Cash Is King For Now

2025-03-04 02:35:00 ET

Summary

• Tariff threats and a shrinking labor force put downward pressure on stocks and the economy.
• The Atlanta Fed GDP Now forecast for Q1 GDP growth has crashed from its initial estimate of nearly 4% growth to just 2.3%.
• Weakening GDP growth with slightly higher inflation has been the scenario the IDEC Model predicted. That is the current scenario.

Tariff threats and a shrinking labor force put downward pressure on stocks and the economy. The S&P 500 is trading at 22x the forward 12-month EPS target, which is predicting an increase of 13% in EPS. The problem is that the 10-year average PE ratio is just 18x EPS, and that 13% increase in EPS in the next 12 months is extremely optimistic. It assumes that earnings can grow 13% in a world where nominal GDP growth should be only around 4%. It also assumes that Washington, D.C. can extend the 2017 tax cut and jobs act, which would otherwise amount to a $4.5 trillion tax hike. Then again, this would only equate to an extension of the existing tax rates. Thus, it would not be a significant boost to the economy. And it also assumes that the significant tariffs imposed that are needed to pass such a tax-cut extension would not have any adverse effect on GDP growth. Likewise, any retaliatory tariffs would be innocuous as well. However, even if all works out flawlessly, the point is that the current valuation of equities has already priced in perfection in both EPS growth and valuation....

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