After the Rally: Where LPL Research Stands on Stocks and Bonds

Jeff Buchbinder (00:00):

Hello everyone, and welcome to LPL Market Signals. Jeff Buchbinder here with my friend and colleague Lawrence Gillum. Normally at this time of year, I would start this podcast by asking Lawrence how he thinks his Tampa Bay Bucs did in the draft. But I'm not going to do that. He can tell me anyway. I'm not going to do that. I'm going to start with what we used to do back in the day on this podcast, which is share our frustrations with things breaking. And so my latest broken appliance is the washing machine. So for the last few days, we've been doing our wash at a neighbor's house. And we'll be getting a new washing machine delivered tomorrow. So I've been on with Lowe's for the last, I don't know, 45 minutes on hold. Didn't get anywhere, so I gave up <laugh>. That's my lead-in to this week's Market Signals. Lawrence, I hope all of your appliances are functional, and I also hope you like the Tampa Bay draft.

Lawrence Gillum (01:03):

Yes, all my appliances are functional, thankfully. Good. hopefully you get your neighbor a nice present, a nice thank you present at the end of this. And then I am pleasantly surprised by the Bucs in the draft. You know, it's, you never know what's going to happen with this draft. And I'm going to go ahead and call it, the Bucs are going to win the Super Bowl. I'm not going to say a date, but I'm going to say they're going to win the Super Bowl.

Jeff Buchbinder (01:28):

I like.

Lawrence Gillum (01:29):

There's always an out.

Jeff Buchbinder (01:30):

I'll make a similar call and say that my hometown, Kansas City Chiefs will also win a Super Bowl at some point, hopefully in the Mahomes era for another one. So with that intro out of the way, let's get into the market content. That's why you're here. It is Monday afternoon, April 28, 2025, as we're recording this, and here's our agenda. Start with a recap. Just a huge rally last week. The Fed was certainly part of it. So Lawrence, I'm glad you're on to create a little stock bond portfolio for us here. Bond market outlook, you know, bond market's been really volatile lately, especially Treasuries. In fact, in the LPL Research department, I think we've probably got more questions about bonds than stocks lately, which is pretty uncommon. Next, Weekly Market Commentary is about the softer tone in negotiations with China and the rally that ensued after that.

Jeff Buchbinder (02:35):

Although the rally really started with the Fed, but that's not an all-clear sign. So we're still sending a message to folks that we want to be a little bit careful with adding risk here because of how far we've come in a short period of time. So that's the general tone of the Weekly Market Commentary this week, which you can find on lpl.com. Then we'll finish up with a week ahead preview. And while it is a busy week for economic data, also a very busy week for earnings. Meanwhile, we have to watch the trade headlines as we go through all that. So, starting with the market recap. So, you know, as I mentioned, the Fed was part of it because Trump said he is not going to fire Powell. That was the start of the big rally. Then we got some dovish Fed speak that Lawrence, you can comment on followed up by the softer tone on China coming out of the White House, Trump even saying he might lower the tariffs even before they get a deal, and that he plans to be, quote unquote, very nice.

Jeff Buchbinder (03:39):

Anyway, the market loved that. And we ended up not just with a four and a half percent rally last week in the S&P, but we were up seven from Tuesday through Friday. One of the biggest four-day rallies that you'll ever see. Of course, earlier this month, we had a one-day rally that was around 10. Still, in a normal market environment, that is a huge four-day rally led by the sectors that have been hit hardest in this sell-off recently. So you've got communication services, consumer discretionary, and tech all up over six. They have led the way down, therefore, they're leading the way up. And those are also certainly sectors affected by tariffs. And then on the other side of the coin, of course, you have the defensive sectors, which have led month to date until this past week.

