Unless Trump blinks, it looks like a bear• In our 2025 Outlook - The Atlas Consumer (Dec 2024), we said the key factor that couldcause a bear market would be a slowdown in US consumer spending. • We already held a relatively defensive view at that time because: 1. We anticipated an economic surprise down cycle due to the yield spike; 2. The FOMO Meter was 1.23, suggesting sentiment was too positive; 3. We wanted to wait for Trump's inauguration to see what he would do.• Fast forward and Trump is hitting the US consumer on multiple fronts: 1. Tariffs increase prices (to some degree), reducing real household incomes, whilealso being a headwind for global growth. The tariffs yo-yo does not help consumeror business confidence, which is another headwind. 2. Government spending cuts reduce household incomes and employment. 3. Deportations reduce consumer spending as there are fewer people to spend, whilepotentially boosting inflation due to labour shortages in some jobs.4. Falling equity markets (if sustained) could have a negative wealth effect. • This combination of Trump's policies are all headwinds for real consumer spending,which is the key driver of equity bear markets in the US and Australia. • The Atlanta Fed's GDPNow estimate for Real PCE is growth of +0.4% for the Marchquarter, down from +3% at the end of January 2025. This model has not been updatedsince March 6, and may incorrectly account for Gold imports. That said, we thinkdirectionally it is correct that US PCE is slowing materially. Recent guidance cuts fromUS companies (e.g. Delta) and high layoffs are consistent with a slowing consumer.• Given the likelihood of a US spending slowdown, we think the conditions are in placefor a bear market (i.e. 20% drop in US equities). To stop the bear, we think Trump needsto pull back from trade wars and focus on tax cuts, deregulation and infrastructure. Thecatalyst for this shift seems to be the level of the 10-year yield and mortgage rates, notthe stock market, so until Trump's goals are achieved we think the market will remainunder pressure in the near term.
PEs tend to fall on the other side of valuation booms• The rise in ASX stocks since the 2023 low was almost all due to PE expansion. But wethink the combination of Trump's policies (growth risks) and a resurgent China (negativedelta for flows) have broken the market's upward momentum. • ASX PEs are already down 1.7 turns from their peak, but this is still higher than 96% ofPEs since 1962. We think PEs can fall 2 turns more, which is a 10% return headwind. • When you look at past cycles, whether in Australia (top chart) or the USA (bottom chart),PE booms have a symmetry. When there is a rapid spike in valuations, it tends to befollowed by an almost similar drop after the peak in valuations. There is also no "permanthigh plateau" for PEs. With momentum broken, lower PEs are likely.
