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Market Recap
April stood out as one of the most historic months in recent memory. We not only witnessed the historic “Liberation Day” tariff announcement and the following market selloff, but also experienced a historic rally following the announcement to temporarily pause the tariffs.
Overall, while there are still many uncertainties surrounding the tariff policy, the market finally found its footing and steadily rebounded, supported by better-than-expected 1Q earnings season. And the S&P 500 “only” declined 0.8% in April.
From a sector performance perspective, two observations are noteworthy:
Technology and the Mag 7 (or FANG+) strongly came back in April. Big tech had been under significant pressure since the beginning of the year — starting with the shock caused by DeepSeek, followed by sell-side research reports citing data center contract pauses and the resulting skepticism around AI adoption.
Since the trade war began, Apple, Tesla, and Amazon have all faced various types of impact. However, based on the already-reported earnings of the Mag 7 and the technology sector, the overall condition remains healthy. AI spending plans are reiterated by many companies.
Technology is too important to the U.S. equity market. Its heavy weight in the U.S. stock market is the biggest representation of so-called American Exceptionalism. Therefore, the rebound of both the Mag 7 and the technology sector is generally a positive development.
However, on the other hand, Energy was the epicenter of the Liberation Day selloff, with declines far exceeding other sectors. During the subsequent market rebound, energy did not participate much, rising only 5.1% from 4/8 to 4/30. In both phases, energy was the worst-performing sector.
On the demand side, the temporary pause in tariffs did not ease concerns over a sluggish economic outlook. On the supply side, oversupply remains a concern, especially after Saudi Arabian officials expressed their unwillingness to cut production further and signaled they are okay with a prolonged period of low prices.
Therefore, even though the market warmed up after April 8 and a weakening dollar typically supports oil prices, the energy sector remained sluggish.
Mark believes that in the short term it might attempt a brief period of stabilization, but into the fall, crude could fall below the $50 level. When crude is this weak, it’s hard for the energy sector to perform meaningfully.
As of May 1, 70% of S&P 500 companies have reported their 1Q2025 earnings. Among them, 77% beat their earnings estimates — in line with the historical average — but the average surprise factor reached 8.7%, above the historical average of about 7.0%.
Of course, Q1 earnings were not significantly affected by tariffs, so continued strong earnings growth was to be expected. More importantly, although many companies mentioned tariffs and related uncertainties during earnings calls, the number of companies issuing negative guidance was not high compared to historical averages. As noted above, there are no signs of reductions in technology spending. Mentions of the keyword “recession” during earnings calls did not exceed historical frequencies either. Overall, the earnings season delivered better-than-expected results.
On the macro data side, many indicators were distorted by tariff-related policy effects, so we need to be cautious and focus on the essence behind the changes:
The preliminary reading of 1Q GDP is one example. The U.S. economy contracted -0.3% SAAR in 1Q2025. However, this contraction was mainly due to pre-ordering by businesses ahead of the tariff imposition.
Another metric, Final Sales to Domestic Private Purchasers — which excludes imports/exports, government spending, and volatile inventories — shows that the economy is still expanding at a 3% annualized pace. This is also a metric frequently cited by Fed Chair Powell, rather than the headline GDP.
In addition, many soft data points such as consumer surveys and Fed regional surveys show rising concerns over the economic outlook. But just as U.S. banks mentioned in their 1Q2025 earnings, the U.S. consumer remains very resilient.
Since COVID, we’ve repeatedly highlighted that U.S. corporates are also more resilient than many investors expect. Are there a lot of uncertainties now? Yes. Is a recession possible? Certainly. But we believe it’s still too early to draw conclusions. And don’t forget the White House put and the Fed put. Trade negotiations have shifted from aggressive rhetoric to a more orderly path. As for the Fed, although Chair Powell made some hawkish comments before the blackout period began, with good inflation data and signs of a softening labor market, an easing Fed is looking more likely. In short, we are in a special period. The policies of the current administration and the volatility in the financial markets may become case studies for the future. But we shouldn’t be blinded by short-term volatility — we should stay focused on the long term. Compared with the end of March, isn’t the overall visibility now significantly improved?
Sector Ratings
In May, Mark downgraded Healthcare from Overweight to Neutral.
The primary reason for the downgrade is that Healthcare’s attempted bounce since 4Q last year failed to bring meaningful relative strength. Since the early April market rebound, Healthcare has not kept pace. In fact, looking at cap-weighted sector performance, Healthcare’s weakness was only second to Energy, ranking second worst among all S&P 500 sectors.
