Reversal of Misfortune

Forget about that 145%... And firing Jerome Powell, too... A much softer tone from Donald Trump... A look at tariff worries in earnings... Elon Musk is back focusing on Tesla... Previewing the rest of 'Mag 7' earnings...

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This sounds like a pivot...

Like we wrote about tariffs last evening, President Donald Trump's tone has softened. And here is some more evidence...

After the market closed yesterday, Trump spoke to the media again. Asked by a reporter about the idea that the U.S.'s current proposed 145% tariff on Chinese imports could be lower when this trade war is all said and done, Trump agreed – and then some...

Standing at a podium in the Oval Office after Treasury Secretary Scott Bessent swore in the new Securities and Exchange Commission head Paul Atkins, Trump said of the proposed tariffs on China...

It won't be that high. It's not going to be that high... It won't be anywhere near that high.

It sounded like he was negotiating with himself.

Trump also added talks with other countries are ongoing amid the current 90-day tariff pause and, "I think it's a process that's going to go pretty quickly." Asked what a number on China might be, he said, "It will come down substantially, but it won't be zero."

And he repeated the idea he discussed last week and we wrote about yesterday... that if the U.S and China don't reach a deal, he will simply "set the number." What that number is remains undetermined, but it won't be anything close to 145%, he's saying now.

If I (Corey McLaughlin) were to bet, it could end up being something closer to the 25% fentanyl-attributed tariff rates on Mexico and Canada, or maybe the 34% "reciprocal tariff" rate on Chinese imports originally announced on Liberation Day.

An unnamed senior White House official told the Wall Street Journal today to expect a tariff rate between perhaps 50% and 65%. Maybe that's an average of two different ideas, as the Journal also reported...

The administration is also considering a tiered approach similar to the one proposed by the House committee on China late last year: 35% levies for items the U.S. deems not a threat to national security, and at least 100% for items deemed as strategic to America's interest, some of the people said. The bill proposed phasing in those levies over five years.

That's still a very significant import tax... It's enough to seriously damage margins for U.S. businesses, which would thus lead to job losses to cut costs and price hikes to maintain profitability. Perhaps as people realize this, the buzz in the market around this softer tone may wear off...

But directionally, what we're hearing from the White House now is better than the "worst case." Again, importantly, it takes two to tango, so let's not get ahead of anything.

But as this plays out, Mr. Market easily forgets the past and likes the idea of "less bad." The major U.S. stock indexes were higher for the second straight day, with the benchmark S&P 500 gaining 1.6% and the tech-heavy Nasdaq Composite Index up 2.5%.

Bond yields were stable again and bitcoin continued its recent surge higher, trading above $93,000. Gold cooled off, down about 3%, after hitting a new all-time high near $3,500 earlier this week. And the CBOE Volatility Index ("VIX") fell to around 28.

Oh, and Trump doesn't want the Fed chair fired anymore, either...

In the same media availability yesterday after market close, Trump almost casually mentioned that he doesn't want to be able to fire Federal Reserve Chair Jerome Powell anymore...

I don't want to talk about that because I have no intention of firing him.

Really? He said...

None whatsoever. Never did. The press runs away with things.

Mind you, Trump said this only five days after a posting on social media that Powell should lower interest rates and that "Powell's termination cannot come fast enough!" and saying to the media that "if I ask him to, he'll be out of there."

In other words, Trump's now saying, "Let's just pretend that never happened." Though the president did again push for a lower federal-funds rate, as he said oil and food prices are falling...

We think the Fed should lower the rate. We think that it's a perfect time to lower the rate and would like to see our chairman be early or on time as opposed to late.

So there we have the latest public posture from the White House on tariffs and the Fed.

And everyone will live happily ever after...

Importantly, we haven't heard a new message from Chinese officials on any of the rhetoric yet (and we won't hear again from Powell until May 7, after the next Fed meeting). It doesn't sound like direct private talks have happened at all with China, either. More from the Journal today...

As trade tensions have spiraled in recent weeks, Trump himself has indicated that he would like Xi to call him. Trump officials have also suggested to Chinese diplomats that Foreign Minister Wang Yi reach out to Secretary of State Marco Rubio, according to people familiar with the matter. So far, Beijing has refused to engage on either front.

Last week, Chinese officials said their government wanted some respect, and a spokesperson repeated that message earlier today. Perhaps that's what the White House is signaling now. Trump said yesterday about China...

We're going to be very nice. They're going to be very nice, and we'll see what happens...

I think we're going to live together very happily and ideally work together.

Today, Bessent followed up and spoke at the Institute of International Finance in Washington and, among other things, talked about the "incredible opportunity" there is to work out a "big deal" with China.

What a difference a few weeks makes, or a few days. As we've been saying, expect volatility in both bullish and bearish directions. Own those high-quality stocks that will keep compounding your wealth, hold hard assets like gold, and invest for the long term.

In the meantime, though, we're getting a look at potential tariff costs...

Earnings season is in full swing, and more than 20% of the S&P 500 are releasing quarterly reports this week. A few storylines have already emerged... For one, we've started to get an idea of how tariffs could hurt the industrial sector.

