In this episode of Markets in Focus

Although it’s too early to say that corporate earnings have fallen off a cliff, Matt Orton, CFA, argues that estimates need to be revised downwards — even if they may not need to fall that much. He and Joey Del Guercio consider alternatives to calling a bottom for equities, ask whether the United States is ceding its importance in investor portfolios, and discuss the future path of interest rates, which may be one of the widest disagreements in the market. They also look at shifts in supply chains encouraged by U.S. tariffs, asking whether they will be temporary or part of a longer-term trend.

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Transcript

Matt Orton:
Welcome, everyone. Thank you for joining us for the second installment of our shorter-form Markets in Focus podcast that's really designed to provide you with topical, specific market updates and our outlook going forward. I'm joined again by Joey Del Guercio. Welcome, Joey.

Joey Del Guercio:
Thank you. Hello, everyone.

Matt Orton:
Excellent. He's going to help lead some of these discussions as well. There is absolutely no shortage of things to discuss right now. It seems like every week, it's probably its own revolving reality TV show of what we need to react to. I think we as investors have been tested pretty significantly over the past month, but just maybe there is a light at the end of the tunnel. I guess if we're ready to kick things off, let's not waste any more time and get started.

Joey Del Guercio:
Let's get into it. Let's start off with tariffs, of course. We're recording on April 28th, in the morning, in case anything changes tomorrow or the next day. Since the last podcast, we've gotten a flurry of tariff headlines, some good, some bad, all kind of nebulous.

We're still in very uncertain times, but it generally feels like we're making progress where it matters most, which is China. Last week, Bessent, in a closed-door meeting, said that he sees broad de-escalation with China. Trump even separately stated that Chinese tariffs would come down substantially.

I guess, Matt, what are your general thoughts on all of this, and do you think the worst of the Trump tariffs are behind us?

Matt Orton:
Yeah, so I think the worst of the left-tail scenarios from some of the tariffs are off of the table. I think that for sure, and that's maybe reflected in some of the market optimism.

To me, it's really hard to say that we're through the worst of it, because we really don't have any readthroughs to what's actually happened. And I mean, Bessent also said, if you remember, that it could take years to properly negotiate or come to an end game with respect to tariffs on China. It's just really tough, in my opinion, to know where exactly it's going to land.

What it does say to me is this is why focusing on stock-specific risk, focusing on asset allocations, allocations even within the equity space, matters so much more right now. Because there's a lot of stocks I'm excited about that aren't as tied up in this China tariff uncertainty — boondoggle, whatever it is you want to call it — that look really, really good. I don't want to buy the market at this point, but I do want to start taking advantage of some opportunities that are out there that can help make my portfolio a little bit more balanced, and are the best opportunities to get into some companies, and some sectors, some industries, that we've had in a really, really long time. It's a lot more than China. And China, there's a light at the end of the tunnel, but we're nowhere near getting out of that tunnel yet.

Joey Del Guercio:
I guess I want to ask you about the light at the end of the tunnel. So right now, we have, the U.S. has 145% tariffs on China. The growing assumption or narrative is that we're going to see that get negotiated down to the 50% to 60% range, which is actually what Trump campaigned on.

Matt Orton:
Also, still a silly number.

Joey Del Guercio:
Yeah. His “Art of the Deal” sounds better now, but it might feel like a victory if the tariff rate gets cut in half from where it is now. Can you just speak to, I guess, the ramifications of having that level of tariff rate there for any substantial amount of time?

Matt Orton:
Yeah, it's huge. Come on.

You can't have blanket tariffs of 45%–50% on your largest trading partner. That's effectively putting a 45%–50% tax on most of the goods that we're buying, so that's not going to last.

Again, it might be “Art of the Deal” with respect to where we're trying to go, but there's no way that it can just be blanket; it needs to be more specific. It needs to be more targeted towards certain industries and types of companies that are the biggest tariff offenders. That are causing problems with respect to our global competitiveness.

Those larger numbers, if they stay, would definitely be problematic to the overall economy. It would be problematic to corporations, and most specifically, consumer spending. Again, it's too early to make any conclusions of how that's going to impact everything, because most of those haven't taken full effect yet, and I doubt they ever are going to. They're really more of a negotiating chip.

Joey Del Guercio:
On consumer spending and business spending, we've seen the hard data really hold up. I mean, we saw March retail sales come in way above expectations. Autos were particularly strong. I guess I want to ask you if is this true resiliency or — like you alluded to a couple questions ago — is this just a pull forward of consumer and business demand? We're going to see that fatigue eventually, even if the tariff rates end up coming down.

Matt Orton:
Yeah, it's a great point, Joe. I mean, who's going out and buying cars at current interest rate levels? Unless, you know, they need to. There was definitely evidence in retail sales, but there's also evidence of resiliency. Because what stood out to me from the most recent retail sales report was also the fact that people were going out to restaurants.

