Week of Apr 27 2025

The market's central narrative conflict centers on James Thorne's assertion that "Risk Assets are a liquidity-driven game—fundamentals are secondary" versus the mounting evidence of fundamental deterioration across economic indicators. This is further complicated by the emergence of what Thorne describes as an "infinite game" in US-China trade relations, where Trump's tariff policies represent not just cyclical disruption but necessary structural adjustment in global trade dynamics. Recent news that major US retailers including Walmart are resuming shipments from Chinese suppliers (while absorbing tariff costs) suggests adaptation to this new paradigm may be underway, supporting the possibility of a Yardeni-style "soft patch" scenario rather than a full recession. Perhaps most concerning is the inflation expectations dynamic revealed in University of Michigan data, which shows long-term inflation expectations have de-anchored to multi-decade highs over the past three months. The Fed appears politically constrained from addressing this issue forcefully, creating the risk of a self-fulfilling inflation spiral that could flip the traditional stock-bond correlation positive. Such a correlation regime change would severely undermine diversification benefits in traditional portfolios and force deleveraging precisely when consumer wealth is already severely compressed.

The technical picture remains mixed despite the Zweig Breadth Thrust signal. The S&P 500 formed a bearish "death cross" as the 50-day moving average crossed below the 200-day moving average. Key resistance levels include the 50-day moving average at around 5,700 and the 200-day moving average at 5,750. The S&P 500 is currently trading approximately 3% below key trigger levels that could activate substantial mechanical buying: 5,565 (short-term), 5,762 (medium-term), and 5,480 (long-term). A rally on par with the 2015 analog could lift the S&P 500 to its 200-day moving average around 5,747, while failure to break above these levels could lead to another test of the April lows.

Left tail risks center on stagflationary pressures from tariff-induced inflation combined with slowing growth. The potential for a "chronic pain" recessionary scenario without a "big bang" volatility event has increased as real economic impacts materialize in supply chains. Inflation expectations becoming embedded in consumer psychology could create a persistent positive stock-bond correlation environment that severely impacts multi-asset portfolios. Earnings disappointments from tech giants could accelerate the $6 trillion in wealth destruction already seen year-to-date, further depressing consumer spending when the top 10% account for 50% of consumption.

Right tail opportunities include substantial mechanical buying on sustained upside moves, particularly if strong corporate buyback activity emerges. Evidence of policy flexibility through tariff exemptions could moderate economic damage, while Fed easing (65% probability for June, 100% for July) could provide additional support to risk assets. Strong tech earnings from the Magnificent-7 could reinforce Yardeni's "Roaring 2020s" scenario where investors look past near-term disruptions to better growth in 2026, supported by his long-term S&P 500 targets of 7,000 (2026), 8,000 (2027), 9,000 (2028), and 10,000 (2029).

Week 18's critical catalysts include US Q1 GDP (First Estimate) on Monday, expected to show significant slowdown to just 0.4% annualized growth; PCE Inflation Data on Wednesday, with the Fed's preferred measure expected to ease to a four-month low of 0.1% in March; ISM Manufacturing PMI on Thursday, providing insight into manufacturing resilience amid trade tensions; Major Earnings Releases from Apple, Microsoft, Amazon, and Meta throughout the week, offering perspective on technology sector health and AI capital spending trends; Bank of Japan Decision on Thursday, with the quarterly outlook providing insights into global trade impact; Chinese PMIs on Friday, revealing initial tariff impact on manufacturing activity; and the April Jobs Report on Friday, with projections showing 130K jobs added (down from 228K in March).