Equities
On Wednesday (30/04), Q1 GDP came in at -0.3% QoQ vs. -0.2% expected, marking the worst reading since Q1 2022 (-1%). The decline was driven by a surge in pent-up imports ahead of Trump’s tariff policy. A rebound is expected in Q2 as imports normalise, but Q3 and Q4 may face distortions. Prediction markets (Polymarket) now assign a 65% recession probability this year. The Fed, however, still projects 1.7% growth, though 66% of Bloomberg-surveyed investors expect less than that.
Friday’s strong jobs report surprised to the upside, with nearly 40K more non-farm jobs than forecasted. Despite weak GDP, domestic demand remains solid, with business activity and consumer spending showing resilience. The aggregate labour income index (hours worked × hourly wages × number of jobs) is still growing at a healthy 5% YoY. However, total wages and salaries are slowing meaningfully, and historically, when this growth falls below the Fed Funds rate, job market slowdowns and weaker consumption tend to follow.
Markets rallied last week as President Trump softened his protectionist stance and signalled progress on U.S.-China negotiations. Economic data and earnings also improved sentiment, reducing immediate rate-cut expectations. Still, with strong labour data and underlying inflation pressures, the Fed may have less room to ease. The 2y yield, however, continues to signal the need for cuts, particularly amid softening manufacturing, now in contraction for three consecutive months.
Trump inherited a deeply imbalanced economy: frozen housing, sluggish labour conditions, declining quit rates and job openings. Having exhausted COVID relief funds, state and local governments are now cutting spending and sliding into deficits. Even if rolled back, tariffs have already introduced friction that will continue affecting trade flows. Container traffic has slowed sharply, raising concerns about the holiday season’s supply chain and potential job losses across logistics and retail.
So far, the economy has held up well, buoyed by strong corporate balance sheets, margins, and consumption, but income growth risks may now weigh on this strength. Uncertainty is rising.
Rates
The yield curve bear-flattened late in the week as markets prepared for $165B in bond supply, including $125B in Treasuries and an expected $40B in IG corporates. Nearly half of the Treasury issuance will be front-end, with $42B in 10Y and $25B in 30Y.
Before the payrolls report, markets priced a 50–60% chance of a June rate cut. Afterwards, Fed Funds futures trimmed expectations to 3.2 cuts from four earlier in the week. Futures markets have consistently leaned more dovish than the Fed, typically overestimating near-term rate cuts.
The low-rate environment that defined the pre-2022 cycle was underpinned by three long-term forces: demographics, peace, and globalisation. All three are now reversing, leading to a structurally higher-rate regime, regardless of how tariffs evolve. This backdrop has contributed to greater rate volatility and persistent pressure on the long end of the curve.
Credit
Credit traded in line with improved risk sentiment, but spreads still reflect concern over slowing growth.
Oaktree flagged stress in credit secondary markets, with some lower-tier paper selling at 50% discounts. Rerouting supply chains remains difficult in sectors like retail and industrials, especially autos, where dependencies are harder to unwind. As refinancing windows narrow, some companies may be forced into private markets or restructurings. Maturity walls and illiquidity in private credit are beginning to raise concerns.
Private markets are beginning to show signs of stress, with “amend and extend” deals from vintages like 2017–2019 facing pressure. Liquidity issues may require restructuring. Meanwhile, the market is experiencing several dislocations:
- Idiosyncratic dislocation – company-specific issues (e.g., flawed business model).
- Secular dislocation – challenges affecting an entire industry regardless of the economy.
- Macro dislocation – systemic market shocks limiting access to syndicated debt.
These dislocations are now presenting selective credit opportunities.
Equities
This earnings season does not yet reflect the impact of tariffs but captures management expectations. So far, 79% of companies have beaten earnings and revenue estimates. Average and median revenue beats are 1.1%, while average and median earnings beats stand at 12.2% and 5%, respectively. Market reaction has been strong: 81% of firms outperformed the S&P 500 the day after results, with average/median performance of 1.6% and 1.9%. Over the following five days, 75% of companies outperformed the index, with an average return of 4.2%.
The peak in tariff-related fear may be behind us, but downside risks remain. Institutional investors have turned cautious, while retail flows remain aggressive. Deutsche Bank, once one of the most bullish houses (7,000 S&P 500 target), has revised down to 6,150. Oppenheimer also cut from 7,100 to 5,950. These shifts likely reflect pressure to mark-to-market after a sharp 20% drawdown.
Retail flows reached a record $40B in April—surpassing March—with $4B of inflows on April 3 (post-Liberation Day) and again on April 9 during the largest single-day gain since the GFC. Robinhood reported a 77% YoY jump in trading revenue.
Technicals are also flashing strong signals:
- April 21–22 saw two back-to-back 90% up days
- April 24 triggered a Zweig Breadth Thrust
- April 25 marked a 50% retracement of the S&P 500 decline
- Three consecutive 1.5%+ up days last week
- VIX closed under 23, with 9 straight positive sessions—the first since 2004
- S&P 500 up +3.19% this week, +4.11% last week
Several bullish catalysts are in play: potential tariff resolution, a more dovish Fed, a decline in back-end rates without growth deterioration, and a pause in earnings downgrades. Yet, caution is warranted.
Cloud companies are emerging as new defensives. Microsoft reported $170B in annualised cloud revenue this quarter, with a 26% 5y CAGR. Software and cloud services are increasingly considered essential in the digital economy, similar to utilities in past cycles.
Over 25% of the decline in forward EPS stems from the Energy sector; ex-Energy, forward EPS is down only 1%. Meanwhile, the declining cost of leverage and compressing implied volatility have supported the recent rally. Thin liquidity (e.g., wide bid-ask spreads, shallow top of book) increases the risk of sharp market moves. This rally has been mechanical in nature, driven in part by a volatility reset in the options market.
Historically, 10% corrections without recession are buying opportunities. This one involved a 20% drawdown. Investors who maintained a “no recession” view used this dislocation to add risk. Institutional flows remain muted; retail drove much of the rebound. The key question: Is a recession more likely now? Probably, but not dramatically more so than before Liberation Day.
Small caps remain pressured, especially as tariff-sensitive industries bear the brunt. In the past, investors turned to utilities during downturns. Now, cloud and SaaS names play that role.