By Paul R. La Monica

Donnie say "relax."

If the name of the game earlier this month was fear and trepidation, investors seem to have shed some of their nervousness about a global trade war after President Donald Trump said China tariffs would come down. The S&P 500 index rose 4.6%, while the Dow Jones Industrial Average advanced 2.5%, and the Nasdaq Composite gained 6.7%. Long-term bond yields edged lower. And Wall Street's fear gauge, the Cboe Volatility Index, or VIX, no longer shows signs of panic.

Don't be surprised, though, to see the nerves return. While the nursery rhyme tells us that April showers bring May flowers, it's more likely that May sours for Wall Street. "I'm hiding out in bonds even though it's not the sexiest position," says Frank Rybinski, chief macro strategist at Aegon Asset Management.

There are plenty of reasons for investors to be on edge. Earnings targets for 2025 are in flux. Delta Air Lines, CarMax, and Tesla are among the companies that have chosen not t o give guidance for the year due to uncertainty about the global economy as a result of Trump's tariffs.

Rybinski is concerned that the outlook for this year is too high. The consensus forecast for the S&P 500's 2025 earnings per share is about $264. With the S&P 500 hovering around 5525, the market is trading for a little below 21 times those estimates. Rybinski argues that this multiple is too rich and that earnings projections are going to fall because of the impact that tariffs would have on the economy.

"What if there is zero growth or a recession? You could see a contraction in earnings estimates," he says, adding that a multiple of 19 times profit forecasts of about 250 would be "more accurately factoring in risks." That would leave the S&P 500 at 4750 -- below its early-April trough.

Some fear that stocks have even more downside. The eventual market bottom will look more like a W than a V, says Bob Shea, chief investment officer at Dynasty Financial Partners. There will be several sharp rebounds and pullbacks as opposed to one big spike higher. He thinks the S&P 500 won't only retest the April lows -- it could also hit a new one. Shea says a price/earnings ratio of 18 times for the S&P 500 could make sense as a bear case. "If the U.S. continues on the path of upsetting the world, why should the market have a 20 multiple?" he says.

Shea is also worried about the big pullback in the U.S. dollar this year. It's down 8% against a basket of other major global currencies. That usually doesn't happen during times of global crises, when investors typically flock to the greenback as a haven. "The dollar slide shows a lack of confidence in U.S. policies," he says.

Sure, there are reasons for optimism. A Truth Social post about positive trade negotiations could lead to an epic rally. So would any suggestion that inflation is cooling and the job market is weakening, which may lead the Federal Reserve to cut interest rates again. But there may be too many risks to justify jumping into U.S. stocks at these levels. The outperformance of many international markets could continue.

"With U.S. valuations near extremes, now would appear to be an excellent time to increase non-U.S. exposure," says Roy Leckie, executive director at Walter Scott. "We're not of the view that U.S. exceptionalism is dead. But it's on hold."

So, too, it seems, is the bull case for the U.S. stock market.

Write to Paul R. La Monica at paul.lamonica@barrons.com

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(END) Dow Jones Newswires

April 25, 2025 18:46 ET (22:46 GMT)

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