GDP shrinks for the first time since 2022

The U.S. economy contracted at an annualized rate of 0.3% in Q1 2025, marking the first decline since early 2022. This downturn was primarily driven by a 41% surge in imports as businesses rushed to stockpile goods ahead of President Trump's new tariffs. While consumer spending and business investment showed resilience, these gains were insufficient to offset the negative impacts of decreased government spending and heightened trade tensions. The contraction raises concerns about the potential for stagflation, as inflation pressures persist amid slowing growth.

• Despite the first decline in GDP since 2022, there were some positive elements in the report
• Imports were the main driver as people pulled forward orders to get ahead of the tariffs
• As this trend reverses in the second quarter, it will likely contribute positively to GDP
• Consumer spending was up 1.8%, which was slower than the prior quarter but still healthy
• As long as the job market remains strong, the consumer should be in relatively in good shape
• As a reminder, our economy is 70% consumption

Labor market remains resilient

The U.S. labor market remained resilient in April 2025, with nonfarm payrolls increasing by 177,000—surpassing expectations of 133,000 despite a slight slowdown from March's revised 185,000 gain. The unemployment rate held steady at 4.2%, and wage growth remained solid at 3.8% year-over-year. Job gains were concentrated in healthcare (+51,000), transportation and warehousing (+29,000), and financial activities (+14,000), while manufacturing employment declined, reflecting early signs of strain from recent tariffs. The labor force participation rate edged up to 62.6%, indicating continued engagement in the workforce.

• As mentioned above, the strong jobs number indicates a still healthy labor market
• It seems businesses are still hiring despite uncertainty around tariffs
• This data point seems to indicate that businesses didn’t make significant changes post-liberation day, or that maybe they expect the stance on tariffs to be reversed
• However, the risk we run here yet again is that the longer the uncertainty around tariffs remains, the larger the probability of businesses and people changing their hiring and spending patterns

First quarter earnings come in strong

As of May 1, 2025, the S&P 500's Q1 earnings season is demonstrating strong performance. With approximately 65% of companies having reported, the blended year-over-year earnings growth rate has risen to 12.9%, up from 8.9% the previous week. This marks the second consecutive quarter of double-digit earnings growth and the seventh straight quarter of year-over-year increases. Notably, 73% of reporting companies have exceeded EPS estimates, though this is slightly below the five-year average of 77%. Revenue growth stands at 4.6%, marking the 18th consecutive quarter of revenue increases. Sectors leading in earnings growth include Health Care, Communication Services, Information Technology, and Utilities, while Energy and Consumer Staples have reported declines. The "Magnificent Seven" tech giants have significantly contributed to the overall earnings uptick.

• While results continue to be strong, it is important to note that all of the numbers are in the rearview mirror
• We still don’t know how much has changed since the tariff announcements
• Notable companies such as Amazon have guided earnings lower for the rest of the year
• GM noted that tariff-related charges of $5bn
• We have also heard cautionary guidance from consumer companies, including P&G, PepsiCo, and Kimberly-Clark

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