White House in prior administrations.

There was also no set of forecasts for government debt, deficits or tax revenue in the document. Also excluded: any projections related to entitlement programs — headlined by Social Security and Medicaid — which are large drivers of overall federal spending.

Those details will be made later in the year, after Republicans work through the details of a giant tax cut bill set to move through Congress in the coming months, a senior Office of Management and Budget official told reporters on Friday. That legislation is slated to add trillions to deficits. (…)

On the domestic side, Trump is proposing a 22.6% cut in spending for the 2025 fiscal year. The proposal would slash environmental and renewable energy programs and calls on lawmakers to cancel $15 billion in former President Joe Biden’s signature infrastructure law for green energy funding.

The White House previewed the budget with a series of talking points that highlighted Trump’s use the spending plan as social policy document. Proposed reductions in early childhood education, housing, science and foreign aid were branded as “Cuts to Woke.” The elimination of $3.5 billion in refugee assistance came under the heading “Defunding the Open Border.” Climate, environment and renewable energy programs would be slashed on the premise of “Ending the Green New Scam.”

A senior OMB official described the plan as a paradigm shift, with historic commitments to defense and homeland security secured through the tax package which Democrats are powerless to block, unlike in Trump’s first term.

Agencies getting some of the biggest proposed cuts include a 26% reduction to the Department of Health and Human Services, 33% to the Small Business Administration, 44% to Housing and Urban Development, 54% to the Environmental Protection Agency and 56% to the National Science Foundation. (…)

The budget illustrates that DOGE’s effort would not ultimately result in significant deficit savings. It proposes to hold all non-emergency discretionary funding flat at $1.613 trillion when almost $120 billion in defense funding is added via Trump’s tax bill. Overall cuts are attributed to emergency funding, such as that for natural disasters, which can easily increase in the wake of storms, flood and fires.

The Trump plan also illustrates the limits of savings from cutting agency operating budgets and personnel in a federal budget dominated by giant entitlement programs as federal debt payments increase from interest rates that are notably higher now than in the years prior to the pandemic. (…)

• How Trump’s budget proposals could affect lower-income Americans

The budget would cut 10% from last year’s level of discretionary spending — things the government does excluding mandatory programs like Social Security and Medicare.

• But the White House wants to increase spending for border security and defense, so the bulk of the cuts are on non-defense programs, like health care, education, and housing.

The cuts would bring non-defense discretionary spending to its lowest level in modern history — less than 2% of GDP, compared to an average 3.1% over the past 40 years, per an analysis from Bobby Kogan, a senior director of federal budget policy at the liberal Center for American Progress.

“They are calling for something that is extreme, objectively, and even by Trump standards,” adds Kogan, who worked at the Office of Management and Budget during the Biden administration. (…)

A president’s budget is just a wish list; Congress doesn’t simply put it through.

This is just a partial proposal, it doesn’t discuss Trump’s plans for tax breaks. Some of those, like no taxes on tips, could theoretically help lower earners.

It also doesn’t cover Medicaid, the federal health insurance program for lower-income Americans. That’s reportedly on House Republicans’ chopping block.

GM Cuts Workers at Canada Truck Plant, Citing Trade Turmoil

GO WITH THE FLOWS?

• Based on flows, retail confidence is still very high while the pros are very cautious.

Source:  @WallStJesus

• With the US dollar heading into bear market and political risk weighing heavily, foreigners have had a clear change in heart on US assets with net outflows from US bond funds, and a sharp drop in demand for US stocks. (Callum Thomas)

Source:  @lisaabramowicz1

TRUE EXCEPTIONALISM

Goldman Sachs’ excellent and essential annual ROE analysis:

The S&P 500 index ROE is 8 pp greater than the rest of the developed world (21% vs. 12%) and helps explain the US stock market’s valuation premium vs. the MSCI World ex. US index.

The aggregate ROE gap now ranks in the 92nd percentile and S&P 500 ROE is greater than other DM equity markets in each of the 11 sectors.

While the S&P 500 currently trades at a 2.4x greater Price/Book (P/B) multiple vs. the MSCI World ex. US (4.2x vs. 1.8x), valuations across regions and sectors appear consistent with expected profitability.

The ROE gap is largest in Info Tech (22 pp) and Consumer Discretionary (20 pp), but the gap extends to every sector in the S&P 500.

