Amid fears of tariffs-induced economic slowdown/contraction and indiscriminate selling of stocks, equity bulls are hoping for signs of stability and a relief rally.
It has been 11 quarters since the US economy shrank. The contraction took place in 1Q22, dropping at an annualized rate of one percent. A back-to-back, two-quarter drop has not occurred since the first and second quarters of 2020, when Covid hit (Chart 1).
As things stand, as of last Thursday, the Atlanta Fed’s GDPNow model is forecasting real GDP to contract 2.8 percent in the just-concluded March quarter. There are growing worries of a recession – not just in the US but globally – as the Donald Trump administration’s aggressive, and possibly myopic, tariff policy feeds through the system.
Simplistically, a recession is two consecutive quarters of economic contraction. In essence, it represents prolonged and broad contraction in economic activity.
Economic contraction will have repercussions for company earnings. In 2020, when Covid took a toll in the first half, operating earnings for S&P 500 companies plunged 22.1 percent to $122.38. In 2022, there was just one negative quarter, yet earnings dropped 5.4 percent to $196.95. Earnings then grew in 2023 and 2024, up 8.4 percent and 9.3 percent respectively, with 2024 ending at $233.36.
Incidentally, in March of 2023, the sell-side was expecting $246.31 for 2024. Typically, these analysts tend to start out optimistic and lower the numbers as the year progresses. Even this year, they were modeling in $277.86 last July; as of last Thursday, this has been revised lower to $265.84. For 2025, the consensus was $310.02 this January and $304.30 as of last Thursday (Chart 2).
The point is that downward revision has been a trend, and estimates for this year and next remain elevated, with expected growth of 13.9 percent this year and 14.5 percent next! Even before pricing in tariffs-induced shock to the economy, these numbers are heavily pie in the sky. With tariffs, it is not hard to imagine they face a drastic cut in the quarters to come.
Equities are beginning to price this in.
From the February 19th all-time high of 22223 to last week’s close of 17398, the Nasdaq 100 has plunged 21.7 percent. Last week alone, the tech-heavy index tumbled 9.8 percent. In the week before, sellers aggressively showed up at the 200-day moving average, which was breached in the first week of March.
Rather ominously, the technically oriented ones are probably not thrilled to see that a rising trendline from the 2022 lows has been breached (Chart 3). There is horizontal support at 17000, which is a must-hold.
A similar trendline support on the Russell 2000 has also been compromised. In fact, this trendline goes back to the Covid lows of March 2000 (Chart 4).
The small cap index, which is typically viewed as a barometer of risk-on sentiment, peaked as far back as last November, when on the 25th a new all-time high of 2466 edged past the prior high of 2459 from November 2021.
From last November’s high through last week’s close (1827) the Russell 2000 has sunk 25.9 percent; as a matter of fact, it touched 1786 intraday Friday, rallying 2.3 percent from that low to the close. This is positive, but it is possible the index gravitates toward 1700 for now.
For nearly two years through December 2023, the index was rangebound between 1700 and 1900 before breaking out. Last week, 1900 gave way on Friday.
Interestingly on the S&P 500, a trendline drawn from the lows of March 2020 drew bids in Octobers of both 2022 and 2023 (Chart 5). This support lies just north of 4800, which also lines up with the highs of December 2021 and January 2022. In the futures market today, this support likely got tested. At the time of writing this, e-mini futures were down 1.5 percent, much better than down north of five percent earlier. It remains to be seen what the regular hours bring.
The large cap index peaked on February 19th at 6147 and was down 16.4 percent through last week’s close (5074).
If the improvement in futures holds up in the cash market, then a relief rally could occur. Recent selling has been brutal, and several indicators have been pushed into gross oversold territory. Even in this scenario, sellers are likely to get active at gap-down resistance just under 5300 and then just under 5400.
Thanks for reading!