Jeff Buchbinder (04:30):

You have staples, the only sector down. You have utilities marginally higher and then real estate pretty much flat. So that is one of the most, let's call it risk on sector mixes that you will ever see with the, let's call them riskier sectors or high beta, doing so well. And then the defensives lagging behind. So that was really the story in a market like that. It's hard for international to keep up. And generally speaking, international did not keep up. Because the dollar was up last week. But you did have pretty good performance out of Latin America. Remember Brazil and Mexico, Brazil got the initial 10% reciprocal tariff. So, you know, signaling a country that maybe doesn't require as heavy of a lift on trade to get to a deal. And then of course, Mexico under the USMCA along with Canada certainly going to get a better deal when all is said and done. So, makes sense that those countries would fare pretty well lately, and they did last week. So so, you know, I alluded to this, Lawrence, here's the bond market performance for last week. The Fed was really right in the middle of this, huh?

Lawrence Gillum (05:51):

Yeah, absolutely. So we did see some of the tone around Fed independence get walked back a little bit last week. So that certainly helped calm a lot of the fears out of the bond market. Certainly Fed independence is paramount when you talk about Treasury securities and the ability for the Treasury securities to act as they should within a kind of, call it a higher inflationary environment. So if Fed independence was at risk there was concern that there would be some premature rate cuts which would potentially cause inflationary pressures to kind of reignite. Thankfully, that was walked back a little bit last week. So we did see a rally out of the rates market. The aggregate bond index, the core bond index up about 70 basis points, up 2.7% on the year.

Lawrence Gillum (06:38):

That was really led by the mortgage-backed securities index also up 70 basis points and up 2.8% on the year as well. What's interesting though, is despite all the volatility that we've seen out of the Treasury market, it's up 3% this year and was up about 50 basis points last week. So a lot of volatility that we'll touch upon in a second, but still positive returns so far year to date. Out of the kind of the riskier sectors we did see some of the riskier fixed income markets, high-yield bond sector up 1.3%, a lot of spread tightening. You know, I guess to your point, there was a risk on tone in the equity markets. The credit markets traded in concert with the equity markets last week, as well so we did see spreads tighten a lot out of the high-yield bond market, and that showed up with a positive 1.3% return there. And then preferreds, we are neutral preferreds. I still like preferred from an income perspective. They had a great week last week, up 1.1% for the week, down 30 basis points on the year, though. So there has been some challenges in that market. But last week was a good one.

Jeff Buchbinder (07:47):

Yeah, no doubt risk was good last week. Not good today, I'm not sure how much spread widening we're getting today, but the stock market is down - little less than 1% as we're recording this. And that's certainly not an environment where you would think high yield would work. I mentioned the dollar you know, up a little bit more than 1% after the big sell-off recently, so that's encouraging. This has been one of the biggest downdrafts in U.S. asset positioning that we've seen. So if you just, you know, add up how much U.S. equities the world owns, how much in dollars they own, how much Treasuries they own, right? Kinda add it all up. It's really the positioning has gotten decidedly negative. So when that trade, which has, let's call it unwound, rewinds and you know, you recapture some of those losses, you're going to see presumably a rally in Treasuries, a rally in the dollar, and gains in in stocks.

Jeff Buchbinder (08:52):

So, you know, pretty good picture last week, certainly we've made a lot of progress. We've cut the stock market losses in half, bond market's been up, and it's still up year to date. But for the stock market, you've still got some, a little bit of a hole to dig out of here, which we think will happen between now and the end of the year. Just might be a bumpy ride. So let's continue on the bond market discussion, Lawrence, you titled your section unpacking recent bond market volatility. So we'll start with the 10-year and certainly that has been a wild ride lately, no doubt.

Lawrence Gillum (09:29):

It has been. And I guess like your washing machine, there was concerns about the bond market breaking or being broken, but it has not and we don't think that it will be broken anytime soon. But there has been a lot of volatility in the fixed income markets. What we're showing here is the 10-year Treasury yield over that, call it five-day trading period at the beginning of April. We saw the 10-year Treasury yield spike higher by about 71 basis points over the course of those five trading days. You don't tend to see that very often, thankfully, right? Because the Treasury market tends to be the market where a lot of these other consumer loans get priced off of. So any sort of big negative reaction out of the Treasury market, it does flow into the real economy like mortgage rates, et cetera.

