Did We Dodge DOGE?
The five D’s of dodgeball, as famously quoted in the movie “Dodgeball: A True Underdog Story,” are Dodge, Duck, Dip, Dive, and Dodge again. These are the fundamental movements players use to avoid being hit by a thrown ball. In dodgeball, you win by not dropping your ball or by catching a ball thrown by the opposing team. We have experienced some of these D’s so far this year in the economy and financial markets. While first quarter GDP posted a slightly negative number due to higher imports (a result of dodging tariffs), we have so far avoided significant inflationary pressures and a recession. Financial markets took a dip and dive in March and April, but have rebounded to new highs. Major DOGE cuts have largely been ducked in the passage of the latest tax bill.
Dodgeball is a zero-sum game. The broader economy is often characterized by positive-sum interactions, where innovation, trade, and increased productivity can create wealth and benefits for all participants. The concept of zero-sum thinking can be problematic if it leads to the belief that economic growth is always a competition where some must lose for others to win. The White House said on Tuesday that it would be implementing a 50% tariff on copper, causing copper futures to jump over 17% this week. The administration also threatened a 200% tariff on pharmaceutical imports. Semiconductor tariffs are also in the works. Markets have been shrugging off the latest tariff pronouncements, but eventually this could begin to bite earnings. Many companies are indicating that they will absorb most of the tariff costs, though some will be passed on in the form of higher prices. How much remains to be seen.
Originally, DOGE (Department of Government Efficiency) cuts were targeted at about $2 trillion out of a $7 trillion federal budget. That was scaled back to $1 trillion, and looks to be closer to about $190 billion that will be finally realized. The “One Big, Beautiful Bill,” also known as a rescissions package, includes $9.4 billion in cuts, with a significant portion attributed to initiatives identified by DOGE. These cuts aim to eliminate waste, fraud, and abuse in the federal government. In total, DOGE cuts amount to about 2.7% of the Federal budget, much less than originally proposed.
The Dismal Science Versus Perpetual Optimists
The consensus forecast among economists suggests that growth will slow down over the coming quarters as higher tariffs weigh on earnings, capital spending, and consumer spending trends. The consensus forecast among stock analysts suggest earnings acceleration over the coming quarters. These two views are inconsistent. We will receive more color from companies shortly as earnings season gets underway, regarding how these competing forecasts may resolve. The outcome is probably somewhere in between the top-down economist views and bottom-up analyst forecasts.
S&P 500 earnings are expected to increase 5.0% in the second quarter over the prior year, down from 13.3% in Q1. Revenue growth is expected to slow to 4.2% from 4.9% in Q1. Six of the eleven S&P 500 sectors are expected to deliver earnings growth in Q2, led by Communications Services and Technology. The Energy sector is expected to be the biggest drag on earnings growth due to weakness in the underlying commodities. Looking ahead, earnings are expected to increase 6% in Q3 and 7% in Q4. For all of 2025, earnings are expected to increase by about 9%. That would be a healthy outcome if realized, but we are cautious.
Fed Up with the Fed
A majority of Federal Reserve officials at their meeting last month expected they would be able to resume interest rate cuts this year, but only two voiced support for a rate cut as soon as July. Officials who believed lower rates would be appropriate later this year thought those moves could be justified by a weaker labor market or more modest (and temporary) inflation pressures from tariffs. But the minutes noted that a meaningful minority of officials thought inflation had not made enough progress toward the Fed’s 2% goal to justify lowering rates, even before any larger effects from tariffs become evident in the months ahead. The White House has been pressuring Fed Chairman Powell to cut interest rates further, but to no avail thus far.
The S&P500 and Nasdaq are both up about 6% this year despite all of the bobbing and weaving in markets and interest rates. Against a tumultuous backdrop, the 10-year Treasury yield has traded in a range of 4.0-4.8% over the past six months, and now sits at 4.4%. While revenue from tariffs has exceeded $80 billion so far this year, there are unintended consequences from all of this tariff upheaval. For instance, a 10% tariff on Costa Rica was imposed in April. That could cause a major problem because all of the baseballs used by Major League Baseball (over one million per year) are made in Costa Rica. That alone makes this trade issue worth solving amicably! More progress is needed on trade and tariffs before this gets resolved, meaning risk for second half earnings. For now, we will dodge, duck, dip, dive, and dodge again, and keep our eye on the ball for longer-term investment opportunities.
Sofia Vergara turns 53 today while Singer Jessica Simpson turns 45. Also, Philadelphia native Jeff Bergman, who voiced Daffy Duck along with Mel Blanc, turns 65 today. That’s all folks.
Christopher Crooks, CFA®, CFP® 610-260-2219