Market Factors: No rally unless these four conditions are met

With this edition of Market Factors we discuss one strategist’s view that markets are rangebound without more tariff clarity and improved earnings outlooks. Data is emerging hinting at a stunning decline in global trade, and the diversion covers Mexican gangsters becoming TikTok influencers.

Stocks

Clarity on tariffs, trade and profit forecasts are needed for an equity rally

Morgan Stanley chief investment officer Michael Wilson believes that the globally dominant U.S. equity market will not break out of its current trading range until four conditions are met. None of the four seem imminent.

Mr. Wilson sees the S&P 500 as rangebound between 5000 and 5500. He does not expect a sustained rally above the next technical barrier, 5600 (roughly where the 50-day moving average resides), until considerable uncertainty is removed for investors.

A trade deal with China is the first condition. Some tariff hikes will remain but the 145 per cent that is threatened could stall the global economy and interrupt supply chains globally. At this stage, however, U.S. and Chinese officials can’t even agree on whether they’ve spoken or not.

The second condition is a more dovish Federal Reserve. Chairman Jerome Powell is currently too concerned about tariff-driven inflation pressure to consider rate cuts.

The third condition – long bond rates have to fall below 4.0 per cent – is related to Fed dovishness because a reduction in inflation expectations will be necessary first. Thirty-year Treasuries are currently yielding 4.7 per cent.

The final condition for a rally is an improvement in earnings guidance and, not-coincidentally, this also encompasses my biggest short-term worry about markets. Healthy profit reports are being released during the ongoing U.S. earnings season but management for many companies have been falling all over themselves to reduce expectations for the year.

In a Monday morning report, Mr. Wilson’s competitor at BofA Securities, Savita Subramanian, outlined a deteriorating profit outlook. Ms. Subramanian’s earnings revision ratio – the number of upward versus downward revisions to 2025 earnings – is close to record lows since 1986. She does emphasize, however, that the reductions are small. Mr. Wilson warned that current revision breadth “portends further downward EPS revisions.”

Mr. Wilson recommends high quality large cap stocks with cyclical attributes. He screened the 1,000 largest U.S.-traded public companies for these attributes in addition to expected earnings growth rates and recent downward price moves. Stocks from the resulting list that are most likely to interest Canadian investors include Nike Inc., Lululemon Athletica, Paypal Holdings Inc., Arista Networks Inc., Snowflake Inc., Warner Music Group and Pinterest Inc.

Economy

Shocking slowdown in China-U.S. trade underway

Shipping logistics specialist Flexport has warned of a collapse in shipping from China to the U.S. as it becomes apparent that Chinese producers will not take the new tariffs lying down.

The 60 to 65 per cent drop in ocean cargo between the two countries indicated by Flexport CEO Ryan Petersen raises the spectre of empty American store shelves in the coming weeks. It could also mean that numerous small businesses that source products from China will soon fail.

U.S. tariffs, and the uncertainty surrounding the implication and scale of the levies, may result in a stall in global economic growth. For the U.S. in particular, the Atlanta Federal Reserve’s GDPNow index suggests that the economy is currently contracting at 2.5 per cent.

The Canadian economy has held up reasonably well so far, in part because of trade business being pushed forward ahead of the tariffs, but it will certainly not be out of the way of a widespread recession. Few executives or entrepreneurs, for example, are willing to invest in such an uncertain environment.

Diversions

Unlikely Tiktok Influencers

I’m hoping readers can navigate The Atlantic’s soft paywall because How Drug Cartels Took Over Social Media is both really morbid and highly entertaining. In Mexico, drug cartels have taken to filming themselves to dominate national TikTok traffic. Posts include high speed boat chases and the menial baling of $100 bills.

The Atlantic columnist Antón Barba-Kay also recounted gunmen filming the military’s failed attempt to nab a cartel. Mr. Barba-Kay begrudgingly called the posts “good tv”.

The essentials

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Globe Investor Highlights

Elon Musk’s return to Tesla is good news for anyone who thinks he’s a visionary leader. But David Berman questions why the stock is still priced for global dominance

Rob Carrick says he’s no fan of this popular investment pitched at nervous investors

Tim Shufelt previews the upcoming Canadian earnings season, with a warning that there’s a time bomb sitting at its core

Is South Bow’s big dividend safe? John Heinzl shares his thoughts

Tom Bradley on why the bond market is both important and extremely interesting right now

What’s up next

The domestic economic data calendar is quiet but does include GDP growth for February on Wednesday. The earnings release schedule is much more busy, starting with Gildan Activewear Inc. on Tuesday (US$0.57 per share expected). Wednesday includes Loblaw Companies Ltd. (C$1.865), CGI Inc. (C$2.128) and Canadian Pacific Kansas City (C$1.032)

On Thursday, Cenovus Energy Inc. (C$0.409), Cameco Corp. (C$0.198), TC Energy Corp. (C$0.995) and Canadian National Railway Co. (C$1.783) all report. Imperial Oil Ltd. (C$2.139) and Magna International Inc. (US$0.853) release results on Friday.

U.S. first quarter GDP is out Wednesday and 0.4 per cent annualized growth is expected. The employment cost index for Q1, an important inflation indicator, is also out Wednesday with a 1.0 per cent quarter over quarter increase forecast.

Thursday will see the ISM Manufacturing survey for April released – a contractionary 47.9 reading is expected. Change in non-farm payrolls for April will be announced Friday and economists expect 123,000 new jobs created. Durable goods orders will also be reported Friday and the ISM services result is out May 5th.

The American earnings calendar is full. Tuesday will see profit reports from UPS Inc. (US$1.41 per share expected), General Motors Co. (US$2.704), Coca-Cola Co. (US$0.72), Pfizer inc. (US$0.676), Corning Inc. (US$0.507), Royal Caribbean Cruises Ltd. (US$2.532), American Tower Co. (US$2.468) and Visa Inc. (US$2.682). Profit reports from Caterpillar Inc. (US$4.325), Western Digital Corp. (US$1.099), Microsoft Corp. (US$3.225) and Meta Platforms Inc. (US$5.268) are released Wednesday.

Thursday will see results from Baxter International Inc. (US$0.484), McDonald’s Corp. (US$2.682), Stryker Corp. (US$2.727) and Amazon.com (US$1.358). Monster Beverage Corp. (US$0.46) reports on Friday and Ford Motor Co. (loss of US$0.008) results are out on May 5.

See our full economic and earnings calendar here (You can bookmark the page – it gets updated weekly)