Lawrence Gillum (10:14):

So we don't tend to see this environment very often, but we did see it at the beginning of April, our conclusion was frankly that it wasn't any sort of pushback on American exceptionalism or foreign selling. It looked like to us that there was just a de-leveraging event or several de-leveraging events, some unwinding of some of these leveraged trades, these basis trades, these swap spread trades, these things that that you know, that hedge funds have tended to gravitate towards over the call it, past couple decades. And because these trades tend to be smaller in nature, they get amplified by a lot of leverage. So when you see a spike higher in yields like that that tends to beget more selling on top of more selling, et cetera. And that's how you get these, these yields, spikes and complicating issues is on the next slide,

Lawrence Gillum (11:06):

we talk about just how the positioning within some of these primary dealers are already stretched. So primary dealers are these kind of asset or these banks, these large banks that tend to provide a kind of buyer of last resort, if you will, during some of these fixed income market, these Treasury market sell-offs. But what we're showing here on the screen is that the positioning within these primary dealers and their ownership of Treasury securities is at the highest levels they've been in quite some time, if not ever this high, and a primary function of that is that the Treasury Department continues to issue out and auction off more debt, as we've talked about a lot on this podcast, you know, the Treasury debt outstanding sits at around 36 trillion.

Lawrence Gillum (11:57):

So there's a lot of debt outstanding. A lot of the primary dealers are required to own a lot of this Treasury debt. And unfortunately, because they're required to own it that means that in times of stress, they are frankly unable to provide that backstop within the Treasury market. So, the selling that we saw on the first part of the week de-leveraging of some of these leverage positions that was amplified by frankly, just a lack of liquidity and the lack of the ability for these primary dealers to take the other side of those positions. So it was a really bad scenario. You had a de-leveraging into a market that was pretty illiquid, and that really pushed yields higher than perhaps they should have gone all else equal. But it was a challenging week. And of course, what happens in the bond market doesn't stay in the bond market, that does flow into other markets as well. And one of the reasons why we were getting a lot of questions about the bond market, because it really was the kind of the center of what really broke down beginning of this month.

Jeff Buchbinder (13:06):

Yeah. And certainly that volatility in the Treasury market spilled over into the equity market. It was all kind of one story. Before we go further, Lawrence, just real quick, define basis trade.

Lawrence Gillum (13:18):

So basis trade. So if you look at, yep. So the basis trade is when a hedge fund or an investor out there you can either buy a Treasury security and then sell a futures position like a 10-year Treasury future position as well as owning a 10-year Treasury yield. The difference between those two positions is the basis. It tends to be pretty small. But the expectation is that over time, those two instruments, the yields on those two instruments will converge. And you can you know, book a profit that way, but because they are small hedge funds, other investors tend to leverage those up, you know, 10, 20 times to amplify the gains. But when things go against you, like they did the beginning of April because of all that leverage associated with it you know, kind of unwinding that position forces other investors to unwind their position, which forces other investors to unwind their positions as well. So, to me, it seems like you're picking up nickels in front of a steamroller, but it's been a profitable trade for a lot of times, but then when it becomes unprofitable, it becomes unprofitable pretty quickly.

Jeff Buchbinder (14:34):

Yeah. Then you need a term for it, like "vol-mageddon", <laugh>, you know, or the long-term capital management crisis.

Lawrence Gillum (14:41):

Which is, that was one of the trades that helped blow them up. So that's spot on. So it's these trades that they seemingly do great for a little while until they don't. And that's when you run up against some market volatility that disrupts a lot of other markets as well.

