Fed Raises Recession Odds as Trump's Tariff Plans Loom

Market Snapshot

Major indices showed mixed performance today, with the S&P 500 gaining +0.4% to close at 5,633.07, while the Nasdaq Composite outperformed with a +0.9% rise to 17,449.89. The Dow Jones Industrial Average edged slightly lower by -0.03% to 41,989.96.

Market volatility remained elevated with the VIX hovering near 20, reflecting investor anxiety ahead of Trump's anticipated tariff announcement. Despite the uncertainty, the S&P 500 maintained technical support at the critical 5500 level.

• Top Gainers: Tesla (TSLA) +3.7%, XPeng (XPEV) +9.7%
• Top Losers: Johnson & Johnson (JNJ) -7.6%

Bottom Line: Markets displayed resilience despite looming tariff concerns, with technology and EV stocks leading the advance while healthcare faced significant pressure.

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Pre-Market Pulse

• Electric vehicle stocks dominated pre-market action with XPeng (XPEV) surging +9.7% to $12.96 and Tesla (TSLA) gaining +3.7%
• Newsmax shares made a spectacular NYSE debut, rocketing +735% and closing at $89.50
• S&P 500 futures were essentially flat at -0.02% while Nasdaq 100 futures showed more strength, edging up +0.3%
• Asian markets traded cautiously overnight with Japan's Nikkei flat and Hong Kong's Hang Seng down -0.2% as investors awaited tariff announcements

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Sector Spotlight

Month-to-date performance shows a clear divergence between defensive and growth sectors:

• Energy: +3.7% MTD (top performer)
• Utilities: +0.1% MTD
• Financials: -3.7% MTD (pressured by flattening yield curve)
• Healthcare: -1.9% MTD (dragged down by J&J's legal issues)
• Technology: -8.9% MTD (semiconductor weakness)
• Consumer Discretionary: -9.0% MTD (worst performer despite Tesla's rebound)

Bottom Line: A clear rotation from growth to defensive sectors is underway, with Energy and Utilities outperforming while Technology and Consumer Discretionary face significant selling pressure. This pattern typically emerges during periods of economic uncertainty and rising recession concerns.

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Economic Beat & Fed Watch

• ISM Manufacturing PMI: 49.0 (Actual) vs 50.0+ (Expected) - indicating contraction in manufacturing activity
• ISM Prices Paid: 69.4 (surging higher) - signaling persistent inflationary pressures
• JOLTS Job Openings: 7.57M (Actual) vs 7.69M (Expected) - showing continued softening in labor demand
• 2-year Treasury Yield: Dropped 5bps to 4.25%

The Fed's latest Summary of Economic Projections (SEP) revealed concerning revisions:

• 2025 Core PCE Inflation: Now projected at 2.8% (a significant +0.6 percentage point upward revision)
• 2025 Unemployment Rate: Forecast at 4.4%

Bottom Line: Economic data points to a concerning combination of manufacturing weakness alongside persistent inflation pressures. The Fed's substantial upward revision to inflation projections suggests rate cuts may be fewer and later than previously anticipated, creating a challenging environment for risk assets.

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Corporate Central

Johnson & Johnson (JNJ) -7.6%

• Shares plummeted after a U.S. appeals court rejected the company's bankruptcy strategy for handling talc-related lawsuits
• The ruling potentially exposes J&J to billions in additional liability
• Why it matters: This legal setback not only impacts J&J but creates uncertainty for other companies using similar bankruptcy strategies to manage mass tort liabilities

Tesla (TSLA) +3.7%

• Rebounded sharply after reporting Q1 deliveries of 386,810 vehicles, down 8.5% YoY but showing sequential improvement
• CEO Elon Musk announced plans to unveil the company's robotaxi on August 8th
• Why it matters: Despite missing analyst estimates, investors focused on sequential improvement and future autonomous driving initiatives

Newsmax Media

• Shares skyrocketed +735% in NYSE debut, closing at $89.50
• The conservative media company's spectacular debut reflects investor interest in media companies aligned with former President Trump
• Why it matters: The extraordinary price action suggests potential speculative excess in Trump-adjacent stocks ahead of the election

