The S & P 500 is now within roughly a half-percent of a 10% decline from its recent high. That would be a garden-variety correction, and it would be based on: 1) very rich valuations (the S & P 500 was trading at a multiple of 22 times 2025 estimates, historically high), and 2) a modest slowdown in the economy. That’s what it feels like. It feels like a garden variety correction. The economy is slowing but still in decent shape. But the tariffs are making everyone crazy. I’ve been joking for a week that the tariff headlines are like having a bowling alley installed in your brain. Every day you’re getting your head scrambled. Tipping agent The reason the market is in a tizzy is that the tariffs could be the agent that tips the economy from a modest slowdown into a recession. And for stocks, there’s a big difference between a slowdown and a recession. In a slowdown, growth declines, but the economy doesn’t shrink. In a recession, the economy shrinks. And the stock market reacts very differently to the two. Winners and losers in slowdowns and recessions In 2019, VisualCapitalist ran a study of economic cycles going back to 1960 based on data from SPDR Americas Research. It showed what you might expect: in a slowdown, defensive sectors like consumer staples and health care do well, but technology stocks can also do well. S & P 500: top sectors in a slowdown Consumer Staples +15% Health Care +15% Financials +14% Industrials +12% Utilities +12% Technology +10% But things are whole lot different in a recession. In a recession, almost nothing goes up. True, defensive sectors do not drop as much, but tech stocks tank. S & P 500: top sectors in a recession (since 1960; two quarters of falling GDP) Consumer Staples +1% Utilities -2% Health Care -3% Materials -12% Consumer Discretionary -12% Financials -12% Industrials -15% Technology -20% Real Estate -22% Are earnings at risk of significant cuts? Ed Bastian, the CEO of Delta Air Lines , lowered the earnings guidance for his company due to uncertainty in the economy. He’s one of the first CEOs to specifically cite uncertainty as an issue. That could open the floodgates for analysts to begin lowering earnings estimates in other sectors. That’s not good. Earnings estimates for 2025 have been remarkably stable, within a dollar or so of $270 for the S & P 500 since January. Overall, earnings are expected grow by 11% this year. S & P 500: Q1 earnings 2025 Q1: $60.39 Q2: $66.02 Q3: $70.64 Q4: $73.35 2025: $270.56 Source: LSEG Notice all the gains for this year are loaded toward the back end of the year, which is not unusual. But the first quarter number ($60.39) has been coming down (it was $62.78 at the beginning of January), and those numbers for the first and second quarter could start coming down fast if analysts take their cues from what the Delta CEO was saying. This creates two moves: one where the market moves in anticipation of a slower economy … then potentially another leg down when analysts actually begin cutting estimates. Savita Subramanian at BofA Securities estimated last week that full implementation of the tariffs under discussion last week (25% import tariffs on Canada/Mexico, an additional 10% on top of February’s 10% for China and a reinstatement of steel and aluminum tariffs of 25%) could drop S & P 500 estimates by 10%. That would practically wipe out any projected gains for the year. This is why it is really difficult to call bottoms in economic slowdowns. One thing is clear: what markets want is for the tariffs to go away, on the belief this could be the difference between a modest slowdown and a recession.