Jeff Buchbinder (15:03):

Thankfully, we haven't seen any big institutions fail this year, at least not to my knowledge. Hopefully that continues. Certainly we don't, we wouldn't have that expectation. All right. So next chart. Yes, that's,

Lawrence Gillum (15:16):

That's correct. Yep. So the other issue, or the other question, I guess, out of the bond market is because of the volatility that we've seen that particularly centered around, in our view, that de-leveraging event that took place in early April is has the Treasury market lost its haven status? Are investors selling, primarily foreign investors, selling U.S. Treasuries and investing in non-U.S. developed bonds? And if you look at this chart, you would, your ultimate conclusion would be absolutely, this looks at the ratio between the U.S. Treasury Index versus the non-U.S. Treasury index. So when the lines are going higher, that means U.S. Treasuries are outperforming. But as you can see over the, you know, the most recent period on this chart non-U.S. developed Treasury markets or government markets, really have outperformed the U.S. Treasury markets fairly significantly.

Lawrence Gillum (16:06):

So, a broad-based sell-off in the Treasury market and you've seen a lot of investors potentially move into these you know, these other developed government bond markets. I don't have the second part of the slide, but if you zoom out you would see that the type of performance is actually relatively normal. So despite all the hand wringing about U.S. losing its exceptionalism and its haven status, you know, we don't think that's true. We still think that the Treasury market will be the destination for investors if things were, you know, if economic conditions collapse or if the Fed starts to cut aggressively, we do think the investment community will come back to the Treasury market, in particular, just given the size of the market, the liquidity of the market.

Lawrence Gillum (17:01):

There's other markets out there, the German bund market, the, you know, the Japanese government bond market, but they don't have the same sort of liquidity and size of the U.S. bond market. So despite the kind of near term concerns about the U.S. losing its haven status as it relates to Treasury securities you know, I would argue that's overdone. It's just one of those markets that when things start to go bad investors gravitate towards this market. And I expect that to continue on a, you know, on go forward basis, despite all the concerns out there right now.

Jeff Buchbinder (17:42):

Yeah. I guess cleanest dirty shirt in laundry, right?

Lawrence Gillum (17:47):

That's right. And there's no other.

Jeff Buchbinder (17:49):

We're not predicting, just to be clear, we're not predicting a major global economic downturn or anything of this or aggressive Fed rate cuts in response to economic weakness.

Lawrence Gillum (17:59):

Yeah, that's right.

Jeff Buchbinder (18:00):

Not at all. In fact, I think it's fair to say our recession forecast or probability is 50%. But that was set before last week. So if we updated that today, I think it would probably come down a bit.

Lawrence Gillum (18:14):

Well, if and when, I mean, recessions as we know are, they're part of the economic cycle, unfortunately. But, so when a recession does happen, or if any sort of geopolitical event or even macroeconomic event does occur you know, the Treasury market, I would argue, would be the end destination for a lot of investors still just given and the size and liquidity of that market. There is a risk, though, associated with this market and that is the amount of foreign investors that own Treasury securities. Jeff, you mentioned earlier about the number of foreign investors that own Treasury securities and corporate bonds and equities, et cetera. Foreign investors own about 30% of the total marketable debt outstanding for Treasury securities. That's those are the white bars there. And they've increased their ownership over time relative to other investors in the Treasury market.

Lawrence Gillum (19:08):

So the risk is that if you know, one of the end policy goals of the Trump administration is to kind of either erase or minimize these trade deficits that we have with other countries. But one of the byproducts of having a trade deficit with another country is that one country's trade deficit is another country's trade surplus. And these other countries take their dollars that they get from us, and they reinvest it back into our market, either through equities or corporate bonds, or even Treasury securities. So if the end goal is to reduce the deficit amongst other countries, that would likely mean that foreign investors would be a smaller part of the of the equation here, which given their ownership right now, again, 30% of our bonds are owned by non-U.S. entities that that's going to make funding our deficits particularly challenging.

