We got tariff liberation day wrong. The White House broke a core covenant of capitalism.  But stocks stretched to downside (and excessive recession risk) and we see high probability of de-escalation. Array ( [cookie] => f555d3-5e81d9-37e5f1-956f12-2ed323 [current_usage] => 1 [max_usage] => 2 [current_usage_crypto] => 0 [max_usage_crypto] => 2 [lock] => [message] => [error] => [active_member] => 0 [subscriber] => 0 [role] => [visitor_id] => 0 [user_id] => 0 [reason] => Usage under limits [method] => ) 1 and can accesss 1

VIDEO: We believe stocks have overshot to the downside, even as technical damage is enormous and requires patience to repair.

Please click below to view our Macro Minute (duration: 12:00).

We want to apologize as the terms of tariff Liberation Day were far worse than we expected.  The resulting market fury is not due to a reaction to a trade war, but rather, in our view, the fact the White House broke a core covenant of capitalism — stable and predictable regulatory environment.  Companies are now facing massive amounts of stranded capital, or capital to earn a lower return. That said, stocks are too far stretched to the downside, while recession risks are excessively priced.  Hence, while we do not know when stocks will bottom, the following analysis argues investors need to see the positive risk/reward of being patient.

The market has been under notable pressure following the adverse developments tied to the so-called “Tariff Liberation Day,” which was far more disruptive than initially expected. The sharp sell-off in equities wasn’t merely due to escalating trade war fears but stemmed from what appeared to be a fundamental breach of capitalism’s regulatory covenant. The White House’s sudden and aggressive executive orders left companies without the predictability they need to recoup capital investments, prompting vocal corporate backlash. A striking example is AAPL -5.02% , which is facing a 54% increase in production costs—effectively nationalizing a third of its assets by redirecting its gross margins into tariff revenues.

• The aftermath of Tariff Liberation Day has ignited strong corporate resistance.
  • Companies are not reacting solely to tariffs, but to the perceived betrayal of a stable regulatory framework essential for long-term investment and planning. 
  • The suddenness of the executive orders left supply chains stranded, particularly those redirected away from China during Trump 1.0. 
  • This dislocation is material: capital invested in building diversified manufacturing operations is now at risk. AAPL -5.02% ’s case illustrates the extremity, with their cost of production jumping sharply due to tariffs that essentially siphon off their profits.
    
• Despite this upheaval, there are clear signs the situation could de-escalate in the coming days. Several developments point to a potential easing of tensions.
  • For one, the EU has expressed a desire to give negotiations time before retaliating, while also preparing a list of countermeasures. 
  • In addition, multiple countries have reached out to the White House offering concessions. 
  • A delay in implementing the reciprocal tariffs—potentially by 90 days—is also under consideration, with public endorsements from Lloyd Blankfein and Bill Ackman. 
  • Furthermore, Trump may make conciliatory remarks or the UK could announce a mutual concession.
    
• The White House’s alignment with Main Street does not imply it wants a market crash. While some interpret recent moves as favoring Main Street at Wall Street’s expense, this may be a misread.
  • Trump has emphasized he does not seek a market sell-off and that markets sometimes need to “take medicine.” 
  • However, continued equity weakness erodes his negotiating power with China, which publicly celebrated Friday’s U.S. market decline. 
  • Policymakers recognize this, and the administration is floating supportive measures for consumers—such as eliminating taxes on Social Security, tips, and overtime, as well as making domestic car loan interest deductible.
    
• Although PolyMarket shows a 66% chance of a recession, we believe the probability remains low. Recession risks remain overblown due to significant offsets that cushion the tariff blow. Consider:
  • Main Street vs. Wall Street: the burden of tariffs is likely to fall more on producers than consumers, blunting their macroeconomic impact. 
  • Oil has fallen from $70 and Mark Newton thinks it could go down to $50 – saving up to $150 billion. 
  • There are lower floating interest rates and consumer debt of $3T. That’s 35 billion dollars of savings. 
  • Rate fluctuations could lead to Mortgage rates dropping 100 basis points.  That’s 125 billion.
  • Surprising math, but these offsets may fully counterbalance the tariff impact on households.
• From a tactical perspective, markets are deeply oversold and ripe for a reversal.
  • Mark Newton notes that while technicals haven’t yet confirmed a bottom, positioning is highly washed out. Long/short net leverage is at 2022 lows, and short interest has surged. Valuations have compressed—15x on 2026 earnings, or 17x assuming a 15% earnings decline. 
  • Statistically, back-to-back 4.5% drops have only occurred four times since 1950, and each instance saw strong 12-month forward returns. Participation remains weak, with only 23% of stocks above their 200-day moving average, a level that historically precedes strong gains. 
  • Additionally, the VIX term structure is inverted, which has historically been followed by one-month win ratios of 100%.
    

Bottom Line: We still believe the probabilities favor a de-escalation and that stocks are stretched to the downside.