I think it was the food and beverage retailers line item within retail sales that was actually quite strong. That says that people are still going out to eat, people are still going to bars. The control group was also strong too.

There are signs of resiliency within this. And again, we're based in a beach vacation destination. We're in a weird, off-season period, but our beaches are packed. Our airports are packed. People are still traveling, going out.

I don't know if they just haven't canceled their trips, or they couldn't cancel the trips, but based on what I see in vacation areas — and based on all the travel I've done over the past few weeks to talk to clients and see what companies are doing to mitigate some of these tariffs — it's been encouraging to see the number of people that are still out and about, that are still spending. It's really hard to tell.

What I would be paying close attention to, if you really want to get a sense of how this might be starting to play out, are there early signs of some sort of consumer weakness? Pay attention to earnings from retailers, especially those who are more discretionary, like your Starbucks. Are people still buying $5 or $6 lattes? That's important. Are people still going to hotels? Pay attention to Hilton, pay attention to Marriott. Visa as well. We got a great report from AmEx, but what's happening at Visa? Are people still spending at the rates that we expected? You need to put all of this together to get a mosaic of maybe where the consumer might be starting to migrate, but I'm not seeing significant signs of cracks in the system yet.

Joey Del Guercio:
Agree there. I mean, anecdotally, I went to the mall this weekend because I had to. I struggled to find parking. I was there a lot longer than I meant to be, and there was no shortage of people within the mall.

Matt Orton:
Yeah, people are out. I mean, it's all anecdotal, but it does not feel like it did at other times. There's more people out and about now than there were in 2022, at least in my limited experience.

Joey Del Guercio:
Yeah, in the Tampa Bay area.

Matt Orton:
Right.

Joey Del Guercio:
Anyway, let's turn to monetary policy. We had some noise there this past week, too. Since our last recording, the Fed's independence has come into increasing focus. President Trump called the chair of the Federal Reserve, Jerome Powell, a “loser” and additionally dubbed him Mr. “Too Late,” which is a pretty cool nickname.

Matt Orton:
It seems like that could be a Taylor Swift song title, by the way. So, just as a heads-up for her.

Joey Del Guercio:
I mean, he very clearly wants Powell to cut. That's been the vector of attack for him on Powell, and he's since walked back his aggression a little bit towards Powell. I guess, what do you think of this? Is it even reasonable to expect Powell to cut, just given where the job market is, given where inflation is now?

Matt Orton:
Yeah, it's perhaps where the widest disagreement is out there in the market right now; between will they cut/won't they cut? I think some folks are expecting four-plus cuts to come before the end of this year. I am not in that camp. I think two cuts, maybe, we get this year, because again, I'm not seeing right now the cracks to the job system. Maybe they're going to come, but at least they don't exist right now.

If we get another good NFP on Friday for April, plus the fact that inflation is likely going to pick up, or at least remain fairly strong, it takes away the need for the Fed to cut. Or their ability to cut. I'm not in the camp that the Fed needs to run to save this overall economy, because I don't think that we're at the precipice of a recession to begin with.

I think the Fed's between a rock and a hard place. I don't think they can do much. The calls for taking away Fed independence, or getting rid of Powell — I think were a complete distraction. Unnecessary. Very, very dangerous. But it seems like we're past that. Cool heads have prevailed, and I think we're beyond that at least until May of next year. So hopefully we don't get any more of that sort of uncertainty.

Honestly, Mr. “Too Late” is a great way to put the blame on the Fed for perhaps some of the more perverse effects of fiscal policy to begin with, right?

It's easy to use the Fed as a punching bag if you're the executive branch and things haven't quite gone the way you want to. That's happened time and time again through history. Almost every administration. Why would you want to take that away, and then basically have to take the blame for both monetary and fiscal policy? It just doesn't make sense to me.

Joey Del Guercio:
Yeah. No, that's a good point. I guess Powell's kind of a scapegoat for all the fiscal noise.

Anyways, let's move on to markets, because I view where we are as being at a bit of a crossroads. The S&P 500 death-crossed for the first time since the first quarter of 2022 — which sounds quite horrible, but it's just when the 50-day moving average crosses the 200-day moving average from above. Just comes from above, crosses below.

We've seen a pretty sharp bounce since then. The S&P had drawn down almost 20%. It's now bounced over 10% to the upside, and I think we're only down about 10% since that February 19th all-time high.

Also, risk assets are starting to come back. Bitcoin's back above like 95,000 right now, so it feels like there's a lot more appetite to take on risk. We're in the middle of earnings season. We're 11% off the S&P's bottom, only about 10% in a drawdown. How do you feel right now? Not to ask too loaded of a question, but is it too early to call bottom?