Lawrence Gillum (20:10):

So, you know, there's a, you know, there's an argument that you know, if we do see foreign investors start to move out of our bond market, we could see higher yields here to attract other demand which would be counterproductive to the Trump administration's goal of keeping interest rates low. So things to consider. It's not, obviously when you're dealing in a global environment there are, you know, secondary, tertiary type of outcomes when dealing with trade deficits and surpluses and capital surpluses, et cetera. So something to pay attention to, our view is that, again, foreign investors are not going to sell their bonds. They're not going to go away frankly, just because there aren't a lot of other alternatives out there. But it is a risk as they are such a big buyer of our Treasury securities.

Jeff Buchbinder (21:02):

So, all that said, Lawrence, do you still have confidence that the 10-year Treasury will be in the neighborhood of four at the end of the year?

Lawrence Gillum (21:10):

I do. So, assuming we escape recession, or at least you know, a deep recession that causes the Fed to cut rates more than what is priced into markets, I do think that we're kind of in this range for the foreseeable future. Our year-end target is 3.75 to 4.25. We're at 4.22 now. So I think we're kind of in this ballpark especially when you consider what's priced into markets as it relates to the Fed rate cutting cycle. Markets have priced in around three and a half cuts this year, probably too many cuts. So we could see the long end of the curve, the 10-year Treasury yield, move higher over the course of this year. But I think as we get towards the back half of this year, when markets start to get more clarity on rate cuts this year and rate cuts next year we could see you know, a 4% or even lower 10-year Treasury yield. So, I don't know that we're going to get back to 5% absent any sort of reacceleration of inflation, which isn't our base case, of course. So I think we're past the cycle highs in the 10-year Treasury yield. But it maybe stuck in this, you know, 4.24% range for, you know, the next couple months if not next couple quarters.

Jeff Buchbinder (22:30):

Very good. Thank you for that. Let's keep moving and we'll get to the Weekly Market Commentary, which is on equities, but certainly Lawrence, I want to hear from you when we get to the week ahead preview, and then certainly anything you want to add on earnings. So, we titled this, you know, the softer tone on China is reassuring and encouraging. But if you read the commentary, again available on lpl.com, you'll see that by no means do we think this is an all-clear sign that, you know, softer language on China is coming. When we talked about the bottoming process and the things we'd have to see, you know, certainly there was a technical element to it. Pretty much every technical box that we wanted to check has been checked. And, you know, that certainly is reflected in this move back to near 5,500 on the S&P from a closing low, slightly below 5,000, and an intraday low of 4,835.

Jeff Buchbinder (23:34):

So you know that you can check the technical boxes, but the other key box to check for us was better headlines on tariffs. And yes, we're getting better headlines, but nothing's really happened yet. It's just been talk, right? All we've gotten is, well, I shouldn't say nothing. We got a 90-day pause, which certainly helps, but those tariff increases are still out there. We certainly don't know for sure if everybody's going to be locked in at 10. We certainly don't know for sure if China's going to go down to 60 from wherever they are now. I think it's 145 <laugh>, but there's even higher levels of tariffs on certain industry, certain goods. So let's call it 145. People certainly in the market expect that to come down. So we're inching forward in terms of better headlines, but we still got a ways to go on that front.

Jeff Buchbinder (24:29):

So just want to throw that out there. Turning back to the technicals here, we would call this no man's land. We are bumping up against some of these resistance levels. We got really within about a hundred points of the 50-day here on this bounce. So pretty close. If you think the 50-day or the 200-day, which is 5,746 right now, if you think 200-day holds, you just don't have a lot of upside. And remember, the high end of our S&P 500 target is 5,800. So between where we are now, again, near 5,500, doesn't allow for a ton of upside. So if you figure the technical risk reward trade off, we think it just tilts slightly downside. I don't want to sound too bearish, but we're kind of, you know, in no man's land between these moving averages and this uptrend turning to earnings a little bit.

