Tariffs Cause The First June Surplus In Nine Years
Low or High Beta? Relative or Absolute?
For the first time since 2016, the Federal government ran a budget surplus in June. Before the Financial Crisis, a surplus was the norm. However, since then, deficits have been the rule, not the exception. The cause of the $27 billion surplus was $27 billion in tariffs taken in. For reference, the government took in $23 billion in May and only $6 billion in tariff revenue in 2024. Additionally, spending cuts further supported the positive monthly fiscal balance.
Despite tariffs causing a surplus in June, the year-to-date deficit is running $1.34 trillion. With three months left in the fiscal year, the deficit is running about 5% higher than last year. While tariffs will help on the deficit front, interest expense is now the single largest line item causing the deficit. It is estimated that the Federal interest expense for the fiscal year will exceed $1.2 trillion. Such is more than double what it was before the pandemic. While the amount of debt has increased significantly since then, the higher interest rates are the main culprit. Any wonder President Trump is begging Jerome Powell to lower rates?
What To Watch Today
Earnings
Economy
Market Trading Update
Yesterday, we provided our 3-month outlook for the market. Today, however, kicks off earnings season with the major banks set to report this morning. As noted above, JPM, BLK, C, and WFC will report with all eyes focused on corporate outlooks, net interest income, and buyback announcements. If you missed our analysis on Friday, we provided our overview for Q2 earnings, which starts with a profound downward revision to expectations.
“Over the last few months, according to data from S&P Global, the Q2-2025 earnings estimates have declined from $234/share in the original March 2024 estimate to $220/share as of June 15th. That $14 drop in estimates is partially due to the impact of tariff concerns on corporate outlooks.”
As Goldman Sachs noted, the expectations bar is low and will be cleared (analysts forecast S&P 500 EPS YoY growth will decelerate to just 4% in 2Q from 12% in 1Q). At a high level, the focus will be on the impact of tariff policies on margins, sales, and investment spending. The current expectation is for consumers to take the brunt of the tariff cost burden (economists think they will absorb 70% of the cost), but if not, it will impact corporate margins. Of course, with inflation not budging, the implication is that consumers haven’t borne the brunt of the tariff cost burden, as in any of it. Since corporations aren’t issuing profit warnings, the conclusion is simple: foreigners are paying the tariffs, just as Trump said they would.
While Q2 will be an easy bar for corporations to beat, analysts expect a strong resurgence of earnings into 2026. That optimism should most likely be approached with some scepticism.
The reason is that since economic growth drives earnings, the current data doesn’t suggest a strong resurgence in consumer activity. The Economic Composite Index (roughly 100 data points) has decreased sharply in the last two months. Historically, earnings track real economic activity, suggesting a risk of disappointment.
More importantly, our most significant concern for Q2-2025 earnings and the rest of the year is slowing economic growth, which will spill over into consumer spending. As discussed in “Consumer Spending Drives Earnings,” there is a high correlation between Personal Consumption Expenditures (PCE) and earnings. To wit:
“One of the better measures for developing a framework for future earnings growth is personal consumption expenditures (PCE), since they comprise nearly 70% of the economic equation. The annual percentage change in forward earnings tracks the yearly percentage change in PCE fairly closely.”
Given the recent softness in the employment data and the downturn in PCE, the risk to earnings is rising.
Investors should emphasize quality, weigh defensive income options, remain alert to guidance tone, and consider hedged exposure in reports. A well‑balanced approach, with a tilt toward AI‑led growth balanced with conservative positioning, will align risk/reward ahead of potentially market-moving announcements.
Trade accordingly.
SimpleVisor – Low Versus High Beta Divergence
Not surprisingly, during this latest stage of the risk-on rally, characterized by speculative stocks leading the way higher, high beta stocks have become very overbought while low beta stocks are oversold. The first graphic below shows that the high beta factor is the most overbought factor on a relative and absolute basis. Conversely, low beta stocks are oversold on a relative basis and sit at fair value on an absolute basis.
The second graphic helps us appreciate whether the current performance divergence is extreme. It shows the z-score is over two standard deviations from its norm. Thus, the relationship over the last 126 days is getting extreme compared to the past relationship. This analysis coincides with our other technical analysis. The market is overbought, and speculative stocks are clearly in vogue. Concurrently, low beta, more conservative stocks are out of vogue. A rotation, when it occurs, will likely favor low-beta, conservative stocks.
Relative Returns Or Absolute- What’s More Important?
A couple of years ago, I wrote about absolute versus relative returns. Given the latest market run, I am getting a lot of questions about chasing returns, and individuals comparing themselves to the S&P 500 index. Historically, trying to beat a benchmark index leads to poor outcomes. However, understanding absolute and relative returns can help solve this issue. Notably, while most investors say they want relative returns, they want absolute returns. The problem, as we discussed in “Benchmarking Has More Risk Than You Think,” is that investors are often unaware of how much risk they are taking. To wit:
“There are many reasons why you shouldn’t chase an index over time and why you see statistics such as ‘80% of all funds underperform the S&P 500’ in any given year. The impact of share buybacks, substitutions, lack of taxes, no trading costs, and replacement all contribute to the index’s outperformance over those investing real dollars who do not receive the same advantages. More importantly, any portfolio allocated differently than the benchmark to provide for lower volatility, income, or long-term financial planning and capital preservation will also underperform the index. Therefore, comparing your portfolio to the S&P 500 is inherently ‘apples to oranges’ and will always lead to disappointing outcomes.“
But here is the only question that matters in the relative versus absolute returns debate:
“What’s more important – matching an index during a bull cycle, or protecting capital during a bear cycle?”
You can’t have both.
SV
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