Macro
In the first 100 days of his second term, Donald Trump’s presidency has had profound and destabilizing effects on the U.S. economy. His aggressive use of tariffs triggered significant market volatility, rattling both equity and bond markets. Investors, typically drawn to U.S. Treasuries during periods of risk, instead shifted assets toward safer foreign currencies like the yen and Swiss franc, signaling a loss of confidence. As a result, the U.S. dollar is on track for its worst first 100 days under a new presidency since the Nixon era, with losses not seen since 1973. Unlike previous presidencies, where the dollar typically strengthened early on, Trump’s return — marked by tariffs and pressure on the Fed to cut rates — has weakened the dollar and boosted currencies such as the euro, Swiss franc, and yen. Temporary tariff pauses helped stabilize markets somewhat, but protectionist policies have raised inflation risks and weighed heavily on consumer confidence, which has now fallen to three-year lows.
Hard data indicates that the economy remains resilient for now. However, soft data — including consumer sentiment surveys, purchasing manager indexes, and executive surveys — is deteriorating rapidly as fear grows over the economic impact of tariffs. Investors are struggling to assess how tariffs will hit the economy, as this represents one of the largest economic experiments in decades, with constantly evolving plans. Although the initial damage may prove less severe than feared, asset managers have turned increasingly pessimistic on U.S. growth. Many believe that reversing the aggressive tariff policy could help, but stress that any reversal would need to be quick. As time passes, prospects for fully reversing the damage diminish. Furthermore, for the first time since August 2021, the majority of institutional investors expect higher inflation over the next 12 months, according to the Bank of America Global Fund Manager Survey.
Trump’s broader economic agenda emphasizes sweeping deregulation and consolidation of federal power. Through agencies such as the Department of Government Efficiency (DOGE), he has dismantled major regulatory bodies, destabilizing institutions critical to economic governance. His heavy-handed approach to trade, government restructuring, and immigration has injected uncertainty into supply chains, labor markets, and investment planning, heightening operational risks for businesses. While supporters applaud Trump’s efforts to pressure allies into greater defense spending and renegotiate global trade terms, critics warn that these policies risk triggering a self-inflicted recession. His broad assertion of executive authority — often sidelining Congress and the judiciary — has raised concerns about erosion of the checks and balances that underpin economic stability. As trade wars and executive actions continue, the long-term economic impact remains uncertain, but early signs point to a fragile and increasingly politicized business environment.
Tariffs represent a core part of Trump’s negotiating strategy, often using the “anchoring method” — setting extremely high starting points to frame the terms. This tactic has had unintended consequences, creating massive business uncertainty and leading to pullbacks in capital expenditures and consumer spending. The longer uncertainty persists, the more business sentiment deteriorates, further slowing capital investment. Additionally, prolonged tariffs risk tarnishing the U.S. position globally and eroding the soft power built over decades.
While tariffs can induce a recession, their inflationary impact is expected to be temporary. Initial shocks could push inflation above 4%, but pressures should ease once the supply chain absorbs the tariff impact. A bigger concern is that the political dynamics of the U.S. — with its short electoral cycles — make it difficult to endure the prolonged economic pain that a drawn-out trade war would entail. In contrast, China, though facing its own economic vulnerabilities, can absorb longer-term pressure due to its centralized political structure.
China’s internal consumption remains weak, and it struggled with exports even before the trade war, as evidenced by last year’s period of deflation. Achieving the government’s real GDP growth target of “around 5%” will be extremely difficult unless trade tensions ease. Although the Chinese government revised its CPI target down from “around 3%” to “around 2%,” actual inflation forecasts are running even lower, while long-term inflation expectations have surged to 30-year highs. For China, striking a trade deal before companies commit to relocating supply chains is critical to avoiding permanent economic damage.
Fiscal Situation and Political Constraints
The U.S. faces a major fiscal challenge, with a 124% debt-to-GDP ratio and public debt standing at $36.2 trillion compared to $29 trillion of GDP (U.S. Treasury). Last year’s budget consumed one-third of the economy. To restore fiscal sustainability, spending must fall closer to 20% of GDP. Trump’s plans may appear radical and unpopular, but maintaining the status quo of large deficits and bloated government is no longer a viable option. America is undergoing a period of realignment that will inevitably be bumpy; if the Trump administration fails, the resulting instability could be severe. However, addressing these issues now — even with disruption — is preferable to allowing the situation to deteriorate until a crisis forces change.