Jeff Buchbinder (25:24):

Corporate America has very little visibility. We've gotten good earnings results so far for the first quarter, particularly financials and Alphabet. A lot of the growth we've seen, and I'll show you a table with the numbers here in a little bit, but a lot of the growth we've seen in earnings is from Alphabet. It's just that big. And then the banks certainly have chipped in. That's really where the upside has come from. But the problem is guidance. Because of the trade uncertainty, it's really hard for companies to provide guidance. So we've actually seen roughly a 10% reduction in the number of companies that are giving annual guidance at this stage of earnings season. These numbers come from Bank of America. At this time, last year in earnings season, we had guidance from 27% of the S&P. This year we have 16.

Jeff Buchbinder (26:20):

So not getting as much guidance that was anticipated because of the uncertainty. It's really delaying the process of adjusting earnings estimates down. And that was another part of our bottoming process checklist, getting earnings estimates to a reasonable level. We're not quite there yet. Next, valuations. So there's a couple of really big caveats to this chart, but this is just showing that higher inflation tends to be accompanied by lower stock valuations. It's trailing P/E versus the annual change in the CPI. But one caveat is for this relationship to hold, you really have to go back to the sixties, seventies, and early eighties. That's where most of these low valuations are. This market's very different. The productivity, the use of technology in corporate America today warrants higher valuations, period. So if you chop off, this is a very long-term chart, it goes back to the 1960s.

Jeff Buchbinder (27:24):

If you chop off the old data points and just look at maybe the past 20 years, this relationship doesn't really hold. I mean, it holds, but barely. Still, we'll, stand by the statement, higher P/Es tend to come with lower inflation and vice versa. I mean, it's really just math. But you can run with high valuations for quite a while even if inflation is maybe bouncing around a little bit. So that's kind of one caveat. The other caveat is the market's going to look through this inflation, we think. Tariffs are a one time adjustment. And then from that point forward, so now we're talking about year end, you were just talking about that Lawrence, at year end, people are going to see, you know, they're going to have more visibility into the tariff landscape, right? And we're going to have more visibility into structural inflation, not just cyclical.

Jeff Buchbinder (28:19):

We'll call tariff inflation, cyclical inflation. We'll have more visibility into what inflation will be lasting, and that will better allow investors to price in inflation into stock prices. So right now, we have a little bit of an inflation problem. We're going to have to be patient. We think this limits upside to the stock market. So from technical analysis perspective, from an earnings visibility perspective, and an inflation perspective, we have some headwinds here that we think limit the upside to stocks. So 5,800 is the high end of our range for our year end S&P 500 target. You still need a 21 P/E to get there against 2026 earnings, which we just cut to 270, not cheap, not cheap. So again, at risk of starting to bearish, we just think the upside is a little bit limited here. And a lot has to go right.

Jeff Buchbinder (29:16):

And in particular, we need tariff rates to come down quickly. And we need some countries, frankly, to be down more than to just that 10% level where they are right now. Our expectation is maybe 10 percent's a floor because the Trump administration needs those dollars from tariff revenue to pay for the tax cuts that they're negotiating now. And will continue to negotiate for the next few months we'll see. More on that in future podcast episodes, <laugh>. But the floor to tariffs is probably not too far away from 10%. So any comments on any of that, Lawrence?

Lawrence Gillum (29:56):

Well, a couple things. I would say that just looking at your last chart, I think that it makes sense to, if you think about higher inflationary pressures that tends to come with higher interest rates and as you've talked about, you know, ad nauseum in this medium and others, that high interest rates tend to be a reason why you see lower valuations. So as long as the interest rate environment doesn't you know, significantly get away from the Fed, and we see higher yields that should help, you know, keep these valuations within the equity market, you know, relatively tame and calm. The other thing I would add is that we look at the corporate credit markets a lot and look at spreads and the corporate credit markets after a brief kind of you know, widening in terms of concerns about the economic conditions or even credit fundamentals, corporate credit spreads are back down to kind of historically tight levels.

