Risk/reward for stocks better today than Feb 2025 (highs) and argue for P/E expansion

VIDEO: The risk/reward for stocks is arguably better today than it was on Feb 18, 2025 at the all-time highs and more importantly, we believe factors support an expanding P/E.

Please click below to view our Macro Minute (duration: 5:06).

This is not a popular opinion but we believe the risk/reward for stocks is better today than it was on Feb 18, 2025 (when S&P 500) was at all-time highs. I realize this sounds counterintuitive given many economists are telling us a major “soft patch” of economic data lies ahead. But let me explain:

• Think of it this way:
  – Visibility on tariff = risks far lower
  – Economic weakness ahead = high-yield says no recession
  – Companies “battle tested” surviving 5th major test: COVID, Bull-whip supply chain shock, inflation surge, Fastest rate hike in history, Tariff is latest gauntlet
  – Sentiment shockingly cautious = contrarian bullish
  – Trump “put” alive and well = our staunch argument
• Put this together, and we would argue P/E should be rising into year-end 2025. Yes, the P/E of the market should be higher and expanding as risk premium should be falling.
• In other words, our YE target of S&P 500 6,600 remains intact.
• The April CPI report (Tuesday) was also encouraging as it shows inflation is currently tracking lower than consensus expected. And this means, that tariff-distorting inflation is coming at a time of lower inflation.
• Core CPI came in at +0.24% MoM vs consensus of +0.27% and the details were good. Shelter and auto insurance remain the two largest contributors of inflation, punching above their weight:
  – Core CPI MoM +0.24%
  – contribution from shelter +0.15% (43% weight, 62% of rise)
  – contribution from auto ins. +0.02% (3% weight, 10% of rise)
  – ex-these two, core CPI is -0.1% YoY below trend, at 1.9%
• We believe too many investors are focused on the “speed bumps” of economic data ahead. That is, inflation is picking up due to tariffs. And the supply chain disruptions means we will see economic weakness ripple into the data. But unless this turns into a self-reinforcing downturn with credit contraction, then markets are likely seeing through this.
• In fact, keep on eye on Financials and Industrials. These 2 groups would be showing persistent weakness is a recession was looming. Industrials are up 8% this month, so clearly not reflecting this.
• And high-yield continues to rally in a fierce way (see below). If there was a recession, high-yield spreads should be rising to 600bp wide or higher and instead are rallying hard, down to 359bp wide now.
• Washed out leads MAG7, Bitcoin, Ethereum, etc: Bitcoin and Ethereum remain important leading indicators, in our view. These peaked early and now are leading us higher:
  – Bitcoin is now near all-time highs BTC 0.24%
  – which argues S&P 500 should recover to all-time highs
  – Ethereum ETH 1.03% has surged recently
  – this argues to “washed out” stocks to recover
  – such as MSTR 4.90%  TSLA -2.07%  PLTR -2.60% , etc
• For an ETF proxy for Bitcoin, there is BITB 1.02%  IBIT 1.07%  BTC EZBC 1.05%  and for Ethereum ETHA 3.79%  ETH FETH 3.81%

BOTTOM LINE: Probabilities favor “V-shaped” recovery

Given the confirmation signals above, we believe the probabilities favor a V-shaped recovery (versus a W-shaped ala 2011). We realize this is counterintuitive given the lack of earnings visibility. But the likely reason is equities collapsed from 2/18 to 4/7, and this waterfall decline reset positioning and sentiment in a way to allow for a V-shaped recovery.

• But ultimately, what really matter is trajectory for 2026
  – new tax plan, 100% expensing of domestic capex
  – de-regulation
  – expanded export demand?
  – tariff rates better than current rate
• we think this is the reason that if tariff deals are soon announced, equities can further recover.

The bull market has proven itself intact. We have identified two lists of “wash out” stocks, both large-cap (22 names) and SMID-cap (27 names). We want to look at stocks which did not make a new low between April 1-April 8, even as the S&P 500 fell to new lows.

