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May 1, 2025 – U.S. GDP unexpectedly contracted by 0.3% in the first quarter, the first decline since 2022, largely due to a surge in imports ahead of anticipated tariffs. Despite this GDP contraction, major tech companies like Alphabet, Microsoft, and Meta reported quarterly earnings, indicating continued strength in areas like advertising and cloud computing. However, concerns remain about the broader economic outlook due to uncertainty surrounding tariffs, potentially leading to higher prices, weaker employment, and a challenging environment for the Federal Reserve regarding inflation and interest rate policy.

//  by Tower Bridge Advisors

Surprise GDP Decline and a Mixed Economic Landscape
The U.S. economy unexpectedly contracted in the first quarter of 2025, with the gross domestic product (GDP) declining at an annualized rate of 0.3%. This marks the first such contraction since 2022. A primary factor in this downturn was a significant surge in imports, as businesses increased their inventories in anticipation of upcoming tariffs. This import surge substantially impacted overall GDP, resulting in a record drag from net exports, subtracting nearly five percentage points. While consumer spending saw a modest increase of 1.8%, the slowest pace since mid-2023, federal government spending also decreased. Consequently, the dynamics of international trade emerged as the dominant influence on the quarter’s economic contraction.

This increase in imports was a direct consequence of the Trump administration’s evolving trade policies, with initial tariffs taking effect during the first quarter and further escalations anticipated in the second. The urgency to import goods pushed the growth rate of imports to its highest level since the recovery from the pandemic in the third quarter of 2020. Despite the reported decline in headline GDP, some economists have pointed to underlying resilience in domestic demand, evidenced by a 3% rise in final sales. It is important to note, however, that this GDP report reflects past economic activity, and ongoing uncertainty surrounding trade tariffs and volatility in the financial markets has continued into the current quarter.

Looking forward, businesses and economists are increasingly concerned that these tariffs could lead to higher consumer prices and potentially further negative GDP growth and job losses if the administration does not adjust its approach or secure trade agreements. The Federal Reserve also faces a complex situation, as tariffs could contribute to both increased inflation and weaker economic momentum, thereby complicating its dual mandate of maintaining price stability and full employment.

Strong Tech Earnings Contrast With Broader Uncertainty
The current earnings season has revealed a bright spot in the performance of major technology companies. Alphabet, Microsoft, and Meta have all reported robust first-quarter earnings. Collectively, these three firms achieved an average year-over-year revenue growth of 13% (ranging from 12% to 16%), while their operating profits increased between 13% and 27% over the same period. These results suggest that certain segments of the economy continue to perform well, with spending on areas like advertising, cloud computing, and enterprise applications holding up against earlier concerns of a slowdown. Furthermore, these tech giants are making substantial ongoing investments in artificial intelligence (AI) infrastructure, with combined capital expenditure plans exceeding $200 billion for the year, largely directed toward AI data centers.

However, the economic landscape appears less favorable for companies in other sectors, such as travel and leisure. Executives in the airline and hotel industries have noted that weaker consumer sentiment and expectations of rising prices due to tariffs are negatively impacting bookings. Specialty retailers also face a challenging environment, lacking the scale of larger competitors like Amazon, Walmart, and Costco, which allows for more favorable negotiation of tariff impacts. A key question remains whether new trade deals will be established before existing pre-tariff inventories are depleted.

The recent GDP report suggests that many companies did indeed build up inventories ahead of the “liberation day” tariffs. Because import figures are subtracted from GDP to avoid double-counting when goods are sold, the report highlighted a -5% contribution from net exports, largely due to the high volume of imports—a figure significantly larger than in typical periods. Data on the “change in private inventory” suggest that there could be several months’ worth of extra inventory currently held. Consequently, the ultimate impact of the tariffs on consumer spending will depend heavily on the timing of any future trade agreements.

Fed Navigates Employment and Inflation Amidst Uncertainty
Recent employment data indicates a potential softening in the labor market. This morning’s initial unemployment claims report revealed a spike in filings to 241,000, exceeding the anticipated 225,000. While this is just one data point, it aligns with other reports suggesting a weakening in job openings and announced layoffs from several large companies, such as UPS, indicating a likely trend toward worsening unemployment as the year progresses. However, the Federal Reserve has signaled its intent to await more definitive confirmation of this deterioration in official government reports before considering further reductions in interest rates.