Lawrence Gillum (30:51):

So even when you look at the corporate credit markets whatever is happening in the broader macro environment, the broader macro landscape, the corporate credit markets aren't really suggesting that company fundamentals are going to necessarily depreciate very much from current levels too. So I know there's a lot of noise out there, a lot of volatility, a lot of concerns. But if you look at just the markets themselves, they're not really suggesting a lot of you know, defaults that are going to spike high or anything like that. So, I think what we're seeing is a lot of volatility, a lot of noise but it's really not necessarily negatively impacting markets, at least in the corporate credit markets.

Jeff Buchbinder (31:34):

Yeah, I think one of the reasons why Treasury Secretary Bessent is comfortable targeting the 10-year yield is because equity markets will follow the lead of a strong Treasury market. Yep. At least in part. And if this tariff trade policy goes bad, it's going to be reflected both in higher yields and in a weak equity market. Right? We'll wait. Judgment remains to be seen. But for now, clearly the market is still a little bit nervous. So thanks for that, Lawrence. Let's preview the week and I'll just do a real quick update on earnings before we wrap. So just a huge week of data. We've got GDP, we've got the jobs report, we've got the ISM and then the busiest week of earnings season, 180 S&P 500 companies report this week, which is a lot. And we get four big techs, which include Apple Amazon Meta, and Microsoft. Easy to remember without looking it up. Two A's, two M's. And I believe Tuesday, Wednesday, Thursday, we'll get all of those. So I think the most important thing to watch there is capital expenditures, guidance, Alphabet last week gave us good guidance. They maintain their $75 billion capital expenditures plan for 2025. Hopefully, most, if not all of the other big AI players will do the same. That's what I'm watching this week. So, Lawrence, how about the economic data?

Lawrence Gillum (33:08):

Yeah, so economic data, as you mentioned, a lot of economic data this week. No Fed discussions. The Fed is in its self-imposed blackout period. There's a Fed meeting next week. So we won't have a lot of Fed conversation. We won't have any Fed conversation this week. So it is going to be a data driven week with all the economic data. The other thing I would point out too, that's not on here is that if Scott Bessent, Treasury Secretary Scott Bessent, to kind of bring back the draft lingo, he's on the clock. This will be his first Quarterly Refunding Announcement. The Treasury Department every quarter comes out and describes its borrowing needs as well as the composition of its borrowing needs. So, the announcement will come today in terms of their expected borrowing needs.

Lawrence Gillum (33:57):

The composition comes Wednesday. Wednesday could be a market mover if the Treasury Department decides to move away from primarily funding the government through shorter maturity T-bills, issuing longer maturity, coupon paying securities. It's not the expectation, despite the fact that Treasury Secretary Bessent, in his prior role, was pretty critical of the previous administration funding government, primarily through T-bills. Given the rate volatility that we just talked about, there is no expectation to change that strategy, just at least not yet. So it'll be interesting though, because this is kind of his, I mean, he has been in the news a lot lately but as it relates to the Treasury Department this is a big week for you know, his ability to, again, calm the rates market by announcing their funding needs and the composition of their borrowing needs. So it seems like we're seeing a lot of Scott Bessent, but markets so far, you know, have taken his comments in stride and you tend to see a calming reaction out of markets when he is out there. So hopefully that remains in place this week as well for the QRA as it's called.

Jeff Buchbinder (35:14):

Yeah, more Scott Bessent and less Peter Navarro seems to be market friendly. So do you think when we get to the end of the week and we see all this data, Lawrence, that the market will be pricing in slower economic growth and maybe a smidge more on the Fed rate cut side, or no?