Matt Orton:
Yeah. I mean, I'm feeling more constructive about where the market goes. But again, this is an exercise, and rather than calling bottom for the market, it's calling bottom in maybe certain trades that have happened. Do I think maybe we've seen rock bottom for some of the A.I. trades, some of the A.I. tangential plays, like power? I think maybe, because earnings are coming in better than we were expecting. And you're seeing — especially a lot of the electric and power companies that are built into data centers or electric equipment-type companies — you're seeing really strong earnings results coming from that entire cohort of companies.

There are still tangible pipelines, that are out there, that are not impacted by any of the noise that's out there with respect to DeepSeek or tariffs and trades. Again, maybe we're getting towards the end of the tunnel with respect to A.I. and some of those long-term or durable secular growth themes. Again, we're going to see from the hyperscalers, or the rest of the hyperscalers this week, so that's going to be important to get a sense of where that trade is going.

For the market as a whole, there's still a lot of uncertainty that's out there.

Again, I think the market's gotten excited that we're walking back some of the worst inclinations that were embedded or being priced in from the administration. So we're getting some pivots. That's encouraging to the market. Has the market maybe moved too far, too fast, in baking in optimism? Perhaps.

I mean, earnings estimates haven't come down significantly. While they don't need to, necessarily, I do think I would feel better about the market from a valuation standpoint if we had seen more of an EPS drawdown from consensus expectations. I still think there's some room to go, again, for the market as a whole. Not necessarily at the individual stock level.

I think there's still going to have to be some shakeout that takes place with respect to resetting earnings expectations. But that's going to happen over the next quarter or so. Again, we're looking backward right now, and guidance is basically non-existent outside of a handful of companies.

It's going to take time to digest and really figure out where we go, what tariffs ultimately look like. Again, the China tariffs are going to be the most important piece of that, and there's zero clarity with respect to where those go.

Joey Del Guercio:
Different question, but off the vein of taking a while to digest what's going on and react to it, I want to just take a second to talk about global allocation.

Since the U.S. has bounced, it's outperformed Europe, international equities, by a slight margin. But the U.S. has been the best game in town for decades, by and far, and I think that's starting to come into question a little bit.

Whether or not the tariffs get cleared up, it's still a matter of whether or not you can trust the U.S. as being this ballast in global portfolios. Because at the worst of this downturn, you saw yields spike, you saw the dollar fall, you saw U.S. equities fall. It was this whole “Sell America” concept.

I guess I'm wondering: Do you think that there's still a re-rating in global allocations to the U.S. that's going to get ratcheted down over the coming quarters, as institutions slowly take down their U.S. allocations a bit?

Matt Orton:
Yeah. Well, I think some of the calls for “Sell U.S.” — and the end of the U.S.'s investable asset classes — that was all incredibly hyperbolic.

I think on the margin there are some changes that are starting to take place, and frankly, I think some of it's healthy. I've been out there saying we've hit peak concentration for the U.S. market, and part of that's driven by the fact that you're seeing a lot of foreign holders — I'll call them large, real-money foreign holders, whether those are pension funds, insurance companies — taking profits from some of the Mag 7, the names that were the really easy ones to ride in the U.S., and move some of those allocations at the margin into their own domestic markets, be that in Europe or in Japan or other parts of the world.

I think there's scope for that to continue a little bit, but they're not fully de-allocating.

When I talk to other colleagues — on trading desks or at long-only funds, especially those that are more European-focused — a lot of the long-onlys haven't noticed a significant tick up or increase in overall allocation. That, coupled with some of the trade noise, says to me that a lot of the moves are happening more on the margin, more with respect to tactical shifts than with respect to global asset allocations. Because again, earnings so far in the U.S. have been fairly resilient. It's too early to say that they're falling off a cliff.

We're not at some precipice that's going to turn into just this hair-on-fire situation with respect to where earnings are going to go. Yes, estimates need to continue to be revised, in my opinion, but I don't think they fall that much. Earnings in the U.S., even if we shave off 2%, 3% going forward, that still puts them relatively in line with maybe where you end up in Europe or other parts of the world.

There's still growth here. There's growth, and improving growth, around the rest of the world. Again, I think it's about balance.

You want to be balanced. You want to lean into things that are working. You want to be idiosyncratic with respect to how you build companies. You want to focus on individual sectors, industries, companies, as opposed to just the market as a whole.

If you do that, and you take advantage of maybe building in some more global allocation to your portfolio — because it is working and I think there's scope for it to continue to work — I think you'll be in a good place.

I don't think this is a full “sell U.S. equities” type of trade, and it's still by far the largest part of global markets as well. There is going to still always be a bid when things get too dislocated.

Joey Del Guercio:
Agreed there.

Also, you've been talking about unique global offsets for a while, and I just wanted to flag: On Friday, there were headlines about how Apple was rerouting much of their U.S.-focused iPhone production to India from China. What are you seeing there? Do you think we're going to see a lot more of these Southeast Asian supply chains rerouted from China to India?

