https://www.wsj.com/finance/stocks/company-earning…
Solid Earnings Season Marred by Investors’ New Fears Over Outlook
Shifts in trade policy, worries in bond market cast a pall over strong corporate results
By Karen Langley, The Wall Street Journal, May 25, 2025
Key Points
American corporations showed strength before April’s tariffs, with S&P 500 profits expected to be up 13% in Q1.
Trade policy shifts, bond market jitters and inflation fears create caution despite solid earnings.
Tariffs were mentioned on 2,136 earnings calls, and some firms, including Ford, withdrew financial outlooks.
…
Reasons for caution abound. Those include the shifts in U.S. trade policy, jitters in the bond market and fears of a resurgence in inflation—and all come while stocks look expensive relative to history. The risks were on full display last week, with a weak auction of government debt driving declines in stocks Wednesday and fresh tariff broadsides from Trump fueling losses Friday… [end quote]
The stock market has been recovering from President Trump’s “Liberation Day” shock. Investors have quickly regained confidence and VIX is low. The Fear & Greed Index is in Greed. The trade is risk-on as the prices of stocks and junk bonds are increasing while the 10 year Treasury price is declining.
Last week this optimism faded a bit as Trump suddenly slapped a 50% tariff on the EU. But the markets seem to becoming accustomed to this kind of extreme action and perhaps are regarding it as an opening bid in a negotiation. So the slight decline in the stock market may turn out to be noise.
The action in the bond market is real, not noise. The 10 year Treasury real yield has stabilized just below 2%. This is much lower than the pre-2000 normal level but much higher than the < 1% real yield that prevailed between the 2008 Great Financial Crisis and the Covid crisis. Many traders simply weren’t of a trading age (or even out of elementary school) when the Federal Reserve suppressed interest rates by Quantitative Easing (buying unprecedented, huge amounts of Treasury and other debt using fiat money conjured out of thin air).
Now the Fed is gradually reversing QE. Also, they have announced that they are seeking a neutral fed funds that will neither stimulate nor slow the economy. They will not cut the fed funds rate as long as inflation remains above their goal as long as employment stays strong.
Inflation is well above the Fed’s goal of 2%. Inflation is likely to rise due to the new tariffs and expulsion of immigrants who are a large part of the labor force. The options market does not expect a fed funds cut until September 2025 at the earliest and even that may be too soon.
There are several reasons the Treasury yield could continue to rise.
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If inflation increases due to the tariffs and reduced immigration.
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If deficits grow like the CBO is predicting, overwhelming market demand and forcing yields higher (prices lower).
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If the U.S. antagonizes foreign buyers, such as China, so they no longer want to buy U.S. Treasuries. Just as important, if the tariff war reduces Chinese imports as intended, so the Chinese don’t have as many trade surplus dollars to invest in Treasuries.
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If the Federal Reserve continues to allow its bloated book of Treasuries to roll off (as planned) and doesn’t reverse course and suppress Treasury yields with QE.
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Elevated risk premium due to market uncertainty.
If the long-dated Treasury yields remain high (or increase) there will be several long-term knock-on effects. The housing market will be damaged. The federal deficit will be increased as interest payments (already 11% of the budget) eat up more. Banks and other institutions that hold Treasuries as ballast will find their assets shrinking. (This is what sank Silicon Valley Bank in 2023.) Lending in the shadow banking system (unregulated lending) will become tighter.
The stock market is still in a bubble. It lost some air on “Liberation Day” but recovered. But remember that the entire situation is in flux due to Donald Trump’s impulsive influence on the entire trading system.
The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the second quarter of 2025 was 2.4 percent on May 16. That is a nice, sustainable growth rate. But it could be upended if tariffs cause supply chain disruptions that won’t show up until inventories have been drawn down.
The METAR for next week is partly sunny. There are plenty of clouds but the market’s optimism is still strong.
Wendy
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https://www.chicagofed.org/research/data/nfci/curr…
https://www.clevelandfed.org/indicators-and-data/i…