XPeng (XPEV) +9.7%

• Surged after reporting March deliveries of 9,507 vehicles, representing a 29% YoY increase
• Q1 deliveries totaled 21,821 vehicles, up 20% YoY
• Why it matters: XPeng's strong delivery numbers suggest Chinese EV demand may be stabilizing after recent volatility

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Global Market View

• European markets showed volatility with the German DAX rebounding +1.7% on Tuesday but opening lower today as tariff concerns resurfaced
• China's Caixin Manufacturing PMI beat expectations at 51.1 (expansion territory), yet failed to lift Asian markets amid broader trade concerns
• Goldman Sachs raised its U.S. recession probability to 35%, citing potential economic damage from proposed 20% blanket tariffs
• Iron ore prices jumped +4.2% to $118/tonne on renewed hopes for Chinese stimulus measures

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Market Spotlight: Tariff Tensions and Recession Risks

Markets are increasingly focused on the potential economic impact of Trump's anticipated tariff announcement. Goldman Sachs has raised its U.S. recession probability to 35%, specifically citing the potential damage from proposed 20% blanket tariffs.

The tariff concerns are creating a notable divergence in sector performance, with defensive sectors like Energy and Utilities outperforming while growth-oriented sectors face selling pressure. This rotation pattern typically emerges during periods of economic uncertainty.

Adding to the complex picture, manufacturing data shows contraction (ISM at 49) while inflation pressures remain stubborn (prices paid component surging to 69.4).

This combination creates a challenging environment for the Federal Reserve, which has already revised its 2025 core PCE inflation projection upward by 0.6 percentage points to 2.8%.

The market's reaction to these crosscurrents has been surprisingly resilient, with the S&P 500 maintaining support at the critical 5500 level despite elevated volatility.

However, the widening gap between sector performance suggests investors are increasingly positioning for economic turbulence ahead.

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Analyst Actions

• Upgrade by Morgan Stanley to Overweight (from Equal-Weight) with Price Target $60 (from $45) for Uber (UBER). Rationale: Improving unit economics and market share gains in food delivery.
• Downgrade by JPMorgan to Neutral (from Overweight) with Price Target $170 (from $210) for Apple (AAPL). Rationale: Slowing iPhone demand and AI implementation timeline concerns.
• Initiation by Jefferies with Buy rating and Price Target $85 for XPeng (XPEV). Rationale: Leadership in autonomous driving technology and improving delivery trends.
• Downgrade by Bank of America to Underperform (from Neutral) with Price Target $145 (from $170) for Johnson & Johnson (JNJ). Rationale: Increased legal liability risk following talc bankruptcy strategy rejection.

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Risk Radar

• Tariff Implementation Timeline: Markets remain highly sensitive to the specifics and timing of Trump's tariff announcements, with potential for significant volatility if implementation appears imminent
• Inflation Persistence: The surge in ISM prices paid component to 69.4 suggests inflation pressures remain stubborn, potentially limiting the Fed's ability to cut rates
• Yield Curve Dynamics: The flattening yield curve is pressuring financial stocks and may signal increasing recession concerns among fixed income investors

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Look Ahead: What to Watch For

• Friday's Nonfarm Payrolls Report: Consensus expects +200K jobs added, with particular focus on wage growth figures for inflation implications
• Fed Chair Powell's Speech: Markets will closely monitor Powell's comments following the tariff announcement for any shift in monetary policy stance
• March PCE Inflation Data (Next Week): Forecast at +0.3% month-over-month, this preferred Fed inflation gauge will be crucial for rate cut expectations
• Earnings Reports (Thursday): 23 S&P 500 companies report including Conagra (CAG) and Levi Strauss (LEVI)
• Technical Level: Watch the S&P 500's 5700 resistance level for signs of renewed bullish momentum

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In Summary: Markets are navigating a complex landscape of tariff concerns, persistent inflation, and mixed economic signals. The rotation from growth to defensive sectors suggests increasing caution among investors despite the S&P 500's resilience at key technical support levels.

Friday's jobs report and Fed Chair Powell's upcoming comments will be critical in determining near-term market direction.

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