Inflation continues to be a concern, remaining above the Fed’s target rate of 2%. The first-quarter core PCE (personal consumption expenditures) price index, the Fed’s preferred inflation gauge, came in at 3.5%, an increase from the 2.6% recorded in the fourth quarter of 2024. A stabilization or decrease in the inflation rate would provide the Fed with more flexibility to support economic growth through a more accommodative interest rate policy. Given the inflationary expectations associated with the Trump administration’s trade and tariff policy changes, most economists currently do not anticipate any interest rate cuts before June.

Finally, the S&P 500 index has shown a strong recovery, increasing by 11% since its low on April 8. However, there are concerns about the sustainability of this sharp rebound, particularly given the high degree of uncertainty surrounding tariffs and their yet-to-be-fully-realized effects on businesses and consumers. Many companies have adjusted their outlooks to reflect this uncertainty. In our view, the current economic environment feels more like the eye of a storm rather than a clear path forward, and therefore, a cautious approach to investment remains warranted. Our seatbelt sign remains “on.”

Country singer Tim McGraw turns 58 today, actor Jamie Dornan (Fifty Shades of Grey) turns 43 and quirky filmmaker Wes Anderson turns 56.

Christopher Gildea 610-260-2235

Tower Bridge Advisors manages over $1.3 Billion for individuals, families and select institutions with $1 Million or more of investable assets. We build portfolios of individual securities customized for each client's specific goals and objectives. Contact Nick Filippo (610-260-2222, nfilippo@towerbridgeadvisors.com) to learn more or to set up a complimentary portfolio review.

# – This security is owned by the author of this report or accounts under his management at Tower Bridge Advisors.

Additional information on companies in this report is available on request. This report is not a complete analysis of every material fact representing company, industry or security mentioned herein. This firm or its officers, stockholders, employees and clients, in the normal course of business, may have or acquire a position including options, if any, in the securities mentioned. This communication shall not be deemed to constitute an offer, or solicitation on our part with respect to the sale or purchase of any securities. The information above has been obtained from sources believed reliable, but is not necessarily complete and is not guaranteed. This report is prepared for general information only. It does not have regard to the specific investment objectives, financial situation or the particular needs of any specific person who may receive this report. Investors should seek financial advice regarding the appropriateness of investing in any securities or investment strategies discussed in this report and should understand that statements regarding future prospects may not be realized. Opinions are subject to change without notice.

Filed Under: Market Commentary

Previous Post: « April 28, 2025 – Markets rallied as the Trump Administration suggested tariffs might be reduced against China and that ongoing negotiations with almost 100 countries are progressing, although no deals have yet to be announced. But even with tariff reductions, the headwind will still likely be the greatest in a century. So far, the impact is hard to measure as few tariffed goods have reached our shores. Early Q1 earnings reports show little impact through March, although managements have been loath to predict their ultimate impact. Stocks are likely to stay within a trading range until there is greater clarity regarding the impact of tariffs.
Next Post: May 5, 2025 – Investors overreacted to Trump’s early tariff overreach but may have gotten a bit too complacent that everything is now back on a growth path. While there are few signs of pending recession, the impact of tariffs already imposed are just starting to be felt. So far, no trade deals have been announced although the White House claims at least a few are imminent. The devil is always in the details. Congress will start to focus on taxes. Conservatives may balk but there is little indication to suggest they won’t acquiesce to White House pressure once again. »