Lawrence Gillum (35:32):

You know, it's interesting because you have this divergence between the soft data, the survey data, and the hard data, which is kind of a lot of what we're showing here, the hard data has been relatively resilient. Markets have priced in kind of a slowdown in terms of first quarter GDP, which will come out when is that on Wednesday. So if that surprises to the downside, perhaps maybe we'll get a broader or a bigger concern about economic conditions deteriorating and more rate cuts. But the hard data has been relatively resilient despite all the softer survey data showing that the economy's headed for a contraction. So we'll have to see. I mean, there's enough data on this screen though to suggest that if it breaks negatively, we could be in an environment where the Fed would be forced to, you know, perhaps lock in its first rate cut in June, so we'll have to see.

Jeff Buchbinder (36:33):

Yeah, that certainly seems to be consensus. I guess something else that'll happen this week is we'll get the start of the wave of "Sell in May and Go Away" commentaries. Well, we will contribute to that <laugh>, but we're not quite there yet. So thanks for that Lawrence. Busy, busy week. All right, so here's, I'm not going to read all this, but here's our earnings dashboard for this week. And you see really solid 10% earnings growth. Three points above the consensus. When earnings season began, I mentioned, you know, banks and Alphabet, really the biggest drivers here. Communication services, healthcare and tech generating the most growth and contributing most to the growth. Those are two different things, right? How fast are you growing and how much are you contributing to the earnings growth overall? Which, you know, depends on the size of the sector. So those are areas we think you could find a lot of good earnings growth.

Jeff Buchbinder (37:27):

And, you know, perhaps this earnings season will be supportive of those sectors. We'll have to wait and see. By the way, we continue to like communication services. We have sort of consolidated our sector views and upgraded financials as part of that. So communication services and financials are now the favored LPL Research sectors. The only sectors that we have underweights on now are materials and utilities. So creating a pretty balanced view. We wanted to reduce our exposure to tariffs. So we pulled back a little bit on consumer discretionary and industrials, which are hit hard by tariffs and have had a really nice bounce over the last couple of weeks, along with the market. And then, you know, utilities and materials give you kind of a, as the two underweight, it's kind of a balance of sector, cyclical sectors and defensive sectors. So we think this gives us pretty good balance, but still a sector mix that can participate in the upside, certainly with communication services and financials.

Jeff Buchbinder (38:32):

So as I mentioned, we'll watch the guidance on capital expenditures from the big tech names. And then certainly we're going to watch for guidance, even though we're getting less guidance and it's more sort of hedged because of the limited visibility, any information is better than no information. And the good news, even with these clouded views of the world, is that the process of getting estimates down to where the market can believe them is ongoing. And we are making progress. Right now, 266 is consensus for 2025. We lowered our numbers to a range of 250 to 255. We'll see if it gets down there, but you know, we're about halfway done, let's call it. So when the market is comfortable with earnings estimates, we think that is a positive step in getting to more of an equilibrium and establishing a durable market low, in addition to the technical developments and better news on trade. So I think we'll end there. Any final comments, Lawrence? Any more draft insights?

Lawrence Gillum (39:44):

No, no.

Jeff Buchbinder (39:44):

Draft ideas, recommendations on a washing machine,

Lawrence Gillum (39:47):

<Laugh>, none of that. Just, it's a busy week. And LPL advisors, if you have questions, reach out. We'll, try to get your questions answered as soon as possible. It's going to be a busy week though.

Jeff Buchbinder (40:01):

And even if you don't have a relationship with LPL, find an LPL advisor in your neighborhood, I can pretty much promise you wherever you are, there's one or many <laugh>. So, thanks for that, Lawrence, really great to hear your insights on the bond market. The bond market has been very confusing and volatile lately, but sounds like things have started to calm down and you haven't lost confidence. I think generally speaking on the equity market, we're still pretty confident in the outlook. Just going to be a little bit of a choppy maybe near-term path to get back to hopefully where we started the year, if not higher. And certainly if the trade news is better than we think, you know, possibility certainly of doing even better than that, we'll have to see. So with that we'll wrap up. Thank you to everybody for listening to another LPL Market Signals, and thanks again to you, Lawrence. Everybody, have a wonderful week and take care.