News vs Noise

Anything that has the potential to impact corporate earnings is newsworthy from a market perspective.  Everything else, although perhaps interesting, is mere noise. Tariffs are already impacting corporate earnings and private credit has the potential to do so.  Let’s explore both.

Tariffs

Free market advocates have plenty to cheer with the Supreme Court’s ruling on tariffs.  Regardless how described, when it’s all said and done, tariffs are taxes.  In general, higher taxes are not good for the economy nor equity markets.  Lower taxes equate to higher profit margins, which means higher earnings, which eventually results in higher markets.  

Friday, when the ruling was announced, it seemed investors took a collective sigh of relief.  Later, investors seem to second guess the outlook after a new 10% tariff was announced, which was later upped to 15%, over the weekend.

A problem with tariffs and subsequent changes, is that they cause corporate leaders to take their eyes off the ball. It is difficult to focus on making better widgets or providing improved services, when the future is unclear, uncertainty is high, and when time and energy is spent on reclaiming past expenses vs setting a future course in an uncertain environment. 

Private Credit

Another concerning issue is that of private credit which is showing signs of potential distress.  This is important for often times it is outliers that serve as precursors to larger problems.  Is this isolated concern esoteric in nature and impacting one asset manager, or is this the proverbial canary in the coal mine pointing toward danger ahead?  Watching closely.  

There’s an old adage about real estate peaking when there are too many construction cranes in the air.   For the last few years, private credit firms have been the primary presenters at a number of investment conferences we’ve attended.  In fact, in some cases private credit presentations were more plentiful than all the other presentations combined.  We simply saw this as cranes in the air and decided to hold off on private credit in our portfolios.  Too early to tell if that was a good call but currently comfortable not being in that space.

Bullish Corporate Earnings & Positive Long-Term Market Outlook

Despite uncertainty, attacks against traditional capitalism as we know it, and even geopolitical and political chaos, corporate earnings continue to move higher.  In fact, earnings and the outlook for earnings have improved to the point that the market no longer appears to be as expensive due to the magnitude and quality of anticipated earnings.  Due to improving earnings, despite all the noise, we remain bullish on the equity markets, while recognizing volatility is the price paid to achieve longer-term returns provided in the stock market.