April 14th, 2025 - "Sell America" was the response of the markets to Trump.

We had highlighted a while ago the potential risk of a mass exodus from the US markets, if President Trump pushes too hard. To give our readers a perspective of the size of foreign ownership of US assets, these are estimated at about 30 trillion $, invested in US equities and US government bonds. Testing the world's tolerance, he not only imposed shocking tariffs on virtually the whole world but he also publicly mocked the leaders of other countries by claiming that they are desperately calling him and are begging for his mercy (...we cannot repeate his exact words here). He also slammed China with absurd tariffs of 145%, in response to Chin's retaliation with 125%.

However, he soon realized that euros, yens, yuans and pounds are desperately needed to finance his country's ballooning fiscal deficit. Foreign institutions and governments finance about 40% of the US fiscal deficit and if even a small part of these freeze their purchases of US government bonds, then the interest rates on these will soar, at a time when the country's debt to GDP is at record high and the annual budget has a 1.3 trillion $ annual deficit . There is no surprise that the USD crashed by the most on a weekly basis since the pandemic and the 10-yr bond yield rose to a high of 4.60%, from the 3.95% low, just one week ago. If the US was any emerging market it would soon be heading to the IMF for a bailout, if "Sell America" gained mote traction.

In a dramatic series of events, the Treasury Secretary, Mr. Bessent, informed the delusional president that things are getting out of control. Divisions in the administration had already surfaced with Musk calling Trump's tariffs architect, Mr. Navarro, a moron and quite a few Republicans voicing their concern. Hedge funds were forced to sell their leveraged Treasury holdings to meet margin calls , foreigners were massively exchanging their dollar holdings for their own currencies and the US stock market was crashing. The low quality bond yields were soaring, threatening a credit crunch and defaults, especially in small/mid size companies. That was the inflection point which made Trump swallow his pride and announce a 90-day freeze on the reciprocal tariffs leaving the universal 10% in place. He later also exempted phones, PCs and chips from the Chinese tariffs , bowing to the billionaires' pressure and after realizing the pain that will be inflicted on US Tech exceptionalism.

Let's now try to see where we stand. The stock markets have stabilized as the US administration finally realized that the world can control the interest rate that the US government is paying on their 36 trillion of debt, as well as the fate of the dollar. It is way too early to assess the economic damage already done to the US economy and hence the rest of the world. Trump's erratic behavior and the absence of any intervention by the Congress (for now) do not offer any basis to assume that all this was just a bad dream from which consumers will wake up and start spending again or the US allies will just forget overnight the US bullying. In all this chaos, China has assumed the role of the "good guy" and is planning to safeguard its own economy by focusing on boosting local consumption. In a recession scenario, equities are expensive, especially in the US and a 20% correction from current levels would not be out of the question. Were this scenario not to materialize but we rather move into a severe slowdown of the economy and hence company earnings are downgraded by say 5-10%, then current levels should correspond to fair value at best, for now.

The ECB meeting on Thursday will be very interesting to watch. The governing council was ready to cut rates by 25bp even before all this market turmoil , but it could now consider a larger cut, although this probably has a small probability. The spike in the EURUSD, which reached 1.1400, the highest level in years, is deflationary by nature for the region , which gives some breathing space to the central bank. The recent inflation data and the drop in energy prices also point to a rate cut with certainty, the size of which will be debated.

US equities managed to stage a late rally and finish the week with 5% gains, after Trump finally backed down. Despite the rally, the S&P500 is still down 9% for the year and Nasdaq -13%. European equities were also hit hard and their partial rebound was not enough to finish the week with a positive sign. They fell by 2% on average, with Swiss SMI underperforming (-3.5%) as the Swiss franc strengthened to record highs against the USD and the EUR. The Euro Stoxx 50 is now only marginally lower for the year (-2%).

The US March inflation numbers were better than expected, ahead of the upcoming increase in prices due to the tariffs. The headline CPI decreased 5bp in March, much less than consensus and which was the smallest monthly increase in nearly a year as prices for gasoline and other energy commodities fell significantly. On a 12-month basis the headline CPI slipped to 2.4% in March from 2.8%, registering the smallest annual increase since the start of the inflation surge in early 2021. The monthly change in Core CPI was 6bp, bringing the 12-month core inflation to 2.80%, also lower than expected. The biggest category surprises were in the services side where lodging away from home (hotel prices) fell 3.5% and transportation services (including air fare) declined almost 1.5%. The lower inflation is a by-product of waning consumer confidence, and hence lower spending, as it has also been documented in various surveys and company comments. We hold the view that growth is the major problem for the US economy, as the possible tariff-induced spike in inflation will be temporary, as demand collapses.

The Q1 reporting season has started in the US and it will be more interesting than ever to watch the guidance that companies are willing to offer for the rest of the year. The current estimated year-over-year earnings growth rate for the S&P 500 is 7.0%, but this has already come down as at the end of the year it was was 11.7%. In terms of sectors, Healthcare (+35.8%), Tech (+14.8%) and Utilities (+10.0%) are expected to provide the bulk of the EPS growth. Communications Services. (+4.8%), Financials (+2.3%), Consumer Discretionary (+1.5%) and Industrials (+0.7%) are expected to show only modest growth. Consumer Staples. (-8.1%), Materials (-10.1%) and Energy (12.4%) will be the drags, as per the current consensus estimates in FactSet.

Chart of the Week : The S&P500' biggest daily gains happen during bear markets, according to history.

The big reversal of the US markets last Wednesday by more than 9% was one of the largest daily percentage changes in histoy. The above chart, compiled by Pictet, shows this history of the S&P500 daily changes where last week's spike is a similar event that happened during the pandemic and previously in October 2008. A similar spike was observed in October 1987, just two days after the big crash. Previously we had similar episodes in the 1930s. Although this reversal has sparked some enthusiasm among market participants, we should note that in all previous times these large daily changes happened within a bear market. Leaving the pandemic era aside, as it is based on external factors, the most recent episode of October 2008 was followed by five more months of selling pressure and equities finally bottomed in March of 2009. We cannot predict the future by just looking at the past, but the message is that we should not get overly excited with a one day reprieve or short-term rebound. A fundamental change in US trade policy must occur soon, for the economy to re-accelerate and hence avoid the slowdown and the earnings downgrades.

Disclaimer

• The content of this document has been produced from publicly available information as well as from internal research and rigorous efforts have been made to verify the accuracy and reasonableness of the hypotheses used. Although unlikely, omissions or errors might however happen.

• The data included in this document are based on past performances and do not constitute an indicator or a guarantee of future performances. Performances are not constant over time and can be positive or negative.

• This document is intended for informational purposes only and should not be construed as an offer or solicitation for the purchase or sale of any financial instrument and it should not be considered as investment advice. The market valuations, views, and calculations contained herein are estimates only and are subject to change without notice. Any investment decision needs to be discussed with your advisor and cannot be based only on this document.

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• Sources: Chart of the Week : Pictet Aset Management