The Fed Show Is Back

The Federal Reserve drama continues tomorrow... From wait-and-see to waiting to react... Powell's power... Takeaways from earnings season... Tariffs' real impact... Catalysts to watch... It's all fear and greed...

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It's time to ponder a familiar question...

The Federal Reserve wraps up another two-day policy meeting tomorrow.

Nobody is wondering what the central bank will do. Futures traders have put a 97% likelihood on the federal-funds rate range of 4.25% to 4.5% staying right where it is.

So instead, as with other recent meetings, the market's attention tomorrow will be on Fed Chair Jerome Powell's press conference in the afternoon... as investors seek clues on what the central bank might do in the months ahead.

Since the last Fed meeting and press conference in mid-March, President Donald Trump has called for lower interest rates a few times, saying Powell's "termination couldn't come fast enough!" Then he changed his tone a few days later by saying he never intended to fire Powell or see him dismissed.

Maybe we'll get some kind of response from Powell about his job prospects tomorrow... But I (Corey McLaughlin) suspect it won't be much. Still, anything he does say would make for headlines... like in November, when Powell said a president couldn't fire him by law.

Instead, Powell will probably deflect the Trump narrative...

We expect the Fed chair to repeat what he has been saying in public forums recently (which the market hasn't loved hearing). As we wrote in our April 16 edition...

The indexes hit intraday lows as Federal Reserve Chair Jerome Powell delivered remarks at the Economic Club of Chicago this afternoon. He essentially repeated what he'd said at an event a few weeks ago... but the markets reacted as if hearing the news for the first time.

"Tariffs are highly likely to generate at least a temporary rise in inflation," Powell said, but he added that "the inflationary effects could also be more persistent," depending on their size and scope.

But Powell also said growth could slow, too, and that the Fed's "dual mandate" goals (of stable prices and maximum employment) could end up "in tension." Tariffs are "likely to move us further away from our goals," he said, "probably for the balance of this year."

If that's the case, Powell said the central bank would have to consider which one to primarily address. (The Fed clearly doesn't believe in simply doing nothing.) Of inflation, he said a goal would be to make sure any short-term tariff-related price increases don't turn into a longer-term trend.

That sounds like a reason to expect higher interest rates for longer.

The data and the politics...

Powell won't decide to cut rates only because Trump wants him to. He and his fellow Fed members will be taking their cues mainly from the numbers. And those numbers continue to provide mixed messages.

The pace of inflation fell in much of 2024... recovered late last year and into early 2025... then flipped into month-over-month deflation territory in March's consumer price index ("CPI") reading.

Meanwhile, U.S. GDP declined in the first quarter... while weakness in the labor market is starting to bubble to the surface.  

Powell and the Fed already showed in the fall that they'd lower rates if they saw labor-market weakness. The thing is, though, when the Fed cut rates by 50 basis points in September, the 10-year Treasury yield and inflation expectations took off higher... while the market was rising in expectation of a business-friendly Trump election win in November.

So, Powell may be more hesitant to cut rates again... barring a significant economic slowdown. Is that coming? Is it already here?

Depending on your perspective, either we're halfway toward a "technical" recession (two straight quarters of declining GDP growth)... or the first quarter of 2025 will be a quirky footnote on a path of long-term economic prosperity.

The reaction function...

The Fed last met before Trump's "Liberation Day" tariffs. Powell said then that the central bank was in "wait and see" mode on tariffs. Everyone is still waiting and seeing about some major details, but now the Fed should be closer to reacting.

Futures traders see a slightly better than 50-50 shot that the Fed will lower rates by July, and they have ideas about multiple rate cuts by the fall. If Powell's remarks reflect that possibility tomorrow, the market shouldn't react much. But if it's anything different from investors' expectations, the Fed chair's words could shake things up.

Ahead of the Fed meeting, the major U.S. stock indexes were down for the second straight day. Gold was up more than 2% – also just like yesterday – and is trading for more than $3,400 per ounce.