We're going to focus today on releases from industrial conglomerate 3M (MMM), aerospace giant GE Aerospace (GE), and defense contractor RTX (RTX). All three companies beat Wall Street's estimates for first-quarter results, but analysts were more focused on what the companies had to say about the influence of Trump's new tariffs on their businesses...

3M's earnings outlook for 2025 matched analysts' expectations, but the company warned that tariffs could knock $110 million to $220 million off its projected profits.

RTX's outlook was similar... It kept guidance the same as it laid out in January, but it added that tariffs could hurt revenue by up to $850 million.

Meanwhile, GE left its forecast unchanged. And it added that about $500 million in tariff impact has been included in the guidance (unlike 3M and RTX – which left tariffs separate). GE said that it will offset tariffs by cutting costs and raising prices. Translation: job cuts and inflation.

Altogether, these three companies see a combined $1.57 billion in headwinds to their businesses from tariffs. And we're willing to bet that more companies are going to come out with their first estimates of how tariffs are going to hurt their businesses...

And then there's Tesla and Elon Musk...

Electric-vehicle giant Tesla (TSLA) kicked off earnings season for the Magnificent Seven stocks yesterday after markets closed. The company missed expectations for both earnings and revenue in the first quarter, with automotive sales falling 20% from the same period last year.

It was the company's lowest automotive revenue since the third quarter of 2021 and lowest net income since the fourth quarter of 2020.

In its presentation, Tesla said it was selling fewer cars and at lower prices. The financial media and other observers have also been pointing to CEO Elon Musk's role in the White House as a source of profit decline as well, though it's hard to say exactly how much that has played a role so far.

In any case, with sales falling and the company having to cut prices and incentivize buyers, Tesla now has an operating margin of 2.1%. That's below the margin of auto competitors like Ford Motor (2.8% at the end of 2024) and General Motors (6.8% at the end of 2024).

But the stock rose anyway. Shares were up 5.5% today, with investors hoping the company can get back on track...

On the company's earnings call, Musk said that his time involved in the White House's Department of Government Efficiency ("DOGE") will "drop significantly" starting in May. As our colleague and Stansberry's Investment Advisory lead editor Whitney Tilson mentioned in a note about Tesla's earnings report today, Tesla said its "planned robotaxi launch in Austin, Texas in June remains on track," and significant upgrades of its Model Y line are ongoing.

So folks are hoping that, with more of Musk's attention focused back on Tesla, the company can reverse the recent slide in its stock price. Shares were down roughly 40% in 2025 through yesterday's close.

Looking forward to the rest of the Mag 7...

Tomorrow, after market close, Alphabet (GOOGL) will report its first-quarter results. And that'll kick off the meat of Mag 7 earnings. Like the past couple of quarters, a lot of the focus is going to be on what's happening with artificial intelligence-related spending.

Alphabet, Amazon (AMZN), Meta Platforms (META), and Microsoft (MSFT) have pledged a combined $325 billion in spending on AI infrastructure for 2025, and the scope of the return on that investment isn't clear.

Until now, these major capital investments have been mostly well received in the market, but there will come a time when folks in the market will want to better see how they will make these companies money and produce lasting revenues.

We'll get reports from Meta, Amazon, Microsoft, and Apple (AAPL) next week.

The Mag 7 will still lead markets – one way or another...

We've called the performance of these stocks this year a "Magnificent Bear Market."

Six of the Mag 7 are down more than 20% from their highs as of yesterday's close (Microsoft, the only exception, is down more than 19%). This performance has dragged the major indexes down, as they're still heavily weighted toward these mega-cap tech companies.

Even after the sell-off we've already seen, the Mag 7 stocks make up more than 29% of the market-cap-weighted S&P 500 and more than 40% of the Nasdaq 100 Index. So, any price swings on the back of their earnings reports can pull markets higher or drag them lower.

As we keep track of the latest on tariffs, Trump, and the Fed, corporate earnings in general and the performance of the Mag 7 in particular will soon be back on a lot of people's radars as well. And sentiment around them will likely play a big factor in the near-term direction of U.S. stocks.

New 52-week highs (as of 4/22/25): Alpha Architect 1-3 Month Box Fund (BOXX), WisdomTree Japan SmallCap Dividend Fund (DFJ), Coca-Cola (KO), London Stock Exchange Group (LNSTY), Lynas Rare Earths (LYSDY), and Sprott (SII).

In today's mailbag, feedback on a piece of mail in yesterday's edition... Jim M.'s note on "the fact that the Trump Tariffs are probably illegal" and "regardless of one's view of trade deficits, they aren't unusual and extraordinary." Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.

"True enough, except answer this: When has this nation been, even relatively, this much in debt: $37 trillion fiat dollars? Which even that fantastic size does not come close to what is expected of the government for funding future payments for Social Security, Medicare, Defense, Interest, and more that even now overcome tax receipts." – Subscriber Michael M.

All the best,

Corey McLaughlin and Nick Koziol
Baltimore, Maryland
April 23, 2025