There is only so much Elon Musk, leading efforts under DOGE, can do without congressional authority. America needs Congress to act, as it cannot fall to one individual to solve structural spending problems. However, structural reform is exceedingly difficult. Over decades, members of Congress have become accustomed to securing ever greater resources for their constituencies to aid reelection efforts. There is little direct political incentive to champion initiatives that serve the broader national interest, especially when the benefits take years to materialize. True change would require lawmakers to risk their careers for the good of the nation — something unlikely without a crisis that outweighs their short-term ambitions. Elon Musk’s efforts to rein in government spending are met with significant political resistance and personal criticism, highlighting the difficulty of trying to impose fiscal discipline in a system that structurally resists it.
Recent stock market weakness has coincided with an unusual decline in the U.S. dollar, suggesting a breakdown in its traditional safe-haven role, according to Bloomberg Intelligence’s Gina Martin Adams. Historically, a 14.6% decline in equities would be paired with a 3.5% rise in the dollar, but this time, the Dollar Index has fallen 9.3% — the largest divergence recorded. This raises further concerns about diminishing investor confidence in U.S. assets during periods of market stress.
Rates
The outlook for global nominal government bonds remains neutral, although selective opportunities are emerging. Long-dated UK gilts are viewed favorably, as yields appear misaligned with fundamentals — 30-year gilt yields are significantly higher than comparable U.S. Treasuries. Signs of stagflation in the UK, combined with an expected moderation in inflation and wage growth, suggest the potential for future rate cuts by the Bank of England, supporting demand for gilts.
In contrast, Japanese government bonds are viewed negatively, with expectations that the Bank of Japan will tighten monetary policy more aggressively than markets currently anticipate. Although the underweight position in JGBs was slightly reduced in March, a cautious stance remains appropriate.
Global inflation-linked bonds are assessed as neutral overall. Breakeven inflation rates are broadly aligned with central bank targets, except in the UK, where inflation expectations remain elevated. Nevertheless, UK inflation is forecasted to moderate over the coming year, which should narrow the current divergence.
The most notable development in the bond market this week is the reduction of risk. U.S. bond market volatility, as measured by the ICE BofA MOVE Index, has recorded its largest decline this year. This move was largely driven by news that Donald Trump does not intend to replace Jerome Powell as Federal Reserve Chair and is willing to significantly reduce tariffs on China.
Bond markets are showing a bullish setup for the coming week, supported by falling yields. The 10-year Treasury yield has declined by approximately 5.8 basis points to 4.256%, marking the second consecutive week of declines. Momentum-driven Commodity Trading Advisors (CTAs) have shifted to net buyers, likely adding further upward pressure on bond prices. Additionally, heavy short positioning in Treasury futures — including a record short in 5-year contracts — is contributing to a more positive outlook for bonds.
Two key facts are often overlooked in current discussions:
- From 1982 to 2008, 5% interest rates were not considered “punishing.” The economy performed well during that period, with major innovations such as the development of the internet, GPS, radio, and television.
- Higher interest rates are, in aggregate, a net benefit to the public, as savers receive more income from bank deposits, money market funds, and bond investments than the additional costs they bear through mortgages and loans. However, the impact of higher rates varies across income groups and can create distortions between wealthier households and those with fewer assets.
Credit
The global high-yield bond market outlook remains negative. Although credit spreads have widened moderately following the recent equity market sell-off, they are still not consistent with typical recessionary levels. Further spread widening is expected as economic uncertainty grows and corporate balance sheets come under greater strain, potentially leading to a rise in default rates.
Investment-grade (IG) credit maintains a cautiously modest outlook. Tight starting valuations limit the potential for further spread compression, increasing vulnerability if recession risks materialise. Negative sentiment toward credit is primarily expressed through high-yield rather than IG bonds.
In emerging markets, hard-currency debt is preferred, supported by attractive all-in yields despite some spread tightening over the past year. Local-currency emerging market debt holds a neutral stance, as external headwinds continue to pressure EM currencies, even though the U.S. dollar has softened recently. Spreads in both segments are likely to widen further if weaker global economic growth leads to higher default rates.
In the private credit space, which now manages approximately $1.6 trillion in assets, pressures are building. A rising number of companies are struggling with profitability: according to the IMF, 40% of borrowers in the sector now have negative cash flow, up from 25% in 2021. To manage these challenges, private credit lenders increasingly rely on payment-in-kind (PIK) notes, allowing companies to defer interest payments and temporarily improve interest coverage and margins, at the cost of adding more debt to already stretched balance sheets.
While private credit benefits from long-term backing by private equity investors, systemic concerns are also emerging. U.S. banks hold more than $500 billion in exposure to private credit markets, raising potential financial stability risks if defaults rise significantly.
Equity
Over the past three weeks, the U.S. equity market has experienced some of the sharpest swings in decades. Following the tariff announcement on April 2, the S&P 500 fell sharply, dropping -4.84% on April 3 and -5.97% on April 4, deepening an already existing correction driven earlier this year by a sell-off in the Magnificent Seven stocks. Investors had an opportunity to “buy the dip” during the sessions on April 7 and 8, with maximum drawdowns of 21.35% and 20.13% from February 19 highs, respectively.