COVENANT OF CAPITALISM: Earning return of capital

• 1. Companies earn money by investing capital and earn a return on that long-term investment, whether equipment, supply chains, or people.
• 2. To earn this return, they need stable and predictable regulatory environment and in turn fund these expenditures with funds raised by investors.
• 3. Post-Trump 1.0 companies diversified supply chains away from China, reflecting that administration mandate to reduce reliance on China
• 4. The entire supply chain is now stranded because of Liberation Day
• 5. Companies have “zero” time to move supply chains, which means US business have stranded potentially trillions in capital.

WEEK AHEAD: Is Trump trying to “kill the stock market”?

• 1. Tariffs are here to stay, but the long-term rate is unknown
  – $300 to $600 billion per year
• 2. Positive option value if Trump de-escalates: 50% total
  – EU decides not to escalate
  – UK or a major nation mutual concession
  – Trump decides to say something incrementally positive
  – delays April 9th date by 90 days
• 3. “Main Street over Wall Street” means companies take EPS hit
  – not “let stock market fall”
• 4. Even if tariffs move forward as is, we do not expect a recession in the US in 2025.  Stocks have declined 20%.
• 5. How to help Main Street:
  – end taxes on social security,
  – end taxes tips & overtime
  – deduction interest for domestic-made cars
  – lower interest rates
• 6. Why no recession:
  – Consumers do not take the “full hit” of the tariff
  – lower oil prices
  – lower interest rates
  – reconciliation bill with tax cut
  – incoming spending

MARKET STRATEGY: Patience as no policymaker in “panic”

• 1. Markets can bottom when policymakers “panic”
• 2. Fed said they will be “patient” unless credit cracks
• 3. White House could announce a “pause” or action before April 9^th
• 4. Equity investors are “record short” but not technical signs of capitulation per Mark Newton
• 5. Quantitative analysis: stocks “stretched massively” to downside
  – P/E ’26E ex-MAG7 15X  – not demanding
  – back-back -4.5% declines  – 4X since 1950, 4/4 higher 12M later
  – 23% stocks >200dma   – 94% 6M win-ratio, 92% 12M win-ratio
  – VIX 4M less 1M -7.9 inversion  – 100% win-ratio 1M later

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45 SMID Granny Shot Ideas: We performed our quarterly rebalance on 2/18. Full stock list here -> Click here

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Key incoming data April:

• 4/1 9:45 AM ET: Mar F S&P Global Manufacturing PMI Tame
• 4/1 10:00 AM ET: Mar ISM Manufacturing PMI Tame
• 4/1 10:00 AM ET: Feb JOLTS Job Openings Tame
• 4/2 10:00 AM ET: Feb F Durable Goods Orders MoM Tame
• 4/3 8:30 AM ET: Feb Trade Balance Tame
• 4/3 9:45 AM ET: Mar F S&P Global Services PMI Tame
• 4/3 10:00 AM ET: Mar ISM Services PMI Tame
• 4/4 8:30 AM ET: Mar Non-farm Payrolls Hot
• 4/7 9:00 AM ET: Mar F Manheim Used Vehicle Index
• 4/8 6:00 AM ET: Mar Small Business Optimism Survey
• 4/9 2:00 PM ET: Mar FOMC Meeting Minutes
• 4/10 8:30 AM ET: Mar Core CPI MoM
• 4/11 8:30 AM ET: Mar Core PPI MoM
• 4/11 10:00 AM ET: Apr P U. Mich. 1yr Inf Exp
• 4/14 11:00 AM ET: Mar NYFed 1yr Inf Exp
• 4/15 8:30 AM ET: Apr Empire Manufacturing Survey
• 4/16 8:30 AM ET: Mar Retail Sales
• 4/16 10:00 AM ET: Apr NAHB Housing Market Index
• 4/16 4:00 PM ET: Feb Net TIC Flows
• 4/17 8:30 AM ET: Apr Philly Fed Business Outlook
• 4/17 9:00 AM ET: Apr M Manheim Used Vehicle Index
• 4/23 9:45 AM ET: Apr P S&P Global Services PMI
• 4/23 9:45 AM ET: Apr P S&P Global Manufacturing PMI
• 4/23 10:00 AM ET: Mar New Home Sales
• 4/23 2:00 PM ET: Apr Fed Releases Beige Book
• 4/24 8:30 AM ET: Mar P Durable Goods Orders MoM
• 4/24 8:30 AM ET: Mar Chicago Fed Nat Activity Index
• 4/24 10:00 AM ET: Mar Existing Home Sales
• 4/25 10:00 AM ET: Apr F U. Mich. 1yr Inf Exp
• 4/28 10:30 AM ET: Apr Dallas Fed Manuf. Activity Survey
• 4/29 9:00 AM ET: Feb S&P CS home price 20-City MoM
• 4/29 10:00 AM ET: Apr Conference Board Consumer Confidence
• 4/29 10:00 AM ET: Mar JOLTS Job Openings
• 4/30 8:30 AM ET: 1Q A GDP QoQ
• 4/30 8:30 AM ET: 1Q ECI QoQ
• 4/30 10:00 AM ET: Mar Core PCE MoM

Economic Data Performance Tracker 2025:

Economic Data Performance Tracker 2024:

Economic Data Performance Tracker 2023: