Why Markets Shrug at Bad News

From Trump’s tariffs to Powell’s fate, none of it’s stopping stocks. Why?

 

KEY TAKEAWAYS

• GDP declined last quarter, yet stock indexes remain near all-time highs
• Economic and stock market performance are not perfectly correlated
• Stocks trade on long-term expectations, not present conditions
• Tariffs and inflation may hurt future corporate profits and GDP
• Stock returns depend on the market itself, not just company or economic health

MY HOT TAKES

• Investors often conflate market, company, and economy—dangerously so
• Short-term news cycles distract from what drives long-term value
• The NPV model rules equity valuation, even if few truly grasp it–that means the future is more important than the past–even 1 minute ago
• Tariffs will have real economic impact—yet stocks may still rally
• Understanding market psychology matters more than parsing headlines
• You can quote me: “Do you get paid if the economy goes up? Do you get paid when a company announces earnings with a beat and strong fundamentals? The short answer is: no. You get paid when the market goes up.”

Which master do you serve? I will admit it–I’m guilty. Guilty of lazily shifting between talking about the economy and the stock market. For example, when I say “things are going to be volatile,” I may be referring to markets and not the economy–-or am I? “We expect a downturn,” can mean a decline in the indexes, or do I mean a slow quarter of GDP growth? Wait, it gets even worse. When I say, “the company is struggling,” do I mean that the company’s stock is down, or is it struggling on fundamental performance? You get it? You do!

 

Folks, as I assume you have already figured out, they don’t all operate in tandem–they are not perfectly correlated. The economy can be struggling, but a company can be performing well… on their income and cash flow statement, but the stock may be going down. Heck, there are companies whose stocks are on a rocket ride without earning a single red cent. *Can I even use the word cent  anymore, now that the penny is on the road to retirement? Better yet, many of my followers may have never even held a penny in their hands, and quite possibly never will. 

 

Now, let’s be clear, stock performance is linked to company performance, which is linked to economic health… at some level. I’ll give you that, but in recent years that relationship appears to be getting looser. Why am I bringing this up now?

 

Step back and take a look at the macro economy. GDP declined last quarter. That can’t be good, no matter what the explanation. Employment seems to be a bit sluggish. Rates are high and restrictive with an unrelenting Fed full of closet hawks. Oh, and in case you have missed it, the US is minutes away from a worldwide trade war. Inflation leftovers from the pandemic still haunt consumers. Knowing all this, would you guess the major stock indexes are just below all-time highs?

 

Drilling down further into companies, we witness a similar anomaly. Since the day after Q1 earnings season ended, me and my Wall Street colleagues have been publicly talking about how Q2 earnings (that season started on Tuesday) growth was going to be noticeably slower than it was for the past few. Purchasing Managers Indexes (PMIs) have been sluggish as well, bouncing back and forth between contractionary and expansionary (below vs above 50). All this, and you would expect stocks to be in a downward spiral, but alas, as mentioned just seconds ago, stocks have traded higher, finding fresh peaks day after day. 

 

Are you ready for the punchline? Stocks don’t trade in the here and now. No. Stocks try to assess the value of the company in the future… in perpetuity, actually. Perpetuity means forever, and that’s a mighty long time according to the former artist, formerly known as Prince, but that’s not too long for stocks. You see, a stock’s price factors in all future earnings which are reflected in today’s dollars. 

 

How will the company do NEXT quarter, the quarter after that, the year after that, and so on… and finally, how well will it do forever after that? Are you expecting a bad quarter coming up? That’s not good, but if it is only a temporary situation and management is competent, it may not be a problem for the value of the stock. However, if the problem is a structural challenge that will impair the company for many years to come, it may be… um, not good. What if that company misses earnings estimates in this earnings season? If you’ve been paying attention you should conclude, “so what” to that question. That happened LAST quarter! Not only is that not relevant, but it is not even part of the famous Net Present Value equation used by bottom-up analysts. To be fair, it is important if the earnings miss is due to ongoing problems which would affect your assessment of the company’s future prospects.

 

Ok, now let’s get real. President Trump is in the process of completely re-designing the global trade environment–completely. It is clear that at the very minimum, a 10% tariff will be levied on most imports. Recent events suggest that the number could be more like 15%! It doesn’t matter which, pick one, but it is clear that 15% will either be paid for out of corporate profits or consumers with higher prices. The former means that companies’ future prospects will be affected and the latter would lead to lower consumption and GDP growth. So, companies and the economy both may underperform in the future.

 

You are reading this blog / newsletter or watching a video about it, so you presumably own stock, or you are thinking of buying stocks. What determines your success in that endeavor? Do you get paid if the economy goes up? Do you get paid when a company announces earnings with a beat and strong fundamentals? The short answer is: no. You get paid when the market goes up. Now, I asserted earlier, and you know this from experience, that just because the economy is doing well or a company seems to be healthy, there is no guarantee that the stock will go up and ultimately deliver financial success to you.

 

Right now, stocks are factoring in all the known information (and unknown information, according to the efficient market hypothesis) about companies, the economy, and the news. Stocks continue to go higher despite what may appear to be an economic slowdown or rough spot for EPS growth. Why? 

 

Will Trump fire Powell? Would it matter if he did? Probably. Will tariffs cost companies and consumers? Probably. But stocks, according to the markets, are expected to weather those challenges. 

 

Remember stocks try to reflect the future, far beyond this news cycle and even this President. Do you want to collect more of those red cents that I referred to earlier. Listen to what the market is telling you, and most important, keep focusing on the long run, because that is where those cents are aplenty. 

 

YESTERDAY’S MARKETS

Stocks gained yesterday as the President took a very public poll on whether or not he should pursue firing Jerome Powell over his weak construction project management skills. Markets said “don’t do it,” and the President thought better of it. The Producer Price Index, which reflects wholesale prices, came in cooler than expected, in contrast to the warmer CPI a day earlier–good news if you're worried about inflation–and the Fed.

 

NEXT UP

• Retail Sales (June) is expected to tick up by +0.1% after slipping by -0.9% in May. This is a potential market mover.
• Initial Jobless Claims (July 12th) is expected to come in at 233k, slightly higher than last week’s 227k claims. Watch where it is compared to its 4-week moving average, to look for a trend.
• NAHB Housing Market Index (July) may have ticked up to 33 from 32.
• Fed speakers today: Kugler, Daly, Cook, and Waller… and no-doubt, the President himself. 🤣
• Important earnings today: PepsiCo, Cintas, Elevance, Fifth Third Bancorp, GE, US Bancorp, Travelers, Abbott Labs, and Netflix.

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