Matt Orton:
Oh, absolutely. I mean, even if we resolve tariffs, Apple's not going back to China. A lot of companies that are moving out of China into a country like India, they're not going back. Even if tariffs are there. And absent tariffs, there's just the geopolitical risks as well and risks of the C.C.P. in control of China.

India is a huge overall growth story. Anyone who's followed me for a while knows I've been optimistic on India, and especially after the big pullback that Indian markets had heading into end of winter, early spring here. The markets have already had a 15% pullback, and they're up over 10% over the past week or so, just given optimism and strong earnings that are coming out of India.

I think that's another area. It's not correlated, or well correlated, to the rest of the world. That's good from a portfolio construction perspective, and again, there's earnings opportunities there, trading in a fair valuation. Looks interesting to me.

Joey Del Guercio:
Yeah, and I mean, it drew down ahead of domestic equities and has since recovered before domestic equities have really recovered.

Matt Orton:
Right, and in 2022, it was a good offset to portfolio weakness, too. India had its drawdown, I'd say prior, and it held out well through most of 2022, whereas the rest the world didn't.

Joey Del Guercio:
All right, so let's finish up with earnings, because we're running up on time.

I want to get your broad takeaways, because my main takeaway from this earnings season thus far is, I guess, frankly, the earnings don't matter as much as the guidance does this season.

What I've been noticing is just that the companies that got too granular with their tariff forecasting, and then didn't embed it in their guidance, got crushed. Raytheon was a good example of that. But the companies that were able to provide granularity about how tariffs could affect them but then either held their full-year guidance steady or even raised it because of offsetting strength in the first quarter, those companies saw really good results. Vertiv was a good example of that. I guess, what are you seeing on a high level? And then more granularly, what are you seeing in Mag 7 earnings? We got Tesla and Google last week.

Matt Orton:
Yeah. Well, Tesla was so bad it's good, I guess. The market was expecting it.

Again, this is where I think the moves we've had in the market make sense. What you've referred to as well, with some of the misses — and I guess providing better guidance for those companies — again, the market moved a lot in advance of those earnings for some of those companies. The fact that you get some semblance of stability or understanding of how their businesses might perform going forward, the market's going to reward that, understandably so.

I think that's what the market's going to be looking out for right now.

Even if you pull a United, and do some bifurcated guidance of saying, "If this, then this" — and do that in multiple stages — that's still better than nothing. At least investors know how corporate management teams are thinking about their business and what their plan A, their plan B, their plan C is, with respect to how you adapt to what the tariff environment might be.

I know it's hard to provide guidance, or any form of visibility, but at least showing what those outcomes could look like is going to be important, I think. And companies that do so are clearly being rewarded by the market.

Joey Del Guercio:
Yeah. I guess also, one more thing I just want to add on, is that a lot of these companies who are embedding the tariff rates into their guidance were doing so at these currently very elevated, probably high-point levels. So that's going to lead to well-understood but easy comps to beat in second quarter, third quarter, fourth quarter. I mean, that's just something to note, too. If tariffs get walked down, we're looking at probably pretty easy beats from the preceding quarters.

Matt Orton:
Right, as you should. You want to manage expectations, right? Manage to lower expectations so you can beat them.

Joey Del Guercio:
Exactly. Then I guess just one last question: Is there anything that you think investors should be keyed into going forward, as we enter the climax of earnings and all this key economic data? ahead of the FOMC meeting too?

Matt Orton:
There's just so much noise out there. I think it's really important to hunker down and try and tune out a lot of the macro noise that's there.

While it's important to follow a lot of those macro updates, a lot of the commentaries along the sides — and especially the more hyperbolic commentaries — just aren't that constructive. At the end of the day, it's really important to follow what's happening at the company level. Earnings do matter. Where we're coming from does matter, because it's the base upon which we're going to move in one direction or the other, based on where tariffs ultimately land, so the results still are important.

Guidance will be important. And refining that guidance over the coming months through investor days, that's going to be really, really important. Then I'm also just laser focused on the jobs market and the state of the consumer. Because if people have jobs, people are still going to continue to spend.

It's going to be really important to make sure that we don't start to see some cracks or fissures starting to form in the overall employment market that then might feed into how consumers are spending.

Joey Del Guercio:
Awesome. Well, thank you very much for answering all the questions, and thanks everyone for listening.

Matt Orton:
All right. Thanks, everyone. Until next time, take care.

Thanks for listening to Markets in Focus, from Raymond James Investment Management. You can find additional episodes and market insights at marketsinfocuspodcast.com. You can also subscribe to our podcast on Apple Podcasts, Spotify, or your favorite podcast app. Until next time, I'm Matt Orton.