The primary drivers of the ROE gap between the US and other DM markets are higher EBIT margins (17% vs. 15%) and greater asset turnover (38% vs. 17%).

The primary drivers of the ROE gap between the US and the rest of world are higher EBIT margins and higher asset turnover.

EBIT margins are higher in 6 out of 9 sectors (excluding Financials and Real Estate) in the S&P 500 compared to the MSCI World ex. US. The gap is largest within Info Tech (16 pp), Utilities (9 pp), and Comm Services (8 pp). The Health Care sector is the most notable exception, where MSCI World ex. US EBIT margins stand at 23% compared with the S&P 500 sector at 10%.

Looking ahead, the S&P 500 will likely maintain its superior ROE relative to other DM equity markets, but a substantial further widening of the ROE gap appears challenging given the headwinds to profit margins. In addition, the tailwind to S&P 500 ROE from the Magnificent 7 appears to be slowing. As a result, a substantial ROE-driven expansion in the valuation gap between the US and MSCI ex. US appears unlikely.

Hmmm… Goldman assumes that a 16pp jump in the U.S. tariff rate to 19% combined with sharply decelerating GDP growth “will lead to roughly flat profit margins in 2025.”

Much slower revenue growth and a quick, sudden huge cost increase is very unlikely to leave margins unscathed. In fact, Goldman adds “the US-led nature of this economic shock could create a larger risk to US profitability.”

Also,

The tailwind to S&P 500 ROE from the Magnificent 7 appears to be fading as well. The Mag 7 composes 31% of the total index market cap and 26% of S&P 500 earnings. Mag 7 ROE expanded from 33% in 2022 to 39% in 2024, boosting the aggregate S&P 500 ROE despite S&P 493 ROE declining from 20% to 18% during this time. However, looking ahead, consensus expects Mag 7 ROE will contract to 35% in 2025 and 31% in 2026, primarily driven by a decrease in asset turnover and leverage, while ROE for the S&P 493 will expand slightly to 19%.

The S&P 493 ROE declined in a strong economy in 2024. I doubt they could expand in 2025, even stay flat.

Of course, we are still in the dark on actual tariffs and potential retaliation but we can safely assume that 2025-26 will be much different than 2024 for growth and business costs.

EARNINGS WATCH

357 companies in the S&P 500 Index have reported earnings for Q1 2025. Of these companies, 74.2% reported earnings above analyst expectations and 20.4% reported earnings below analyst expectations. In a typical quarter (since 1994), 67% of companies beat estimates and 20% miss estimates. Over the past four quarters, 77% of companies beat the estimates and 17% missed estimates.

In aggregate, companies are reporting earnings that are 7.0% above estimates, which compares to a long-term (since 1994) average surprise factor of 4.3% and the average surprise factor over the prior four quarters of 6.8%.

Of these companies, 61.2% reported revenue above analyst expectations and 38.8% reported revenue below analyst expectations. In a typical quarter (since 2002), 62% of companies beat estimates and 38% miss estimates. Over the past four quarters, 62% of
companies beat the estimates and 38% missed estimates.

In aggregate, companies are reporting revenues that are 0.9% above estimates, which compares to a long-term (since 2002) average surprise factor of 1.3% and the average surprise factor over the prior four quarters of 1.2%.

The estimated earnings growth rate for the S&P 500 for 25Q1 is 13.6%. If the energy sector is excluded, the growth rate improves to 15.7%.

The estimated revenue growth rate for the S&P 500 for 25Q1 is 4.6%. If the energy sector is excluded, the growth rate improves to 5.1%.

The estimated earnings growth rate for the S&P 500 for 25Q2 is 6.9%. If the energy sector is excluded, the growth rate improves to 8.6%.

Remarkably, pre-announcements are not terribly negative at this time:

But GS explains:

Forward guidance trends reflect an elevated level of uncertainty among corporates. So far this reporting season, a slightly lower proportion of companies are offering EPS guidance than average. Among those that have continued to guide, an above-average share have maintained previous guidance in place. We view this dynamic partly as a reflection of corporate’s hesitancy to shift guidance due to uncertainty around tariff policy.