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  • May 22, 2025 – Memorial Day Weekend is typically the unofficial start of summer for many. However, this year has been anything but typical. Corporate earnings have been holding up based on recent company reports and outlooks. Tariffs have dented a few earnings reports, but the consumer continues to spend. Credit spreads are not indicating a recession yet, although interest rates have been on the rise as Congress works on a spending resolution bill. Markets gave back some of their recent gains yesterday but are still only about 5% from their all-time highs. Not quite bear market territory. Anyone traveling this weekend to a national park should remember to bring their bear spray.
  • May 19, 2025 – Stocks have clawed back all their post-Liberation Day losses as the perceived impact of tariffs have lessened. But now comes the hard part. Whatever tariffs are imposed will have economic consequences that we are only just starting to see. The big tax bill as originally proposed is a budget buster. 10-year Treasury yields are now back above 4.5%. With hindsight equity investors overreacted after Liberation Day. The subsequent rally may have gone too far as well.
  • May 15, 2025 – Following a big rebound, the S&P 500 is flat YTD but trades at a high valuation of 23x forward earnings. Consumer spending faces headwinds from rising student loan defaults and a cooling housing market. While recession fears have eased, the economy is slowing and inflation trends remain uncertain.
  • May 12, 2025 – China and the United States have agreed to reduce tariff rates on each other by 115% leaving our tariff rate on Chinese goods at 30%. Since shortly after the shock of Liberation Day that sent equity investors into panic mode, there has been a gradual retreat from an overbearing tariff framework outlined that day. Today’s suspension of tariffs, pending further negotiations may not be a final step. But it comes right out of the Trump playbook that shoots for the moon first and then settles into a much more compromised reality later. While tariff negotiations continue not only with China but the rest of the world, investors can now focus on the next leg of the Trump agenda, tax cuts.
  • May 8, 2025 – The Federal Reserve on Wednesday held its key interest rate unchanged in a range between 4.25%-4.5% as it awaits better clarity on trade policy and the direction of the economy. While uncertainty about the economic outlook has increased further, the Fed is taking a wait and see stance toward future monetary policy. Meanwhile, the S&P 500 Index has just about fully recovered its losses following the April 2nd “Liberation Day” when major tariffs were announced on U.S. trading partners. The bounce in risk assets is welcome, but we are still looking for white smoke signals showing that progress on inflation and tariffs is being made.
  • May 5, 2025 – Investors overreacted to Trump’s early tariff overreach but may have gotten a bit too complacent that everything is now back on a growth path. While there are few signs of pending recession, the impact of tariffs already imposed are just starting to be felt. So far, no trade deals have been announced although the White House claims at least a few are imminent. The devil is always in the details. Congress will start to focus on taxes. Conservatives may balk but there is little indication to suggest they won’t acquiesce to White House pressure once again.
  • May 1, 2025 – U.S. GDP unexpectedly contracted by 0.3% in the first quarter, the first decline since 2022, largely due to a surge in imports ahead of anticipated tariffs. Despite this GDP contraction, major tech companies like Alphabet, Microsoft, and Meta reported quarterly earnings, indicating continued strength in areas like advertising and cloud computing. However, concerns remain about the broader economic outlook due to uncertainty surrounding tariffs, potentially leading to higher prices, weaker employment, and a challenging environment for the Federal Reserve regarding inflation and interest rate policy.
  • April 28, 2025 – Markets rallied as the Trump Administration suggested tariffs might be reduced against China and that ongoing negotiations with almost 100 countries are progressing, although no deals have yet to be announced. But even with tariff reductions, the headwind will still likely be the greatest in a century. So far, the impact is hard to measure as few tariffed goods have reached our shores. Early Q1 earnings reports show little impact through March, although managements have been loath to predict their ultimate impact. Stocks are likely to stay within a trading range until there is greater clarity regarding the impact of tariffs.
  • April 24, 2025 – “Headache” is the official Journal of the American Headache Society. Europe and Asia have their own publications and consortia devoted to the study of headaches and pain. The incidence of headaches may have increased for those following the stock market gyrations over the past few months, though resolution of tariff issues would go a long way toward calming markets down. Eventually. Near-term impacts on inflation and the economy may create some pain points and additional volatility if consumers and businesses retrench.
  • April 21, 2025 – Tariffs raise barriers that make imports less desirable. They serve to reduce the balance of payments. But by protecting local producers of higher cost goods, they are inflationary. The attendant decline in the value of the dollar chases investment capital away, capital necessary if reshoring of manufacturing is going to be achieved. The goal of the Trump administration should be to find the balance that favors U.S. manufacturers but retains investment capital within our borders. So far, markets suggest that dilemma hasn’t been resolved.

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