It's been a remarkable ride since President Donald Trump announced widespread tariffs on April 2. Trump's so-called “Liberation Day” announcement included harsher tariff rates than hoped, forcing investors to rethink their expectations for the U.S. economy.
There's evidence that a U.S. economic slowdown is underway, and despite tariff negotiations, tariffs could still push the economy into stagflation or recession. The economic risk raises questions over what's likely to happen to stocks, which usually perform best when a humming economy fattens wallets, allowing households and businesses to ramp up spending.
The post-Liberation Day stock market drop lopped 19% and 24% off the S&P 500 and Nasdaq Composite, respectively, from all-time highs in February.
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The decline was concerning, but “buy the dip” investors took advantage, boosting buys into extremely negative sentiment with most measures flashing “oversold.”
Since April 9, when President Trump paused most reciprocal tariffs that had been announced on April 2, the S&P 500 and Nasdaq 100 have rocketed higher, gaining 22% and 30%.
The returns have been so significant that major market indexes, including the benchmark S&P 500, are flirting with all-time highs again, prompting veteran Wall Street bond manager Bill Gross to chime in with an updated outlook.
Gross has been navigating good and bad markets since 1971. He is the co-founder of Pacific Investment Management Co., or PIMCO, a Goliath money manager with $2 trillion under management. His former role atop the $270 billion PIMCO Total Return Fund earned him the “Bond King” moniker before he left to join Janus Henderson Investors from 2014 to 2019.
Given his long track record, investors may want to pay attention to what he's thinking happens next.
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Stocks, bonds find footing even as economy remains risky
Many are debating what may happen to the economy next. Some believe that tariffs will tax already cash-strapped consumers later this year, slowing economic activity, as businesses also crimp spending awaiting trade deal insight. Others think tariff risks are fleeting and overblown.
The jobs market remains healthy, given that unemployment is relatively low at 4.2%. However, the unemployment rate was 3.4% in 2023, and companies have announced over 696,000 layoffs this year, including 93,816 job cuts in May, up 47% year over year, according to Challenger, Grey, & Christmas.
Related: Analyst sends blunt 8-word message ahead of trade deal deadline
The weakening jobs market prompted the Federal Reserve to cut interest rates by 1% last year; however, it has since gone to the sidelines, pausing further cuts, over fear that more reductions could fuel inflation, particularly given that the tariff impact is only beginning to be felt by consumers and businesses.
The dilly-dallying on monetary policy has prompted sharp criticism, though, including from the White House.
Ostensibly, recognizing that tariffs may slow GDP and worsen unemployment, President Trump has threatened to fire Fed Chair Jerome Powell, and his Director of the Federal Housing Finance Agency, William (Bill) Pulte, has called for his resignation.
If the economy cools and the Fed is unwilling to budge on interest rates, Congress may not be able to help, given that the country's huge deficit and mountain of debt are impacting fiscal policy.
America's deficit exceeds $1.8 trillion, accounting for 6.4% of gross domestic product. At the same time, total public debt outstanding is roughly 122% of GDP, far higher than its 75% level in 2008 during the Great Recession.
The economic backdrop threatens earnings growth, but the stock market has so far looked beyond the risks, assuming that trade negotiations will bear fruit, inflation expectations will retreat, and corporate earnings will continue growing, rather than ratchet lower.
Bill Gross offers a blunt view on stocks, bonds
The fact that Bill Gross has been tracking Wall Street for over 50 years means he's seen plenty of stock market pops and drops, including the Nifty 50, skyrocketing inflation in the 1970s, the S&L crisis in the late 80s and early 90s, the Internet boom and bust, the Great Recession, Covid, and the 2002 bear market.
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In short, Gross has been-there, done-that, so his take on markets is worth paying attention to.
He doesn't see much reason to be a buyer of US Treasuries. Many turn to Treasuries as a safe haven amid economic or geopolitical worry.
Given the economic risks listed above, the ongoing Russia/Ukraine War, and a dust-up in the Middle East, we certainly have that.
Yet, Treasury yields haven't made much progress lower (remember yields fall when bond prices rise and vice versa). Gross doesn't think there's much incentive for them to fall much further.
“Long-term research indicates US 10 year has traded at CPI plus 175,” wrote Gross on X. “With inflation at 2.5% that puts a 10 year at 4.25% or so. That was history — but deficits/ensuing supply of bonds/and a weak dollar should keep CPI from falling below 2.5% and the 10-year from falling below 4.25%.”
The 10-year Treasury note yield is currently 4.29%.
As a result, he predicts a “little bear market for bonds.”
With little incentive to shift portfolios towards Treasuries for gains, what does that mean for stocks?
“Stocks are AI-dominated and continue to suggest 1-2% economic growth despite tariffs and geopolitical unrest,” wrote Gross. “I suggest a “little bull market” for stocks.”
Undeniably, artificial intelligence stocks continue to win favor with investors as companies big and small look for ways to exploit it for profit growth. After a pause earlier this year, technology stocks have turned it on lately.
The SPDR Technology ETF (XLK) is up about 8% in June alone, and unlike the S&P 500, it has already notched a new all-time high.
That said, don't get too excited. Gross doesn't seem to expect much more upside than we've already witnessed.
“Nothing dramatic either way for now,” concluded Gross.
Related: Veteran fund manager sends dire message on stocks