If you want to get a real-time taste of how a former Wall Street trader is approaching things, check out our Ten Stock Trader editor Greg Diamond's live video session at 1 p.m. Eastern time tomorrow. He'll be talking through trading setups he's looking at based on his technical analysis approach to the markets.

As Greg shared today, "With tomorrow's Federal Reserve meeting, we'll see if volatility picks up even more," and he's looking for buying opportunities.

Stay tuned, and we'll have a report in tomorrow evening's edition.

Meanwhile, earnings season is wrapping up...

By the end of this week, another 90 S&P 500 Index companies will have released results for their most recent quarter. This includes Disney (DIS) tomorrow, whose report has traditionally marked an "unofficial" end to each quarterly earnings season.

This time around, many investors want to know about businesses in today's volatile tariff-driven economy.

We've seen industrial companies predict more than $1.5 billion in combined tariff impact, while companies like Walmart (WMT) and several airlines pulled forecasts altogether.

As we wrote in the April 16 Digest...

We haven't seen this sort of uncertainty about companies' earnings guidance since the early days of the pandemic.

That trend has continued this week. Yesterday, after market close, auto giant Ford Motor (F) gave its estimate for how tariffs will hurt its operations.

Auto tariffs are separate from the broader Liberation Day tariffs announced last month. And over the weekend, the White House placed a tariff on auto-part imports for cars built here in the U.S.

Ford suspended its guidance for 2025, citing "tariff-related uncertainty." The company did say that it is on track to meet its previous forecast of earnings before interest and taxes ("EBIT") of between $7 billion and $8.5 billion for 2025, excluding tariffs.

In total, Ford predicts a $2.5 billion hit to earnings this year from tariffs, with cost cuts offsetting about $1 billion of that.

A $1.5 billion hit to Ford's EBIT would bring earnings down nearly 20% from its pretariff outlook. The damage isn't done at the end of 2025, though. Ford CEO Jim Farley said that he expects tariffs to be in place for at least the next three years.

That's not good news for the auto market. But any trade deal that lowers – or even removes – those tariffs before Farley's estimate could be a welcome surprise for these companies and their investors.

More price increases are getting passed on to customers...

Toy giant Mattel (MAT) pulled its own guidance for 2025 as it battles tariffs. China accounts for more than 40% of Mattel's sourcing. But that's changing... The company is working to reduce that to below 40% by the end of the year... and below 25% by 2027.

Still, the company said it plans to raise prices in the near term to offset tariff-related costs. Trump saw this coming from Mattel (and probably other companies). As he said in a cabinet meeting last week...

Well, maybe the children will have two dolls instead of 30 dolls. So maybe the two dolls will cost a couple bucks more than they would normally.

It's not just toys, though. In a Digest last week, we included this excerpt from Mike DiBiase and Bill McGilton's most recent Stansberry's Credit Opportunities issue showing that prices are expected to increase across the board. As they wrote...

Yale University's Budget Lab expects the tariffs to cost the average American household an additional $3,800 this year. That's the equivalent of a 2.3% rise in prices.

Wall Street is already lowering expectations for the second quarter...

Putting it all together, tariff uncertainty, potential pullbacks in consumer spending, and higher prices have Wall Street on edge. And analysts are getting more pessimistic as a result.

In FactSet's weekly Earnings Insight report, senior analyst John Butters gave a simple answer when considering if analysts had lowered their estimates by more than usual. As he wrote...

The answer is yes. During the month of April, analysts lowered EPS [earnings per share] estimates for the second quarter by a larger margin than average. The Q2 bottom-up EPS estimate (which is an aggregation of the median EPS estimates for Q2 for all the companies in the index) decreased by 2.4% (to $63.96 from $65.55) from March 31 to April 30.

April's average decline in earnings estimates came to only about 1.6% over the past decade, according to FactSet.

Similarly, in the first four months of 2025, Wall Street analysts lowered their estimated S&P 500 earnings by 3.1%. That's well above the 10-year average of a 2.3% decline.

