INSIGHTS
By
Kris Wild,
President & CIO
May 15, 2025
Volatility unwinds, tariffs ease, earnings beat, and equities surge. See why Modern Capital remains bullish in May.
Intro
When we upgraded U.S. equities on April 14, it was a call rooted in asymmetry, bad news had been priced in, sentiment was washed out, and positioning was excessively defensive. Now, a month later, we have a markedly clearer macro picture: trade tensions have de-escalated, earnings have come in strong, and economic activity is re-accelerating.
We are entering a phase that we define as post-peak uncertainty where the prior volatility drivers have crested, and the path forward is clearer, though not without risk. In this environment, the risk to own equities has been severely blunted and believe that dips in the market should be bought and leveraged as opportunities present themselves.
Trade Clarity: The Tariff Cliff Averted (for now)
President Trump’s effective tariff rate on Chinese goods has been rolled back to 30% a meaningful de-escalation from earlier threats of blanket 60% levies. Importantly, the White House has signaled that reciprocal tariff schedules may be allowed to lapse on July 8, giving businesses a window to plan and invest with greater visibility. This pivot unthinkable when it was first announced in April by the Trump administration is rationalizing its trade stance under pressure from credit markets and industrial supply chains.
Markets responded accordingly. JPMorgan described the post-pivot environment as one where the market has “escaped a black hole” and re-entered a path of normalized pricing for risk assets. While a 30% tariff is still elevated and could reintroduce inflation pressures later in the year, it represents a deceleration in escalation, which matters for equity multiples.
Earnings: Stronger Than Feared, Stronger Than Expected
As of May 9, 92% of S&P 500 companies have reported Q1 results and 78% beat EPS estimates, with aggregate earnings growth coming in at +5.4%, above the expected 3.2% at the start of the quarter. Forward guidance was net positive across Tech, Discretionary, and Industrials, sectors which had borne the brunt of macro headwinds.
FactSet notes that valuation compression in Q1 created a powerful setup for upside surprises. With the S&P 500 now up 18% over the past 25 trading days a historic bounce by any measure the market is rewarding positive earnings momentum, not just macro relief.
Services PMI and Payrolls: The Domestic Demand Engine Is Still Running
The latest S&P Global Services PMI remained expansionary in April, posting a reading of 50.6, and while this was subdued from March’s established reading of 53.7, we believe the current environment will likely lead to improving business sentiment and robust employment. Coupled with continued job growth (nonfarm payrolls +133,000 in April) and 3.8% annualized wage growth, the labor market remains resilient. That being said, wage growth has been falling steadily over the last two years after peaking in 2022 at 5.75%. This weights the inflation picture more heavily for how households and consumers will respond to its impact.
GDPNow from the Atlanta Fed is tracking 2.3% annualized Q2 growth as of mid-May. That’s a far better growth backdrop than what was seen in Q1. Business spending indicators are also showing signs of recovery, with durable goods orders and CapEx expectations improving sequentially, supported by the unwinding of tariff uncertainty and easing input costs.
Inflation: Cooling Margins, Anchored Prices
Producer Price Index (PPI) data surprised to the downside in May, with input costs and margins falling faster than expected. This, combined with a stable wage inflation trend and improved supply chain throughput, makes a compelling case that the inflationary impulse from trade is stable for the moment. Now, that is not to say that prices could rise over the next month or two, but our base case believes that businesses will take a measured approach in deciding how much of the impact from tariffs they will pass along to consumers.
Macro Forecasts: Risk for Weakness Remains in Focus
he recent moves toward normalization have yet to underpin a broader consensus amongst economists. The U.S Conference Board’s Leading Economic Index (LEI), is still showing signs of forward weakness, and impacts to economic growth, employment and inflation, in Q3 2025 and Q4 2025.
The latest research note from BNP Paribas, also maintains it’s lower 2025 U.S. GDP forecast of 1.8% from 2.3%, even though they are positive on the recent developments of lower tariffs and trade relief. This view has also been reiterated by the Tax Foundation, which has analyzed the average effective tariff rate to be 15% in 2025, the highest rate American consumers have had to pay since 1941. They have also said this rate represents the largest tax on American households since 1993. These are points of friction, and weigh on the macro growth picture, but we believe the American economy will be able to absorb these impacts, with a soft landing being our base case for the year, even though growth will be impacted. Thus we are lowering our recession probability to 30%, this will be revisited if the July 8 suspension of reciprocal tariffs is resumed.
Balancing Risk: The July 8 Catalyst and Structural Limits
We are not naïve to risk. The July 8 deadline, when reciprocal tariff relief is set to expire, remains a critical junction. If tariffs are reinstated, particularly on semiconductors, medical devices, or consumer electronics, we could see a reacceleration in goods inflation. The current 30% average rate is still a material headwind for small importers and could bleed into CPI by late Q3.
But in our view, this makes the current window favorable. The tactical backdrop for equities remains intact, and we do not see sufficient cause to fade this rally especially in light of resilient macro data and strong earnings revision trends.
Conclusion: The Base Case is Bullish
The case to own equities is not just sentiment-driven it is becoming fundamental, forward-looking, and increasingly confirmed by data. We are no longer operating in a fog of war. Tariff policy is more rational, earnings are stronger than anticipated, and economic stability is showing up across services, employment, and forward indicators.
We maintain our tactical overweight in U.S. equities, with particular emphasis on:
Mega Cap Growth: Operating leverage and earnings clarity.
• Technology: Continued CapEx deployment on AI and AI beneficiary ecosystems continue to enforce the longer term growth picture and developing infrastructure
• Industrials: Beneficiaries of CapEx revival and tariff relief.
• Consumer Discretionary: Backed by wage growth and employment momentum.
• Small Caps: Valuation support and high beta to domestic expansion.
Post-peak uncertainty doesn’t mean no risk. But it does mean we are now in a world where fundamentals not fear are back in charge.
Sources and Endnotes
1. CNBC: "The stock market has escaped a black hole and has upside – JPMorgan"
2. FactSet: "S&P 500 Earnings Season Update, May 9, 2025"
3. CNBC: "S&P 500 is up 18% in 25 trading days – what happens next?"
4. S&P Global: "Monthly PMI Bulletin – May 2025"
5. S&P Global: "Week Ahead Economic Preview – Week of May 12, 2025"
6. Atlanta Fed GDPNow – May 2025
7. Bloomberg: "U.S. Producer Prices Fall Unexpectedly as Margins Decline"
8. The Conference Board: U.S. Leading Indicators
9. BNP Paribas Economic Scenario Update – May 2025
10. The Conference Board: U.S. Forecast Update
11. Bloomberg: "Stock Market Today – Dow, S&P Live Updates"
12. Bureau of Economic Analysis (BEA)
13. Tax Foundation. Trump Tariffs: Tracking the Economic Impact of the Trump Trade War