On April 9, news of a 90-day pause on the majority of tariffs triggered a powerful rebound, with the S&P 500 jumping +9.52% — the third-largest daily gain since World War II. This recovery brought the market back from an 18–20% drawdown range to around 10% down year-to-date. For context, the S&P 500 had posted strong gains of +24.23% in 2023 and +23.31% in 2024, but is now adjusting to a more uncertain outlook.
Valuations have come down meaningfully. The forward P/E multiple has dropped from 22.5x at the end of 2024 to around 18.5x today. However, these valuations still bake in high growth assumptions, which are likely to face downward revisions. While the market has priced in some slowdown, it has not fully accounted for recession risks or further trade war escalation. For investors with a longer than two-year horizon, current levels may offer a fair entry point, particularly in areas like REITs that now appear heavily discounted.
The volatility has not just been about single-day moves. Over the last three trading sessions, the S&P 500 rose more than 1.5% daily — a rare and historically bullish pattern. Looking back nearly a century, this exact sequence has occurred only 10 times, and in every case, the S&P 500 was higher one year later with an average return of +21.6%. Prior instances came during major rebounds in 1932, 1970, 1982, 2009, and 2011.
Within the Magnificent Seven, Tesla surged 20% over the past three days, fueled by Elon Musk’s ambitious announcements about humanoid robots, full self-driving vehicles, and a new, affordable Tesla model. This shows a renewed risk appetite among investors willing to look beyond near-term financial challenges toward longer-term innovation.
Alphabet also delivered a strong Q1 earnings report, beating EPS estimates by 40% and reporting a 9.8% increase in ad revenues. Despite facing a 31.6% intraday drawdown earlier in the year and still being down around 15% year-to-date, Alphabet’s results — including a dividend hike and a $70 billion buyback program — lifted sentiment across the tech sector. However, concerns remain around Google Cloud’s slight underperformance and broader competitive pressures in AI. Analysts note that Alphabet is trying to catch up in the AI space, with Gemini now reaching over 350 million monthly active users, compared to ChatGPT’s explosive growth to 600 million weekly users.
Meanwhile, Amazon continues to hold the best track record for earnings surprises at +38.9% YoY, followed by Meta (+11.8%), Nvidia (+9.8%), Alphabet (+8.5%), and Microsoft (+5.9%). Apple remains neutral historically, while Tesla has tended to disappoint, with an average earnings surprise of -6%.
Investor sentiment toward “U.S. exceptionalism” has cooled, with many rotating or hedging away from mega-cap tech. With the Shiller CAPE ratio currently at its third-highest historical level, if it mean-reverts over the next decade, equity returns are expected to hover around 6–7% annually — only about 1–2% higher than bond yields, which currently sit around 4.7% (measured by the Bloomberg US Aggregate Bond Index). This implies a shift away from the broad outperformance seen in the post-GFC era, toward a market where sector and factor selection will play a far more critical role.
REITs in particular look attractive, as they remain heavily discounted due to high interest rates, positioning them at decade-low valuations. REITs have historically proven resilient during periods of economic uncertainty. They are largely immune to tariff impacts, as their revenues are domestic, and may even benefit from constrained new construction. Additionally, during recessions, long-term leases have helped REITs outperform broader equities.
At the same time, the broader market sentiment remains fragile. The sell-off driven by tariff fears reflected the real risks facing U.S. growth. Now, the market is likely entering a slower “digestion” phase, where company earnings reports and management commentary will start revealing the true impact of tariffs and slowing demand. Early signals point to downward revisions of earnings forecasts, delayed expansion plans, slowed CapEx, and increased corporate cash reserves. Companies are preparing for softer consumer spending and heightened uncertainty.
Investors have also moved heavily away from U.S. assets, not just stocks, but Treasuries, credit, and the dollar. As a result, the U.S. Fundamental long/short ratio has dropped to its lowest level in five years, falling from a 2021 peak of 2.2 to just 1.5 today. Trading volumes remain heavily concentrated, with 70% of the Chicago Board Options Exchange activity focused on S&P 500 and Magnificent Seven stocks.
Currently, the most crowded trade in the market is “long gold,” while overall investor sentiment is at its fifth-lowest point historically, comparable to 2001, 2009, 2019, and 2022.
Looking ahead, while the sharp sell-off may have priced in part of the economic slowdown, major risks still remain, particularly around earnings revisions and trade tensions. However, for patient investors with a long-term horizon, select opportunities – especially in discounted areas like REITs and sectors more resilient to global uncertainty – are beginning to emerge.