The large-cap criteria is as follows:

• Current Market Cap >$15 Billion
• Declined more than 30% before Feb 18th
• Didn’t make new closing low between April 1^st & April 8th
• Current price down more than 25% from 52W High

The large-cap “washed out” tickers are:

WBD 4.18% LULU -0.12% TSLA -2.07% DKNG 1.91% DG 0.17% DLTR -2.03% BF STZ -0.33% RKT 1.97% COIN -1.10% HOOD -1.70% HUM N/A% UAL 2.19% LDOS 0.17% TEAM 1.87% HUBS -0.21% MSTR 4.90% CRM -2.23% NET -2.82% SMCI 1.94% EIX 1.14% VST -0.50%

The SMID-cap criteria is as follows:

• Current Market Cap <$15 Billion
• Declined more than 30% before Feb 18th
• Didn’t make new closing low between April 1st & April 8th
• Current price down more than 25% from 52W High
• Short interest Day to Cover Ratio >2

The SMID-cap “washed out” tickers are:

DJT -0.74% ROKU -1.67% AS 8.78% LCID 0.09% RIVN 0.87% LKQ 0.27% CROX 0.54% NCLH 1.77% WBA CELH 1.20% SOFI -3.48% MKTX -0.29% COLB 0.19% GRAL -4.10% INSP -1.53% PRGO -1.25% CNXC -2.99% DAY 0.22% LUV 0.35% LYFT 0.56% CFLT N/A% DT 2.68% ESTC 1.28% PCOR 0.63% LITE 2.88% ALAB -0.63% AES -1.44%

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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 May:

• 5/1 9:45 AM ET: Apr F S&P Global Manufacturing PMI Tame
• 5/1 10:00 AM ET: Apr ISM Manufacturing PMI Tame
• 5/2 8:30 AM ET: Apr Non-Farm Payrolls Tame
• 5/2 10:00 AM ET: Mar F Durable Goods Orders MoM Tame
• 5/5 9:45 AM ET: Apr F S&P Global Services PMI Tame
• 5/5 10:00 AM ET: Apr ISM Services PMI Tame
• 5/6 8:30 AM ET: Mar Trade Balance Tame
• 5/7 9:00 AM ET: Apr F Manheim Used Vehicle Index Hot
• 5/7 2:00 PM ET: May FOMC Decision Mixed
• 5/8 8:30 AM ET: 1Q P Unit Labor Costs Tame
• 5/8 8:30 AM ET: 1Q P Non-Farm Productivity QoQ Tame
• 5/8 11:00 AM ET: Apr NY Fed 1yr Inf Exp Mixed
• 5/13 6:00 AM ET: Apr Small Business Optimism Survey Tame
• 5/13 8:30 AM ET: Apr Core CPI MoM Tame
• 5/15 8:30 AM ET: May Philly Fed Business Outlook
• 5/15 8:30 AM ET: Apr Core PPI MoM
• 5/15 8:30 AM ET: May Empire Manufacturing Survey
• 5/15 8:30 AM ET: Apr Retail Sales
• 5/15 10:00 AM ET: May NAHB Housing Market Index
• 5/16 10:00 AM ET: May P U. Mich. Sentiment and Inflation Expectation
• 5/16 4:00 PM ET: Mar Net TIC Flows
• 5/19 9:00 AM ET: May M Manheim Used Vehicle Index
• 5/22 8:30 AM ET: Apr Chicago Fed Nat Activity Index
• 5/22 9:45 AM ET: May P S&P Global Services PMI
• 5/22 9:45 AM ET: May P S&P Global Manufacturing PMI
• 5/22 10:00 AM ET: Apr Existing Home Sales
• 5/22 11:00 AM ET: May Kansas City Fed Manufacturing Survey
• 5/23 10:00 AM ET: Apr New Home Sales
• 5/27 8:30 AM ET: Apr P Durable Goods Orders MoM
• 5/27 9:00 AM ET: Mar S&P CoreLogic CS home price
• 5/27 10:00 AM ET: May Conference Board Consumer Confidence
• 5/27 10:30 AM ET: May Dallas Fed Manuf. Activity Survey
• 5/28 10:00 AM ET: May Richmond Fed Manufacturing Survey
• 5/28 2:00 PM ET: May FOMC Meeting Minutes
• 5/29 8:30 AM ET: 1Q S GDP QoQ
• 5/30 8:30 AM ET: Apr Core PCE Deflator MoM
• 5/30 10:00 AM ET: May F U. Mich. Sentiment and Inflation Expectation

Economic Data Performance Tracker 2025:

Economic Data Performance Tracker 2024:

Economic Data Performance Tracker 2023: