Navigating Market Uncertainty: Insights From 2018 and the Path Ahead

As many of you know, in February of this year, CJ Lawrence was acquired by Apollon Wealth Management. We are now an investment management division of Apollon and are excited about the prospects going forward. The combination allows us to focus on investing, on analysis, and on generating high-quality ideas for our clients. So, we’re excited about the combination. We look forward to leveraging Apollon’s resources, particularly the Chief Investment Officer Eric Sterner and his team and the work they produce. So more on that to come, but what can you expect from us at CJL in the future? Well, you should expect the same type of work to which you’ve been accustomed to and for which you follow us. My business partner, Bernhard Koepp, and I will continue to deliver content that is deep in top-down analysis and leverages the models and tools for which CJ Lawrence is known.

I look forward to providing more in the future. So, let’s get into some market commentary now. We seem to have come back from the abyss. For reference, today is the 14th of May. It’s about midday, and the market is back in positive territory, albeit slightly for the year. I’m going to cover a couple of topics. One being where are we in the market? Second, I want to look at earnings and interest rates. Third, let’s run comparisons to another period where tariff uncertainty was front and center. And then fourth, we’ll discuss some risks and rewards for 2025 and 2026. As I mentioned, we’re back in positive territory. Who would’ve thought we’d be in the black after all that we’ve been through.  In fact, we’re up 12.5% from this time last year.  On a two-year stack basis, looking back to May of 2023, the S&P 500 is up a whopping 43%.

It doesn’t feel that way given all we’ve been through over the past month or two, but those are the facts and something to build on. As the old saying is so true, it’s not your timing the market, it’s your time in the market. So, getting in and out of markets based on headlines is particularly challenging.  As we’ve advocated, staying in the market is your best course as the market typically finds its way through challenging times. Let’s talk about earnings and interest rates because they’re the underpinnings of what’s going on, albeit there’s a lot of uncertainty about the future of earnings and interest rates. But there’s some clues that we’ve been able to pick through in the first quarter. First off, the first quarter’s results from the S&P 500 companies were quite good. As of today, or last night, earnings are up 13.5% over last year.

It was just a couple of months ago; they were expected to only be up about 11%. So, numbers are coming in above expectations. Maybe there’s some pull forward there, but it seems to us that the companies in the 500 are executing well. If you look out now that earnings calls have taken place and earnings expectations from the companies have been recalibrated and analysts have recalibrated their models, we’re getting a better look at what analysts are forecasting for 2025 full year. Earnings are expected to be up about 9% this year and 13.5% next year, 2026. That’s not too bad. If you believe the hundreds of analysts who contribute to that consensus forecast, we think it’s useful. On the interest rate side, the U.S. 10-year Treasury Bond yield has been hovering between a 3.5% yield and a 4 ½% yield for the past two years or so.

The yield is currently bumping up against the high end of that range, which is something to watch. But it’s nothing out of the ordinary, nor is it alarming. I guess the takeaway from the earnings outlook, which remains somewhat murky, is positive.  And the interest rate outlook provides a reasonable backdrop for healthy market gains.  Four and a half percent on the 10-year yield, and 10% earnings growth is pretty good. If the economy and corporate profits do slow meaningfully in the second half of the year, we would expect the Federal Reserve to respond with lower interest rates, putting a buoy under the market.  The market consensus forecast suggests the Fed will cut rates twice this year.  I think a lot will depend on where employment and inflation trend.

My third point is that there are a few periods in our markets’ history where we can examine trade wars and the impacts of tariffs on markets. I think the comparisons to the Smoot-Hawley tariff days are a little bit overblown, but I do think there are other periods that are useful in terms of thinking through where the economy could go.  Let me read you a couple of headlines and then I want to ask a question at the end. “The stock market softened despite signs that the general economy is still doing well with low unemployment, healthy GDP, and relatively low inflation.” That was from a large U.S. media outlet. “The Trump administration tariffs on aluminum, steel and other goods have introduced a large amount of uncertainty into the global economy.” That was from a print media source. “Even if more permanent agreements are reached, significant damage has already been done”. Another big headline: “China announced lower than expected industrial production and retail sales.”  “Bloomberg reported that Trump has been considering trying to fire Jerome Powell”. And one last one, “US tech giants have come under intense regulatory and legal scrutiny”.