Within the Healthcare industry, the weakness is broad-based. In April, Managed Healthcare fell by 16.2%, primarily due to UNH -0.28% , while Biotech and Life Sciences Tools & Services also underperformed. The largest constituent, LLY 3.89% , posted its biggest single-day drop since 2008 after its May 1 earnings, as the weight-loss drug price war intensified and CVS replaced LLY’s Zepbound with Novo’s Wegovy as the preferred choice.
In summary, Healthcare is currently in a no man’s land. In order for Mark to upgrade or downgrade it further, it needs to make a meaningful move — either to break the relative downtrend or to fall below the prior low.
Within the 11 GICS 1 sectors, Tom and Mark share the same view on 6 sectors:
- Overweight by both: Consumer Discretionary, Industrials, Tech, Financials
- Neutral rated by both: Healthcare
- Underweight by both: Consumer Staples
For the remaining 5 sectors, there is no complete disagreement between Tom and Mark (i.e., no sector where one is Overweight and the other Underweight):
- Communication Services and Real Estate: Overweight by Tom, Neutral by Mark
- 2 commodity sectors — Energy and Materials: Neutral by Tom, Underweight by Mark
- Utilities: Neutral by Tom, Overweight by Mark
Tactical Momentum Rankings
Due to the sharp market volatility, tactical ratings saw fairly large ranking changes in the latest update.
First, the recent rebound in Technology pushed its tactical ranking up from 6th to 3rd. Not only that, Technology also ranked No.1 among all sectors in our Quant model. Overall, Technology fundamentals remain resilient, coupled with improving technicals. It makes sense for Technology to be back at the top of the rankings. Besides Technology, Utilities and Financials remained in the top three.
As mentioned above, Energy’s technicals deteriorated mid-April, dropping from No.1 in last month’s tactical ranking to No.9. Quantamentally, it also saw a significant drop in our quant model. If Mark’s forecast plays out, Energy could remain underweight for a few months until crude reaches a reasonable low.
Healthcare currently ranks last in tactical rankings, mainly due to its weak technical trend (only slightly better than Energy) and muted fundamentals.
Materials is still among the bottom three sectors. Technically, Materials remains one of the worst sectors. Despite Gold pushing to new highs and construction materials holding up well during recent turmoil, the weakness within Chemicals and Packaging has persisted since March. In addition, it is also not favored by our Quant and EPS models.
Industrials ranking improved in the latest update. Industrials, especially capital goods, is arguably one of the segments most impacted by tariffs and recession fears. Declining airline demand has affected the performance of the transportation group, but overall, Industrials performed well — led by Electrical Equipment and Construction & Engineering.
Sector Allocation Changes
As mentioned above, compared to last month, the biggest changes came from short-term trend shifts and Mark’s downgrade of Healthcare.
Due to improved tactical ranking, weights for Technology, Consumer Discretionary, and Real Estate were increased compared to last month by 2.8%, 2.0%, and 1.9%, respectively.
Energy, which dropped from top 3 to bottom 3 in tactical rankings, saw its recommended weight cut by 4.3% compared to last month.
Healthcare, due to both Mark’s strategic rating downgrade and its decline in tactical ranking, was reduced by 2.6%.
Other sectors had some minor changes from last month, mainly driven by their relative performance in April.
Compared with the S&P 500 index sector weights, our most overweighted sectors are Technology (+2.6%), Financials (+2.4%), and Utilities (+1.9%). Other cyclical sectors like Discretionary, Industrials, and Communication Services are also slightly overweighted (by 0.2%-0.5%).
On the underweight side, our largest underweight is Consumer Staples (recommended at -2.4%), followed by commodity sectors — Energy and Materials — which we underweight by 2.0% and 1.6%, respectively. Healthcare, as the most recent downgrade, is underweight by 2.0% compared to the index.
*The above-mentioned weights are based on an 85% Sector ETF + 15% Tactical ETF allocation. If you are 100% allocated to Sector ETFs, you can refer to slide 43 in the attached Deck.
ETF Picks
Over the past month, none of our 5 sector picks outperformed the broad market. We initially expected these relatively defensive names to be less vulnerable during tariff-related volatility. Indeed, these ETF picks demonstrated resilience during the initial market decline, but they failed to catch up with the overall rebound afterward.
In May, we decided to keep the SCHH 1.14% (Schwab U.S. REIT ETF) but replace the other 4 ETFs. Among them, we added back CIBR 0.57% , which had been replaced last month. The updated five ETF picks are as follows:
- Horizon Kinetics Inflation Beneficiaries ETF (INFL 1.41% )
- Schwab U.S. REIT ETF (SCHH 1.14% )
- First Trust NASDAQ Cybersecurity ETF (CIBR 0.57% )
- Global X Video Games & Esports ETF (HERO 3.11% )
- iShares U.S. Aerospace & Defense ETF (ITA 1.77% )
