5/14/25 Charts & Ideas: What Markets Are Telling Us

05/14/2025 | Unsubscribe

Good Morning!

Here are some important charts and ideas capturing the latest trends in US markets to help you understand what is happening from multiple different perspectives:

📉 Implications for Trade & Growth

• 🚫 Import Collapse:
  Sustained 50–60% tariffs = severe bilateral trade contraction.

• 🏗️ Supply Chain Risk:
  Firms reliant on Chinese inputs face cost pressure + sourcing disruptions.

• 🛒 Sticky Inflation Risk:
  If substitutes are scarce, consumer prices may rise, complicating the Fed's job.

• 📉 Real GDP Drag:
  Lower imports = hit to trade-linked sectors, even if not directly in the GDP math.

🧭 What Markets May Be Missing

• 📉 Underpriced Risk:
  If tariffs remain high, equity markets may be over-optimistic about trade normalization.

• 💥 Earnings Volatility:
  Multinationals with China supply exposure could see margin pressure and volatility.

🔁 Alternative Scenarios to Watch

• 🟢 Substitution Softens Blow:
  Nearshoring to Mexico, Vietnam, etc., could partially offset the shock.

• 🔴 China Retaliation Risk:
  Non-tariff barriers or regulatory action could amplify the downside for U.S. firms.

🧨 TL;DR:

If elasticity = -2.0 and tariffs stay at 50–60% → expect a ~70% drop in Chinese imports.
This is a high-impact, underappreciated risk for supply chains, inflation, and equity valuations.

📈 Goldman Sachs: Inflation to Re-Accelerate Through Mid-2026

🔍 What the Chart Shows

• Core PCE Inflation Forecast:

  • 3.8% YoY by Dec 2025 (up from ~2.7% today)

  • Stays above 2% into late 2026

• Trend Reversal:
  Disinflation stalling → sticky inflation resurgence, just as markets brace for extended policy uncertainty.

💼 What This Could Mean for You

• 🏦 Rate Cuts on Hold:
  Persistent inflation >3% likely keeps the Fed hawkish through 2026.

• 💸 Real Wage Squeeze:
  Rising inflation may erode consumer purchasing power, especially for lower- and middle-income households.

• 📊 Market Sensitivity:
  Elevated inflation may dominate macro sentiment, pressuring equity confidence.

• 📉 Bond Market Impact:
  Higher-for-longer yields = risk to long-duration assets and credit-sensitive sectors.

🔁 Alternative Perspectives to Consider

• 🟢 Forecast Uncertainty:
  Global disinflation or labor softness could drag inflation lower than expected.

• 🔵 Fed Still Has Levers:
  Policymakers could tighten or guide hawkishly to keep expectations anchored.

• 🟠 Policy Noise Risk:
  Political narratives and price interventions could distort near-term CPI/PCE prints.

🏢 U.S. Corporate ROE at Historic Highs — Still Holding Post-Peak

🔍 What the Chart Shows

• LTM Return on Equity (ROE):
  Near 20% as of Feb 2025 — well above historical median (~13–14%).

• Comparison:
  Current ROE vs. post-peak medians (1950–2025), including recession vs. non-recession paths.

• Shaded Bands: Represent 25th–75th percentile ROE behavior post-equity market peaks.

💼 What This Could Mean for You

• 💪 Profit Strength Supports Valuations:
  Elevated ROE helps justify richer multiples, reducing downside fears.

• 📉 Downside Cushion:
  High ROE has historically softened equity drawdowns in volatile periods.

• 📊 Institutional Confidence Booster:
  Strong profitability = incentive to stay invested, even in macro chop.

• 🚀 Margin Resilience:
  Suggests pricing power and cost control are intact across key sectors.

🔁 Alternative Perspectives to Watch

• 🔻 Mean Reversion Risk:
  ROE may normalize if rates stay elevated or top-line growth slows.

• 📦 Concentrated Strength:
  Mega-cap tech likely skews ROE higher, masking sector dispersion.

• 🔮 Lag Effect Risk:
  Current ROE reflects past environment — policy lags may hit later in 2025.

📉 Bond Market Shift: Real 10-Year Yield Hits Post-2009 High

🔍 What the Chart Shows

• ⚫ Nominal Yield (~4.5–5%) → Total 10Y Treasury return

• 🔴 Real Yield (~2.2%) → Inflation-adjusted return, highest since 2009

• 🔵 Breakeven Inflation (~2.2%) → Market sees inflation as anchored

💼 What This Could Mean for You

• 📈 Real Yields Are Back:
  Investors now earn positive real returns on Treasuries — a strong case for fixed income vs. risk assets.

• 🔻 Equity Valuation Headwind:
  Higher discount rates = lower valuations, especially for growth & tech stocks.

• 🧾 Fiscal Pressure Rising:
  U.S. borrowing now faces higher real interest costs, raising long-term fiscal risks.

• 🧲 Stronger Dollar Ahead:
  Higher real yields → capital inflows → USD strength → tightens global financial conditions.

🔁 Alternative Perspectives to Consider

• 🔧 Disinflation Cushion:
  Stable breakevens = inflation expectations anchored, offering the Fed breathing room.

• ⏳ Lagged Pain Incoming:
  High real yields may take quarters to slow credit/housing, delayed recession risk.

• 🛑 Fed Pivot Risk:
  If real yields spike too fast, the Fed may step in to prevent economic or credit stress.

📉 S&P 500 ERP Falls to 24-Year Low — A Valuation Warning

📊 What the Chart Shows

• ERP = Forward Earnings Yield – Real 10Y Treasury Yield

• Current ERP: ~2.5%

• Historical Mean: ~5%

• Lowest since early 2000s — last seen during the dot-com bubble

💼 What This Could Mean for You

• 🔻 Stocks Look Expensive:
  Investors are not being adequately compensated for equity risk vs. bonds.

• 📉 Repricing Risk Is High:
  A rate spike or earnings miss could trigger a sharp equity correction.

• ⚖️ Weak Risk-Reward Profile:
  Historically, low ERP = poor forward returns + elevated drawdowns.

🔁 Alternative Views to Weigh

• 🧭 “Goldilocks” Outlook:
  Low ERP may reflect confidence in soft landing + stable inflation — but the margin for error is razor-thin.

• 🧮 Concentration Distortion:
  Mega-cap tech skews the index — small/mid caps may still offer value.

• 📈 Hope in Earnings Reacceleration:
  If EPS surprises to the upside, ERP could normalize, though that’s not guaranteed in a slowing macro environment.

That’s it for today!

📌 Did we land in your inbox? Please make sure our emails arrive in your inbox where you can see them immediately.

Best Regards,

Ultimate Alerts Team

Disclaimer

The content distributed by UltimateAlerts.com is for general informational and entertainment purposes only and should not be construed as financial advice. You agree that any decision you make will be based upon an independent investigation by a certified professional. Stocks/Assets featured in this newsletter may be owned by owners/operators of this website, which could impact our ability to remain unbiased. If you click on an affiliate link the website owner may receive compensation. Although we have sent you this email, UltimateAlerts.com does NOT specifically endorse this product nor is it responsible for the content of this advertisement. Please read and accept full disclaimer and privacy policy before reading any of our content: www.ultimatealerts.com/c/disclaimer/ and www.ultimatealerts.com/c/privacy-policy