As we begin to close out the second quarter of 2025, the financial landscape continues to change rapidly. Fortunately, the abrupt changes have been positive for markets over the past several weeks.
The 145% tariffs announced on April 2nd for Chinese imports was reduced to 10%, bringing the effective tariffs (includes previous tariffs) to 30%-40% on goods from China. Some analysts indicate closer to 50% total tariffs. At the end of 2024, the effective tariff rate was about 20%. The value of goods imported from China in 2023 was $438 billion.
The 15% additional tax on imports equates to over $60 billion in additional taxes. This additional 15% will be absorbed by producers, importers, and consumers to varying degrees with many economists estimating a 1% increase in inflation as a result.
Consumer expectations of inflation a year from now are far higher than the 1% some economists are estimating.
Earnings for the S&P500 covering the first quarter of 2025 are in and grew by 12.9% year over year, surpassing the 5-year average of 11.3%. This exceeds the estimate from mid-January of 11.6% growth. There is data showing some companies ordering and shipping more than they normally would in anticipation of increased import taxes.
Estimates for the second quarter and the full year 2025 have come down from their January estimates. Q2 is now expected to grow at 5.9% (down from 11.6% in January) and 9.1% (down from 14.8%).
Inflation expectations remain elevated. The Consumer Price Index (CPI) is expected to grow by 3.6% over the next 12 months. The Fed is unlikely to lower interest rates anytime soon, and probably not until the start of the next recession, later this summer in my estimation.
“Uncertainty” continues to describe the outlook for markets and the economy. Earnings estimates have declined, making the market (again) about 15% more expensive than average over the past 5 years. Real estate prices are in decline; wage growth is slowing and unknown costs due to import taxes are headwinds. I remain modest in my outlook for market gains in 2025, while expecting potentially 10% swings in equity markets along the way.
Adam Waszkowski, CFA
About the Author: Adam Waszkowski, CFA
