Never mind
Trump's policy reversals buoy markets.
Bottom Line
Financial markets have not responded well to President Trump’s imposition of the highest tariffs in history on April 2—exceeding those from the notorious Smoot-Hawley Tariff Act of 1930—and his threat to fire Federal Reserve Chairman Jerome Powell. Consequently, April had been shaping up to be a month to remember, for all the wrong reasons. The S&P 500 plunged 12.5% through April 7, successfully bouncing off long-term technical support at 4,835, and was still down 7.5% through April 21. This sharp decline rivals April 1932’s decline of 20.2%, the worst April in US financial market history.
Moreover, the volatility index (VIX) tripled from 20 to an oversold 60 during April’s first week. Benchmark 10-year Treasury yields plunged from 4.38% to a six-month low of 3.88% in a massive flight-to-safety rally, before soaring to 4.59% over the next week. It is one of the most significant bond selloffs in decades. The dollar weakened considerably against the euro, bottoming at a strong 1.01 in early February and soaring to nearly 1.16 earlier this week. Gold has surged 22% over the past two months, to an overbought record high of $3,510 per troy ounce, as a hedge against all this fiscal policy uncertainty. Finally, the preliminary mid-April University of Michigan Consumer Sentiment Index plummeted to a three-year low of 50.8 on April 11 (the second-lowest reading in history), while its one-year inflation expectations index leapt to a 44-year high of 6.7%.
No mas We suspect that the financial markets’ negative signaling was sufficiently broad and sharp that Trump shifted his attention away from his senior trade advisor Peter Navarro and back toward his administration’s steadier economic-policy hands, such as Treasury Secretary Scott Bessent and National Economic Council Director Keven Hassett. Soon after, the administration announced a 90-day pause in its tariff implementation, that it was actively negotiating with China and that it had no plans to remove Powell before his term expires in May 2026. Not surprisingly, stocks, bonds and the dollar rallied this week, while the VIX fell to 25 today and gold slipped nearly 7%.
Adjustments to our outlook So, in the uncertain wake of Trump’s tariff policy, we have cut our S&P 500 earnings estimates, P/E assumptions and target to reflect the likelihood of slower economic growth, higher inflation, rising unemployment, reduced corporate earnings and a possible recession. We lowered our estimate for 2025 from $275 to $260. Earnings ended last year at $243, which means we are looking for slower growth of around 7%, not a recession. We also reduced our forecasts for 2026 from $310 to $300 and for 2027 from $350 to $340. We decreased our forward P/E estimates to 20 times earnings. Lastly, we cut our S&P target prices for this year from 6,500 to 6,000, and from 7,300 to 6,800 in 2026.
Is Powell safe? Federal Reserve independence is sacrosanct—full stop. We do not want Congress or any president in charge of setting monetary policy for fear of they would always opt for lower interest rates, inflation be damned. Why? Because their motivation is to get themselves re-elected. They want the economy to run hot and everyone who wants a job to have one. Trump should take Bessent’s advice to leave Powell alone and focus his fiscal policy decisions on lowering inflation, which should ultimately drive Treasury yields lower and compel the Fed to cut interest rates. Trump can “work the refs” all he wants but threatening to remove Powell prematurely achieves nothing other than roiling the markets. Powell’s second term as chair expires in a year, and we believe Trump is within his rights to designate a candidate later this year.
Who’s on Trump’s short list? Three candidates most likely to replace Powell in May 2026 are Kevin Warsh, a member of the Fed Board during the Bush administration, economist Kevin Hassett and current board member Christopher Waller.
Day late and a dollar short Powell’s Fed was late to hike interest rates in 2021, when inflation— which Powell kept telling us was “transitory”—was en route to 40-year highs due to supply-chain kinks and trillions of dollars of fiscal stimulus. At its August 2022 Jackson Hole symposium, Powell said that the Fed took 20% of the blame for being a year late in hiking rates.
'Oops!...I did it again' Members of Powell’s Fed have proven to be poor learners. They orchestrated the mirror image of that mistake by failing to cut interest rates as inflation reversed course. The upper band of the fed funds rate is at 4.5% (after three cuts and a 1% reduction in the last four months of last year). But nominal CPI sits at 2.4% through March 2025, suggesting the Fed has sufficient room to gradually reduce interest rates to 3% over the next the next 18 months or so. Financial markets expect three or four quarter-point rate cuts in 2025, starting in June’s FOMC meeting. We at Federated Hermes anticipate two or three cuts, with the first arriving in June. We suspect that the Trump administration would be fine with either. But Powell has been publicly addressing the risks of higher unemployment and inflation and slower economic growth due to the uncertainty of Trump’s tariff policy. His stance is that the Fed must be patient and monitor the hard economic data.
We are playing the long game As we look out over the next 12-18 months, we see potential positives forming: lower tariffs; decreasing interest rates and Treasury yields; the expansion of the tax cuts, and lower inflation due to falling energy prices; and deregulation.