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The impact of President Trump's tariffs has already begun to show up in recent manufacturing data. Economic activity in the sector contracted in March as prices paid accelerated due to steel and aluminum tariffs. On the back of that recent deterioration, our next guest says he anticipates a pullback in capex spending and flat earnings growth in the near term. Joining us now, Michael Darda, Roth Capital Partners Chief Economist and Macro strategist. Michael, presumably you've just heard our discussion here with Kelly Anne about what President Trump here is trying to achieve, and presumably the cost that he's willing to bear, or that he's willing to have the country bear to get there. Um, there's a lot of talk about whether today is going to be a so-called clearing event. Is it going to be sort of the worst that things are going to get with the tariff announcement this afternoon? What do you think?

Well, I guess we'll just have to see. I mean, it's obviously a fluid situation where we've been in this environment where we have tariffs on, tariffs seemingly off, and then tariffs on once again, but there's a ratcheting effect. Uh, Trump 2.0 has already gone much, much further and more broad-based with the tariffs than what we saw in the first administration. So I think the idea that this is all a ploy or a negotiating tactic or some kind of a bluff that will quickly reverse has been sorely, sorely mistaken.

So then, where does that leave the Federal Reserve, Michael? And I ask because we saw the greatest number of rate cuts getting priced in for the year after some Fed speak this week, three cuts for the year, but if we see tariffs fueling more inflation, how do we possibly get to that?

It puts the Fed in a real predicament, um, because the tariffs will act as an adverse supply side shock, meaning that they will temporarily raise inflation and reduce real economic growth. Um, and the Fed's dual mandate tells it to respond to weaker real growth with rate cuts, but higher inflation with rate hikes. Uh, so markets are pricing in rate cuts and those expectations have stepped up with the stock market correction and and soft macro data at the margin. But the risk here is that if the economy is weakening, uh, and the Fed hesitates on those rate cuts, you could have a situation where the Fed falls behind the curve and the soft landing that we've been in for essentially two years slips away. Right now, tracking estimates for private sector real final sales, so basically looking at consumption and investment, running at just four tenths of a percentage point for the first quarter. Um, that's after an eight quarter average of just above 3%. So it already looked like the economy was slowing down pretty significantly in Q1, and we really haven't seen, uh, the full brunt of effects from tariffs that are coming down the pike. So, you know, these headwinds, I I think, are an important reason that, you know, that markets have been tripped up this year. Uh, tripped up because we came into the year with markets wrongly assuming that Trump was bluffing on tariffs and that somehow magically deregulation and other tax reforms would somehow offset the sting. And it's looking like that's, that was a very bad assumption indeed.

Michael, um, also at the beginning of the year, when we were talking to a lot of strategists, even when the tariffs started to look more probable, a lot of people were saying earnings growth this year is going to be fine, and that's why stock returns are going to be fine. I was intrigued in your recent note when you, um, looked at an earnings model that you all have developed that shows maybe earnings aren't going to be as fine as we thought. Can you walk us through this?

Absolutely. So, you know, we're seeing some of the leading indicator data really roll over here. So we have a model that looks at new orders from the ISM manufacturing index, highly correlated to the trajectory of S&P 500 earnings growth and capital spending. And then the model also uses high-yield debt spreads that change on a year-to-year basis. So right now, with the new orders component of the ISM index sinking for the last two months, uh, and high-yield spreads widening, it looks ahead, you know, six to nine months in terms of the earnings trajectory. So the expectation out of the model now is for a flat trajectory for earnings where analysts came into the year expecting 14% earnings growth. So if you have high stock market valuations, which we did at the beginning of the year and still do have despite the pullback, and those valuations are on earnings estimates that are 10 to 14% too high, that's a real problem. Um, and, you know, I think we're seeing the result of that now with this downside volatility.

All right, Michael, thanks so much for joining us. Appreciate it.

My pleasure.