Management commentary has been focused on the risk of recession and the potential impact of tariffs. 24% of the 357 S&P 500 companies reporting so far have mentioned the word “recession” on their conference calls, compared with just 2% last quarter. We highlight selected quotes from managements discussing recession risk and discussing the potential impact of tariffs on their businesses.

Of companies that have provided FY1 guidance, an above-average share of companies have maintained previous FY1 guidance in place. We view this dynamic partly as a reflection of corporate’s hesitancy to shift guidance due to uncertainty around tariff policy. For example, some companies noted in their earnings calls that their most recent guidance does not incorporate the impact of tariffs.

Q2 estimates have come down, but are still up:

So are full year estimates:

Trailing EPS are now $250.67, a $5 jump from last week. Full year 2025e: $264.69. Forward EPS: $271.54.

But GS notes that sales and capex revisions are sharply down in recent weeks, reflecting corporate uncertainty and cautiousness:

A tally of annual tariff costs is now $4.4B for 9 companies that have provided cost estimates. Proctor and Gamble, a consumer staples company, said: “The $1 billion to $1.5 billion before tax is the impact that we are estimating based on what we know today. That means the tariff rates that have been announced and enacted both in the US and in all other markets in response to the US tariffs. Exactly as you say, that’s about 3% of cost of goods sold about 140 to 180 basis points margin impact.”

Some quotes gleaned here and there:

• The fragile balance that underpins the global equipment supply chain has collapsed. Ocean container bookings have plummeted by 64 percent, which means 64 percent of our business has vanished overnight. Without incoming containers, there is nothing to reload, nothing to export and no way to keep our trucks moving. This loss of freight in the market will bleed into every area of transportation. I have already had to make the heartbreaking decision to lay off one third of my staff. Any further cuts would cripple our ability to operate at even the most basic level. At this point, we are staring down the very real possibility of shutting down entirely. Ten years of fighting to keep a company alive and people employed through a global pandemic, the freight recession of 2023–24, and now this.
• The risk we face now is far greater and less understood than what we saw during the COVID shutdown. Consumers and businesses will limit investment and orders until there is some sense of stability, and we have already experienced this with smaller orders and delayed orders. It’s chaos right now.

Trump Calls for 100% Tariff on Movies Made Overseas The president called the use of incentives by foreign countries to draw filmmakers and studios away from the U.S. a national-security threat

President Trump has found the next industry he wants to bring back to the U.S. with tariffs: Hollywood.

Trump authorized a 100% tariff on films produced overseas, he said in a Truth Social post Sunday. He called it a response to tax incentives that have lured a substantial number of Hollywood productions outside the U.S.

Films made by American studios are often shot in the United Kingdom and Canada, including this year’s highest-grossing film, “A Minecraft Movie.”

“​​The Movie Industry in America is DYING a very fast death,” the president wrote. He called international filmmaking incentives “a concerted effort by other Nations and, therefore, a National Security threat. It is, in addition to everything else, messaging and propaganda!”

Hollywood studio executives scrambled Sunday night to determine what the announcement would mean for their business. Executives said they were given no prior warning about the tariff plan and no information about how it might work.

It is unclear how such a tariff would work because movies aren’t physical goods that move through ports like most items subject to tariffs. The Trump administration would need to determine how to value a movie in order to apply the tariffs, as well as what the threshold would be to classify it as an import.

If other countries imposed reciprocal tariffs, it could devastate Hollywood studios, since most big-budget event films earn the majority of their revenue overseas. (…)

The U.S. movie industry had a $15.3 billion trade surplus in 2023 and generated a positive balance of trade with every major foreign market, according to a report from the Motion Picture Association, an industry trade group.

Some of summer’s biggest productions including “Mission: Impossible – The Final Reckoning” and “Jurassic World Rebirth” were made primarily or entirely outside the U.S.

London in particular has become a thriving hub for Hollywood productions, because of its tax incentives, extensive infrastructure including large soundstages, and English-speaking crews. Disney’s Marvel Studios is shooting a pair of upcoming Avengers sequels there.

The total amount of money spent last year on film and television productions in the U.S. with budgets of more than $40 million fell 26% from two years earlier, according to research firm ProdPro. It rose during that period in the U.K. and Canada, though neither market has yet caught up to the U.S. (…)

AI CORNER

Performance scores of top US and Chinese AI models:

Source: J.P. Morgan Asset Management