Torsten Slok, chief economist of Apollo Group, put out a report on the weekend suggesting a 90 per cent chance of a tariff-induced U.S. recession.
He cites that 85 per cent of capital expenditures and about 110 million jobs (of 159 million employed) come from small businesses (firms with less than 500 employees).
This is the core of the U.S. economy, it’s not the “Magnificent Seven” and the S&P 500 Index, though that impacts the wealth effect to be sure. Until recently, these companies had been driving the U.S. economy.
They will benefit from more domestic demand and lower regulations, that was the thought narrative in the post-election rally.
But the paint splatter tariff policy implementation has significantly hurt confidence. In the 2018 trade war with China, where the average tariff went from two per cent to three per cent, the gross domestic product (GDP) impact was estimated to be somewhere between -0.25 per cent to as much as -0.7 per cent.
The current tariff increases from three per cent to 18 per cent estimates the 2025 hit to GDP could be close to four per cent, not including the knock-on impacts on the consumer. If the current tariffs continue, a deep recession is virtually certain.
Last week we noted that in the average recession, earnings per share (EPS) fall by 11 per cent. Currently, the S&P 500 has US$245 in trailing EPS and growth for all of 2025 is still expected to be $266 (about eight per cent) this year. That expectation seems extremely unlikely.
Post April 2 (U.S. President Donald Trump’s “Liberation Day” tariff announcements), expectations have started to drop. At 20 times multiple, which is not cheap historically, it equals $245 x 20 = $4,900.
That was about where the market bottomed post April 2 and before the 90-day tariff delay on April 9.
If we see the average EPS decline in a recession of about 11 per cent and stay at a somewhat elevated 20 times multiple, we get about $222 x 20 = 4,440.
There are all sorts of ways to measure fair value of a market. We could find targets that are down 40 per cent from the 2025 highs if we wanted to.
Slok notes that the average trade negotiation takes about 18 months.
The Republican led U.S. Congress thus far is copacetic but enter the U.S. mid-terms with a deep recession risk and they will not stand for it. The good news side of the Trump administration policy is less regulation and lower taxes, both of which are not being talked about much, but were behind the huge spike in small business confidence we saw after the U.S. election.
That part is coming, but the ride will be bumpy. The sharp downturn in the March survey was due to tariffs. The April small business confidence survey due on May 13 will be an interesting update.
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