Treasuries, sentiment, and earnings: What investors need to watch

Last week brought us another chapter in the tariff wars as the US announced a 90-day pause on the implementation of the “Liberation Day” reciprocal tariffs against all countries except China. On Friday night, the US announced exemptions (for electronics and phones) to its tariff policy on China, although officials seemed to walk that back somewhat over the weekend. Not surprisingly, stocks and Treasuries experienced wild swings over the course of the week in response to tariff war developments while gold continued to climb higher.¹

Investors are worried about a variety of things, most notably recession — and with good reason. It seems that volatility and uncertainty may be the only certainties going forward. We’ve gotten numerous questions from clients about what we should be watching for now. Here’s a short list of what to watch for in coming weeks:

Six things for investors to watch

1. US consumer and business sentiment. The preliminary reading of the University of Michigan consumer sentiment survey for April fell to 50.8 from 57 in March, well below forecasts of 54.5. This was the lowest level since June 2022 and marks four consecutive months of decline in consumer sentiment.² There’s a rough rule of thumb that if consumer sentiment falls by more than 20 points in a three-month period, it’s a strong indicator that a recession is in the offing. Consumer sentiment has now fallen slightly more than 20 points in the last three-month period, which is concerning. In addition, the New York Fed Survey of Consumer Expectations showed that mean unemployment expectations — or the probability that unemployment will be higher a year from now — rose to 44.0%, which is the highest level since April 2020.³ However, we’ve yet to see “soft data” really translate into “hard data.” So not only will we want to follow consumer sentiment in all the major surveys (Michigan, New York Fed, and Conference Board) closely going forward, but we’ll want to pay attention to the hard data to see how that sentiment translates into action — including of course US retail sales. We also want to pay attention to business confidence and its potential effect on hard data. A newly released study from industry group Chief Executive shows that 62% of CEOs and business owners expect a recession to occur in the next six months, up from 48% in March.⁴ National Federation of Independent Businesses (NFIB) Small Business Optimism also declined materially, but is only slightly below the long-term average.⁵
2. European economic and business sentiment. There are headwinds facing the European economy from US tariff wars. However, there’s a powerful countervailing force: fiscal stimulus. Sentiment readings will give us a sense of how positive the reaction is to European plans — especially Germany’s — to ratchet up defense and infrastructure spending, and how much they are able to soften the blow of high tariffs. We expect this seismic change to have a significant impact on sentiment, and this soft data is then likely to translate into better hard data, including industrial production and retail sales. This will take many months to unfold, but we should start to see signs in sentiment readings in the very near term.
3. Chinese economic data. Similarly, there are headwinds facing the Chinese economy coming from US tariffs. However, China is delivering substantial fiscal stimulus, which should also be a powerful countervailing force. We have started to see “green shoots,” signs that the economy is recovering, such as an increase in China’s credit growth in March, but we’ll be looking for more hard economic data, including domestic consumption since that is one key area policymakers are targeting.
4. Earnings outlook. US earnings season has begun. There seems to be an assumption that earnings will lift markets and cause investors to look beyond tariffs. However, it seems markets are unlikely to care about first-quarter earnings — which are a “rearview mirror” event — and are more likely to care about guidance. And that could prove negative for markets. It’s always important to focus on guidance in these earnings calls, but now more than ever. Insights into how companies are managing through such a high level of uncertainty, and what their economic outlook is, will likely shape market moves.
5. US consumer inflation expectations. While actual US inflation readings have eased — both the US Consumer Price Index and Producer Price Index prints for March were lower than expected — US consumer inflation expectations have surged higher. In particular, five-year ahead inflation expectations have continued to surge and suggest longer-term inflation expectations haven’t met the litmus test of being “well anchored” — which policymakers are concerned with.⁶ Coupled with falling consumer sentiment, this survey data suggests consumers are expecting a stagflationary environment. We’ll closely follow upcoming soft and hard data for confirmation of this expectation, with the understanding that a change in policy could easily avert this fate.
6. US Treasury yields. The greatest US vulnerability in the midst of the current tariff war is likely its relatively high level of debt and foreign ownership of it. Just last year, the US’s cost to service its debt climbed so high that it exceeded its entire defense budget for the first time.⁷ The economic historian Niall Ferguson has argued that such a scenario isn’t sustainable for a great power. Other countries know the high level of US debt is a serious vulnerability; if rates rise, it causes the US to spend significantly more servicing its debt.

It seems that fewer countries are trusting the US — and therefore US Treasuries as a “safe haven” asset class. This has resulted in greater buying of gold, which seems to have become the preferred “safe haven” asset class of choice.

Other countries may also want to find ways to use the US’s debt vulnerability as a weapon in the tariff fight, punishing the US for its tariffs by selling US Treasuries and driving up borrowing costs. Some have whispered that the spike in Treasury yields was responsible for the US placing its 90-day pause on Liberation Day tariffs assessed against a number of countries. We’ll want to follow US Treasury yields as that may very well help dictate the course of tariff wars going forward. Recall US Treasury Secretary Scott Bessent’s goal of driving down the 10-year US Treasury yield, which has been thwarted in recent days.

Looking ahead

Looking ahead, it’s important for clients to recall their investing time horizon, which is typically far longer than an average recession or a presidential term. That can mean maintaining one’s investment policy, remaining well diversified, and even looking for opportunities to take advantage of the uncertainty and volatility.