May 20, 2025 – Of all the words to describe economic and market conditions in April, “chaotic” seems to be the most accurate.
A government policy framework driven by chaos, in which actions and directives have been unpredictable, inconsistent, and poorly designed, has ruled the roost this year, particularly post the “Liberation Day” tariff announcement.
With an initial rollout of protectionist measures, including depression-level tariffs that would have made former President William McKinley blush, the U.S. administration’s rapidly evolving economic policies have left investors dealing with confusion, volatility, and significant potential adverse economic outcomes.
Over the last several months, President Trump has revised his tariff policies more than fifty times. Of those import duty proclamations, many were altered within a week, and some did not even last a day.
Unfortunately, the tariff policy that was rolled out has lacked transparency and a long-term vision, leading to the undermining of confidence among not only businesses and investors, but consumers as well.
Typically, chaotic economic policies have consequences for the country implementing them, including currency devaluation, capital flight, inflation, and a loss of confidence.
While the U.S. equity market fell into a quick bear market in April, with the S&P 500 dropping -20% from its peak, it bounced back nearly as fast, rallying by more than 20% in the 36 days since it reached its low on April 7th. In comparison, the bear markets of 2009 and 2020 took 18 days and 16 days, respectively, to achieve the same performance milestone.
Helping the equity market recovery were the results of the Magnificent 7 group of stocks. While the (maleficent) S&P 493 have seen earnings estimates decline by -4% year-to-date, comparatively, the Mag7 stocks have seen their earnings forecast remain robust.
Source: FactSet
In addition to positive overall first quarter earnings results, some tariff relief and a 90-day “pause” from the White House has put a floor under the stock market and the economy’s growth prospects. Goldman Sachs economists have cut their U.S. recession forecast from 45% to 35%, while speculators have dialed down 2025 recession bets from nearly two-thirds to 37%.
Source: Polymarket
While market sentiment has done a stunning 180, with the Fear & Greed Index flipping from “Extreme Fear” one month ago to “Greed” currently, the economy is not yet out of the woods. Even with the recent import duty concessions with China and the rest of the world, which are in place for 90 days (subject to change), the current average tariff rate for the U.S. is a painful 14%. This level compares to an average of just 2.5% last year, and sits at its highest level in nearly 100 years.
If additional trade concessions and a further significant ratcheting down of tariffs does not occur quickly, serious negative economic ramifications will result. Soon, we will begin to see a marked increase in consumer prices and inflation, a further decline in economic growth, along with significant job losses and a rise in the unemployment rate.
When investors face significant economic risks and uncertainties, along with elevated volatility, typically, they demand a higher risk premia (meaning, lower valuations). While we have seen modest capital flight from America to foreign markets such as Europe and Japan, which have recently outperformed given increased investor attention and a rise in sentiment, a stark contrast in valuations remains.
Despite America’s chaos policy and its associated increase in volatility, its stock market has maintained its premium valuation. After their recent recovery, U.S. equities now trade at nearly 21x earnings, representing a 30% premium to their average valuation over the past twenty years. In addition, U.S. equities trade markedly higher than their international peers irrespective of the recent performance reversal, with the U.S. market trading at a 6.6-turn premium (46.5%) and a 6.9-turn premium (49.6%) compared to Europe and Japan, respectively.
Traditional financial theory (does anyone remember the Capital Asset Pricing Model?) asserts that investors demand higher expected returns for taking on more risk. Certainly, the U.S. stock market has become more risky this year, given the prevalence of chaotic economic policies and their related volatility and uncertainty. However, investors have largely shrugged it off, as the equity risk premium remains essentially unchanged compared to its pre-trade war era. This apparent contradiction should give investors pause.
Nevertheless, because of the administration’s volatile and economically-damaging policy changes, we expect range-bound markets to remain in the near to medium term. Therefore, investors may want to consider taking a hedged equity approach. To help facilitate idea generation, we highlight one top-decile stock that is forecast to outperform and one bottom-decile stock that is predicted to underperform in this month’s AlphaRank Top Stocks.
OUTPERFORM: Loblaw Companies Ltd (TSX: L) is Canada’s largest food and pharmacy retailer, operating under well-known banners such as Loblaws, No Frills, Real Canadian Superstore, Shoppers Drug Mart, and Joe Fresh. It is a dominant player in both the grocery and pharmacy markets, with over 2,400 stores and a strong private-label portfolio, including President’s Choice and Life Brand. Grocery and pharmacy are essential services with stable demand even during economic downturns. Loblaw benefits from predictable cash flow and recession resilience, making it appealing in volatile markets. With an attractive valuation, L trades at a modest earnings multiple compared to U.S. grocers and Canadian defensive peers. Its strong free cash flow, supported by a 25% return on capital, supports both dividends and share buybacks, helping underwrite the stock’s momentum. With an AlphaRank score of 98.1/100, we expect the shares to outperform. Disclosure: Long L in the Accelerate Canadian Long Short Equity Fund (TSX: ATSX).
UNDERPERFORM: Cleveland-Cliffs Inc (NSYE: CLF) is a vertically integrated steel and mining company based in the U.S., primarily serving the automotive, infrastructure, and manufacturing sectors. The company operates iron ore mines and steel mills, positioning itself as a domestic supplier of raw materials and finished steel products. Steel demand is heavily cyclical, and a downturn in automotive production, infrastructure, or manufacturing can hit volumes and pricing. With a lack of profits, negative free cash flow, and a debt-heavy balance sheet, a cyclical downturn would hit the low-quality stock hard. A significant recent quarterly expectations miss, negative momentum, and a high beta in a risk-off environment further challenge the stock’s outlook. With an AlphaRank score of 0.2/100, we expect the shares to underperform. Disclosure: Short CLF in the Accelerate Absolute Return Fund (TSX:HDGE).
The AlphaRank Top and Bottom stock portfolios exhibited mostly positive relative performance last month:
- In Canada, the top-ranked AlphaRank portfolio of stocks returned 0.2%, slightly outpacing the benchmark’s 0.1% return, while the bottom-ranked portfolio of Canadian equities gained 2.0%. The long-short portfolio (top minus bottom ranked stocks) fell -1.8%, as the bottom-ranked stocks slightly outperformed the top-ranked securities. Over the past five years, the top decile AlphaRank portfolio has risen more than 175%, while the bottom-ranked portfolio has risen approximately 25%.
- In the U.S., the top-decile-ranked equities return 0.1%%, ahead of the the S&P 500’s -0.7% decline. Meanwhile, the bottom-ranked stocks fell by -3.9%, leading to a 4.0% return for the top decile minus the bottom decile long-short portfolio. Over the past five years, the top-ranked U.S. equities have gained more than 150%, while the bottom-ranked portfolio has fallen more than -40%.
AlphaRank Top Stocks represents Accelerate’s predictive equity ranking powered by proven drivers of return. Stocks with the highest AlphaRank are expected to outperform, while stocks with the lowest AlphaRank are anticipated to underperform. AlphaRank assigns a numeric value to each security from zero (bottom-ranked) to 100 (top-ranked) based on selected predictive factors. All Canadian and U.S. stocks priced above $1.50 per share and with a market capitalization exceeding $100 million are evaluated. In both the Accelerate Absolute Return Fund (TSX: HDGE) and the Accelerate Canadian Long Short Equity Fund (TSX: ATSX), Accelerate funds may be long many top-ranked stocks and short many bottom-ranked stocks. See AccelerateShares.com for more information.
