Economic data are sending mixed and confusing signals

April 2025 served as a stark reminder to investors that timing the market is a fool’s errand. The S&P 500 Index had dropped 19% from its peak ahead of and in the week following “Liberation Day,” but it’s essentially back to where it was on April 2.¹

Investors have celebrated the perceived willingness of the Trump administration to adjust course on tariffs and attacks on the Federal Reserve (Fed) if certain pain thresholds are crossed.

The rise in the S&P 500 Index since the April 8 bottom has been led by the Magnificent Seven, which were further boosted this week by strong Q1 earnings results from Meta, Microsoft, Amazon, and Apple last week.² But a closer look, and listening to guidance from US companies, suggests that the real pain from tariffs is yet to be felt.

US investors, businesses, and households are worried about the impact of those policies, as illustrated in the significant weakness in investor, business, and consumer sentiment.³  The impact of the tariffs is likely not yet being felt in the hard economic data. For example, the April non-farm payrolls report was stronger than expected,⁴ signaling, in our view, that the US economy has strong momentum going into a challenging period. We believe that the longer policy uncertainty persists, the greater the potential hit to economic activity.

We view the US stock market as having rebounded from what was a short-term oversold condition⁵ and consequently, we don’t expect it to rise sustainably and smoothly over the coming weeks and months. Markets remain highly vulnerable to negative data and policy announcements.

Data is dazed and confused

The first 100 days of President Trump’s second administration have been a whirlwind of significant — and surprising — policy changes. These policies have been focused on curtailing immigration and applying tariffs on trading partners, both of which threaten slower US growth and higher prices.

The April US gross domestic product (GDP) figures showed a contraction.⁶ However, the decline is misleading, in our view, and likely overstates the first-quarter slowdown in the US economy. GDP contracted because imports surged as companies sought to get ahead of the expected tariffs. The 51% rise in goods imports took more than five percentage points from headline growth.⁷ Consumption growth slowed from the fourth quarter of 2024 but still contributed positively to growth in the quarter.⁸

The Institute of Supply Managers (ISM) Manufacturing Index was better than consensus forecasts last week but still signaled a significant slowdown in activity. It has only been lower in four previous periods, and each of those coincided with a recession.⁹

Core personal consumption expenditures, the Fed’s preferred measure of inflation, was within the Fed’s perceived “comfort zone.”¹⁰ Tariffs will likely put further upward pressure on prices in the coming month but may be perceived by the Fed as being transitory if long-term inflation expectations remain contained.

US labor market: Mixed signals

Labor market data is a notoriously lagging indicator, but we expect it to set the trend for how the Fed reacts in the coming months. Nonfarm payrolls advanced by 177,000 in April, surpassing expectations, but are likely to deteriorate in the coming months as tariffs will likely weigh on hiring activity.¹¹

The number of job openings fell in March, indicating that companies are becoming a little more reluctant to hire.¹² This makes intuitive sense, given the high degree of uncertainty today. Companies are likely to defer decisions they don’t have to make today.

Bank of Japan on hold

The Bank of Japan (BOJ) met last week and, as we expected, kept policy rates on hold at 0.5%.¹³ It will likely remain in tightening mode, in contrast to expectations for the other developed world central banks. The BOJ, however, reduced its growth inflation forecasts for 2025 and 2026. The Japanese yen weakened against the US dollar in response, and in local currency terms, the Nikkei 225 Index rose more than 5% over the week.¹⁴

FTSE 100 makes a new record

The UK benchmark index of stocks, the FTSE 100, on Friday, May 2, marked the 15th consecutive day of positive returns.¹⁵ That’s the longest run of positive days since the index launch in 1984. The returns served as a reminder that weak economic growth doesn’t necessarily translate into weak stock returns. Close to three-quarters of FTSE 100 revenues come from outside of the UK.¹⁶

This week, the Bank of England will meet to decide policy rates. We expect it to cut interest rates by 25 basis points. That should mean mortgage and business financing costs in the UK fall this year and support stronger activity in the second half.

Inflation falls in Europe

Inflation data in Europe pointed to softer pricing compared to previous months. The German Consumer Price Index fell to 2.2%,¹⁷ the weakest reading in seven months, while French inflation fell to 0.8%, the lowest since February 2021.¹⁸ The modest inflation reports will likely provide further cover for the European Central Bank to cut rates at the next meeting.

How do we interpret all of this data?

A lot of data was released last week, but most of it covers the period before or just after Liberation Day. This allows market participants and commentators alike to interpret the data with their own bias.

Our interpretation is that while there’s a greater deal of variance in where growth and inflation data will end up this year, there’s much we don’t know yet about where policy will land and how it will be implemented. What we can say is that the most likely path is towards growth slowing from a higher level in the US and growth in the rest of the world falling less, albeit from a lower level.

Near-term inflation pressures are building in the US but fading in much of the rest of the world, freeing up many central banks to engage in easier policy than had previously been expected.

Because markets tend to respond to data deviating from expectations, markets outside the US still appear more attractive to us than US markets. We still believe the marginal pound, euro, franc, yen, etc., will now find its way into markets outside of the US. In our view, it’s a good time to look to European markets, to Asia, and maybe even the UK.