Since April 2, significant changes in U.S. tariff policy have led to a rollercoaster market in overseas markets. A comprehensive analysis of various asset performances indicates that the U.S. stock market remains relatively optimistic in pricing the macro environment.
Weakening growth data and rising inflation data in the second quarter could be critical turning points in reversing pricing trends. The market still faces downside risks under the cyclical and structural pressures of short-term economic data and the diminishing narrative of U.S. exceptionalism.
<h2>Key Points</h2>
Overseas market pricing is optimistic, trading paths are too narrow, and macro pressures are insufficiently accounted for
Under the current inflationary pressures, the probability of recession and expectations for interest rate cuts are not aligned. On one hand, CME futures implied expectations for interest rate cuts have once heated up to five cuts within the year starting in May, and currently remain at four cuts; on the other hand, the market has not priced in a genuine recession in the U.S., with the S&amp;P 500 index nearly returning to levels before April 2, and Bloomberg's consensus earnings expectations for 2025 have only been revised down by 3.6% since the beginning of the year. This combination reflects a very ideal trading scenario: 1) the actual impact of tariffs is less than expected or tariffs will be significantly reduced; 2) even without a recession, the Federal Reserve will still implement substantial interest rate cuts.
This soft landing trading path is too narrow and may face significant downside risks. The success of a soft landing in 2023 is attributed to breakthroughs in AI technology, U.S. fiscal expansion, and global disinflationary pressures. However, under the current macro environment, the probability of replicating such a successful path is clearly narrowing. Market pricing on a narrow path also means that the risks faced are more fat-tailed.
Is there liquidity pressure? U.S. stock market sentiment is indeed low, but has not developed into a liquidity shock
Many sentiment indicators in the U.S. market show that the tariff shock has disturbed the market close to levels seen during the 2020 pandemic, such as the RSI hitting new lows since 2020 and the VIX index reaching new highs, along with AAII retail investor bearish sentiment hitting new highs since the 2008 financial crisis. However, these data alone do not equate to a financial liquidity shock. A financial liquidity shock means that even high credit-rated and highly liquid &#34;safe assets&#34; must be sold off, which has not yet occurred. Indicators such as commercial paper spreads remain relatively stable, and the widening credit spreads mainly reflect adjustments in risk appetite. Future attention should be paid to fluctuations in the U.S. Treasury market and potential chain reactions that may arise.
Rhythm and levels: The second quarter may accelerate the incorporation of stagflation, with downward revisions in earnings expectations potentially dragging U.S. stocks down by around 10%
According to a report titled &#34;Significantly Raising U.S. Inflation and Recession Probability Forecasts&#34; published by Huatai Macro on April 15, 2025, it is estimated that the marginal slope of weakening growth and rising inflation in the U.S. will be the highest in the second quarter. Following recent trading concentrated on news, the confirmation of macro data may accelerate investors' genuine concerns about a stagflation environment, reversing the previously optimistic market pricing. After the second quarter, with the 90-day tariff suspension deadline approaching, the uncertainty of tariff policies will also amplify market volatility and suppress risk sentiment
The downward revision of profit expectations may drag U.S. stocks down by around 10%. According to the report released by Huatai Macro on April 7, 2025 (&#34;The Impact of High Tariffs on the U.S. Economy&#34;) and the report released on April 15, 2025 (&#34;Significantly Raising U.S. Inflation and Recession Probability Forecasts&#34;), under the current policy environment, the U.S. real GDP growth in 2025 is expected to be 1.1%, with core CPI and core PCE inflation in the second quarter year-on-year growth rates reaching 5.5% and 5.3%, respectively.
Correspondingly, the expectation of a U.S. economic recession in 2022 led to a 12% downward revision of the Bloomberg consensus EPS forecast for the S&amp;P 500 index in 2023. Currently, the downward revisions for the Bloomberg consensus EPS forecasts for 2025 and 2026 are only 3.6% and 1.5%, respectively. Assuming the Bloomberg consensus EPS forecast for the S&amp;P 500 index in 2025 is revised down by 10% to around $240, even if the valuation remains unchanged, the index level would adjust to around 4850 points, indicating a potential decline of around 10%; if the valuation further declines to the average level of 2022, the index could pull back to around 4250 points.
If a complete stagflation environment occurs, the EPS growth rate may turn negative. Under pressure, based on the lowest valuation level in 2022, the S&amp;P 500 index could cumulatively decline by 43% from the mid-February peak to around 3500 points, comparable to the maximum drawdown of 45% in the U.S. stock market in the 1970s.
In the medium to long term, be wary of the structural contraction of valuation premiums for dollar assets.
The repeated tariff policies seem to have boosted U.S. stocks, but in the medium term, they may instead exacerbate the momentum for &#34;de-dollarization&#34; in global asset allocation. At the same time, the inevitable result of the U.S. reducing its current account surplus is a decline in the demand for dollars and the motivation for capital inflows into the U.S. Even after experiencing a significant drop, the implied equity risk premium of U.S. stocks from the DDM model on April 4 is 5.1%, still below the average level of 5.4% since 2008, indicating that there is still room for contraction in the &#34;exceptionalism&#34; of overweighting U.S. stocks. Additionally, the fragmentation of the global trade system and rising security costs will continue to drive up the premiums of safe-haven assets outside the dollar, such as gold.
<h2>Main Text</h2>
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Author of this article: Yi Han, He Kang, et al., Source: Huatai Securities Strategy Research, Original Title: &#34;Special Research | Have U.S. Stocks Fully Priced in Macroeconomic Uncertainty?&#34;
Risk Warning and Disclaimer
The market has risks, and investment requires caution. This article does not constitute personal investment advice and does not take into account the specific investment objectives, financial conditions, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article are suitable for their specific circumstances. Investment based on this is at one's own risk

The earnings expectations for the second quarter have been revised downwards, which may lead to a further decline of about 10% in U.S. stocks. Since April 2, changes in U.S. tariff policies have triggered market fluctuations. Although U.S. stocks remain optimistic about the macro environment, weakening economic data and rising inflation may change this situation. The market has not fully considered the risk of recession, and the trading path is too narrow, facing downward risks. Liquidity pressures have not yet emerged, but market sentiment is low, and attention should be paid to fluctuations in the U.S. Treasury market and their ripple effects

- Since April 2, U.S. tariff policy changes have led to volatile overseas markets, with U.S. stocks remaining optimistic despite weakening growth and rising inflation data.  
- The market's narrow trading path suggests significant downside risks, as recession probabilities and interest rate cut expectations are misaligned, with potential declines in the S&P 500 index by around 10%.  
- Long-term, the repeated tariff policies may accelerate the trend of "de-dollarization" in global asset allocation, while the demand for the dollar and capital inflows to the U.S. could decrease.

Second quarter profit expectations lowered, which may drag down U.S. stocks by about 10% again