From what year were these headlines?  2025? They sound familiar and recent, but they were from 2018. I think there are some parallels to what happened in 2018 with the current environment. And if I look at where the market was and what the backdrop was at the time, there are some similarities. The two periods are not perfectly correlated.  In 2018 interest rates were on the rise. That’s not the case today. But earnings were being ratcheted down on the fear of a slowing economy expected in 2019 on the back of tariffs. Sound familiar? What we’re hearing a lot about today is how earnings expectations need to come down because of the threat of tariffs and the impact of tariffs on the economy. Remember in 2018, investors were looking out at 2019 earnings. The Trump administration was putting tariffs on a host of goods, particularly with regard to China.

Earnings expectations in the middle of 2018 were $174 for 2019.  Over the next several months they were ratcheted down to $166. Okay, from 10% growth expectation to four and a half percent growth expectation. Sound familiar? We’re at about 9% expected growth now.  That rate has come down from about 10 ½, and a lot of economists and strategists believe that we’re going to be down into the 5.0%- 6.0% growth range. The two periods show similar growth expectation reductions. Despite the reductions to earnings forecasts in 2018, the stock market did quite well in 2019.  We had a big sell-off in 2018 from October through Christmas Eve, which is when the market bottom and started to recover.  2019 was a banner year for stocks with the S&P 500 up 25%, and the NASDAQ up 35%. We are currently experiencing similar circumstances with a lot of the same rhetoric, a lot of the same headlines, and similar negative earnings estimate revisions.  But ultimately the market recalibrated, companies navigated, and the market rebounded strongly in 2019.  Maybe there’s a lesson to be learned there, so let’s keep an eye on the rhetoric and revisions and the market’s reaction.

As for our last point, number four, we’re not suggesting that it’s up, up and away and we’re not ignoring the risks inherent in this market. There’s still a lot of things that could upend the progress that we’ve made to date. A couple of risks that we’ve been examining, and are worth highlighting, would include the prospect of durable goods pull forward. A lot of companies have been ordering goods trying to get ahead of tariffs, and that may be inflating sales numbers and shipment numbers for the first half of this year, that could lead to a slowdown in durable goods orders and retail sales in the back half of the year. That’s clearly a risk, but I do believe it’s well known in the market at this point. We’re also watching treasury auctions as the 10-year yield bumps up against four and a half.

We’re going to have to examine the demand for US treasury auctions in the coming months to see if 10-year treasury yields break through 4 ½%.  That’s something that would have a negative impact on stock price valuations and the cost of capital for borrowers. Finally, the threat of additional tariff showdowns, or difficult negotiations could weigh on equity prices.  Uncertainty seems to be the watchword that everyone’s using, and faltering trade negotiations would create more doubt in the markets in the coming months. What are the potential underpinnings?  Earnings forecasts have been resilient and can continue to hang in there.  We might also experience a situation where the economy softens a bit, but companies figure out how to navigate the environment and maintain earnings growth.

I used to be a freight transportation analyst back in the ’90s. We had a saying that freight will flow like water flowing downhill. It will always find its easiest path.  That’s what shippers will do.  That’s what importers will do.  That’s what companies with global supply chains will do. They’ll ultimately adjust and find the easiest path. There may be some disruption in the meantime, but ultimately, they find their way. Another bolster to stock prices is that share buybacks are at a historically high level and companies are flush with cash. If stock prices weaken, company managements can step in to be the buyer.  Lower gasoline prices could also potentially offset any impact from higher goods prices.

Finally, we want to wrap up with the thought that the markets may remain volatile but that we recommend investors remain fully invested.  But rather than owning the entire market, we would recommend investors consider owning areas of the market that are benefiting from secular tailwinds rather than relying on an incoming economic tide.

We look forward to following up with all of you in the coming weeks and months. If you’ve got any questions, feel free to give me a ring at 212-888-6403, or my new email terry.gardner@apollonwealth.com. Thanks, and have a great day.

CJ Lawrence a division of Apollon Wealth Management, LLC (“Apollon”) provides advice and makes recommendations based on the specific needs and circumstances of each client. For clients with managed accounts, Apollon has discretionary authority over investment decisions. Investing involves risk and clients should carefully consider their own investment objectives and never rely on any single chart, graph, or marketing piece to make decisions. The information contained in this video is intended for informational purposes only, is not a recommendation to buy or sell any security and should not be considered investment advice. Market performance information and projections have been provided by third-party sources and, although believed to be reliable, have not been independently verified and its accuracy or completeness cannot be guaranteed. Any opinions, projections, forecasts, and forward-looking statements presented herein are valid as on the date of this video and are subject to change. Past performance is no guarantee of future performance. Please contact your financial advisor with questions about your specific needs and circumstances.