And with less clarity from companies about how they're seeing tariffs impact their businesses, we don't expect Wall Street to change its tune on S&P 500 earnings just yet.

Earnings estimates are a huge part of valuing the broader market. Declines in earnings estimates have happened alongside the past two bear markets – and the near bear market from the end of 2018.

But it's not all bad news for stocks...

If earnings estimates continue to decline throughout the second quarter, it would point to a further slowdown in the real economy. But if they stabilize or turn higher, it could be a sign that a market bottom is behind us...

As FactSet shared...

You see, prices tend to move a little ahead of Wall Street's estimates...

During each of those bear markets, earnings estimates didn't turn higher until after the S&P 500 did. So when Wall Street's pessimism is gone, and analysts begin raising earnings expectations again, it could be a good sign that we've passed the bottom in stocks.

In today's context, this means significant "good news" developments on the tariff front – the trigger for lower analyst estimates – could help push the market higher. On the other hand, more "bad" surprises could send stocks lower again.

One final note...

It was about three months ago when we shared an annual investment letter from Austin Root, the chief investment officer at Stansberry Asset Management ("SAM").

SAM is an investment adviser registered with the Securities and Exchange Commission ("SEC"). It's separate from our Stansberry Research publishing business, but it uses our research, plus other sources, to help manage individual clients' portfolios.

In the letter, Austin reflected on the biggest investing lessons from 2024 and shared his outlook for 2025... including unique insight into how a full-service wealth manager like SAM was positioning for the opportunities and challenges ahead.

Today, we have another note to share...

Each quarter, the investment team at SAM writes an in-depth letter for their clients – offering a candid take on market conditions, investment positioning, and where they see risks and opportunities unfolding.

These letters aren't written for headlines or sound bites. They're written to help real investors understand how their money is being managed, and why.

The first-quarter 2025 letter, written by SAM's Investment Committee (including Austin), covers the firm's view on the year's rocky start, how shifting macro conditions are shaping their outlook, and where they're finding opportunities in today's environment.

With permission, we're passing it along to you. Click here to get access to it now.

New 52-week highs (as of 5/5/25): Alpha Architect 1-3 Month Box Fund (BOXX), CBOE Global Markets (CBOE), CME Group (CME), Dimensional International Small Cap Value Fund (DISV), Enel (ENLAY), iShares MSCI Germany Fund (EWG), FirstCash (FCFS), SPDR Euro STOXX 50 Fund (FEZ), K+S (KPLUY), Lonza (LZAGY), NetEase (NTES), TransDigm (TDG), Travelers (TRV), Vanguard FTSE Europe Fund (VGK), and VeriSign (VRSN).

In today's mailbag, feedback on yesterday's edition, which included a discussion on OPEC increasing oil supply again... Do you have a question or comment? As always, e-mail us at feedback@stansberryresearch.com.

"The Saudis are full of it. They have the lowest per barrel cost of major suppliers. They want to squeeze out some of the USA's frackers. This is exactly what they did with great success in 2015, or thereabouts. The deliberate oversupply crushed half of the frackers here. The result is less competition for them, and higher prices." – Subscriber J.C.W.

All the best,

Corey McLaughlin and Nick Koziol
Baltimore, Maryland
May 6, 2025

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Disclosure: Stansberry Asset Management ("SAM") is a Registered Investment Adviser with the United States Securities and Exchange Commission. File number: 801-107061. Such registration does not imply any level of skill or training. Under no circumstances should this report or any information herein be construed as investment advice, or as an offer to sell or the solicitation of an offer to buy any securities or other financial instruments. For more information on SAM, please visit here.

Stansberry & Associates Investment Research, LLC ("Stansberry Research") is not a current client or investor of SAM. SAM provides cash compensation to Stansberry Research for Stansberry Research's advisory client solicitation services for the benefit of SAM. Material conflicts of interest may exist due to Stansberry Research's economic interest in soliciting clients for SAM. Certain Stansberry Research personnel may also have limited rights and interests relating to one or more parent entities of SAM.

For important information about Stansberry Research's relationship with SAM, click here.