The Bull Case?

June 24, 2025
David R. Kotok
Reading Time: 6 minutes

(Please note: The Kotok Report is now also available on Substack at https://dkotok.substack.com.)

Torsten Slok (Apollo) astutely titled a June 21^st comment with “Has Trump Outsmarted Everyone on Tariffs?” His discussion is available to the public on the Apollo site:

“Has Trump Outsmarted Everyone on Tariffs?” | The Daily Spark,
https://go2.apollo.com/webmail/1047283/289831111/cffc8c0675d4a4846cec6eb584ea3b80f491b146bb5bcf76c74c36aca8bd0e30

Torsten: “Maybe the strategy is to maintain 30% tariffs on China and 10% tariffs on all other countries and then give all countries 12 months to lower non-tariff barriers and open up their economies to trade.” Torsten notes that such an outcome could bring in as much as $400 billion in federal revenues.

Kotok note: Trump’s pattern seems to be to start the tariff threats at outlandishly high levels and then settle at lower assumptions or even negotiated agreements. Market agents adjust to work around the additional cost although the process takes time (months and years) to complete. So, the initial tariff shock may be the most extreme point in the tariff lifespan market cycle.

Readers, please note that what I am about to say is NOT a forecast. But it is one of many possible scenarios.

I have already written about the negatives and tariffs’ damage to the world economy. And about the radicalization of national healthcare policy, which is destined, IMO, to shrink the growth rate of the healthcare sector in the United States. Some estimates reach to a shrinkage of a ½ million healthcare sector jobs. It may even shrink the sector weight. When a policy change attacks a sector that is about $4.7 trillion in size, employs 18 million people, and is 18% of GDP, there must be a reduction in the growth rate, and there may be an actual shrinkage in the sector size relative to the size of the entire economy. That is the result forthcoming from RKF Jr’s restructuring of the nation’s healthcare. I don’t like it, but what I think about the new healthcare policy doesn’t factor into what’s happening.

But, but, but. Today’s column is about outcomes in finance and in economic terms. It is about the earnings per share of the S&P 500.

In an earlier Kotok Report we wrote about the worst case for those earnings. Here’s the link:

Impact of Trump Tariffs on S&P 500 Earnings

We projected a tariff impact and slowdown leading to a possible recession. We projected that worst-case earnings would drop to an annualized rate of about $2.20 to $2.40 and that the S&P 500 would fall to a level as low 4000–4400. How we got those numbers and why are in the writings.

We thank Seeking Alpha for redistributing that forecast to over 9000 of their readers. I had some email as a result. One reader asked, “What about the best case?” That is a fair question.

So here goes.

Let’s assume that Torsten’s speculative question is answered with a yes. The uncertainty premium declines immediately. No one can accurately measure that premium, we can only guess at it, but we know it is there.
Pushback to the deportation methods is growing, and Trump is a political operator and sees it. So, in our best-case scenario, Suzie Wiles has a motherly talk with young Stephen Miller and says, “Stephen, keep going, but stop deporting innocent people and stop threatening those who work, pay taxes, have American citizen family members, hold jobs in agriculture or hospitality or construction or medical facilities.” She says, “Stephen, DT 45/47 wants to keep the 490,000 immigrants who are not murderers or rapists. And he wants them working in America and paying taxes including Social Security, and that helps the trust fund with more money to provide the revenue to pay retirees and Medicare. So, Stephen, stop being crazy.” Assume for a moment that Stephen is a young man who listens to maternal advice. So does Kristi Noem, who will continue to shoot a dog or two but will temper policy. Results? The threat to the employment cohort is diminished, and the budgetary negative assumptions about deportation of labor are reversed or, at least, diminished.
Trump has already weakened the dollar, and the yield curve is steepening to reflect that. We’ve written about that several times. The Fed has successfully navigated Trump’s verbal onslaught correctly by standing pat. Think about it: The most stable thing we have seen in the last six months is “no change” in the fed funds rate. That stable rate has preserved a positive real interest rate of around 2% while the inflation rate has trended lower. In our best-case scenario, if Trump tariff uncertainty subsides, markets will discount the outcome, and rates will discount beyond the one-time tariff shock. Fed Governor Waller alluded to this possibility in his recent public remarks.
Let’s add something other than a worst-case outcome in the Middle East. The current Ayatollah gets replaced with a Newatollah. The nuke threat is reduced in a credible, verifiable way so that it would take some new regime many, many, many years to pose a threat again. A side outcome is that Iran stops being a supplier to Putin, which changes the outcome in Ukraine. I believe that has already happened thanks to the targeted Israeli air-war effort. Notice that Israel hasn’t, to date, targeted Iranian hospitals, schools, or old age homes. Contrast that with Hamas or Putin as you think about the two wars raging today. Hamas used human shield Palestinian civilians because they didn’t care about the Palestinian general population. The bombing campaign in Iran is very targeted at nuclear and military facilities.
Let’s imagine that a diminished Iran means that Hamas, Hezbollah, and radical Palestinian militants who do not care about the general Palestinian population have already been beaten (not enough, IMO) and thus “the head of the snake” has been cut off (I hope). In any case, Iran’s proxies are injured. I would encourage the US to punish the Houthis one or two more times so that the Middle East might undergo some changes and get to implementation of the Abraham Accords.

What might the economic outcomes be in this multi-factor best-case scenario? S&P 500 earnings are projected above $300 in 2026 in the bull case. Defense and tech continue or expand earnings growth rates. And the weaker US dollar means foreign purchases of American defense and tech get cheaper for the buyer. Sure, the dollar translation of foreign-sourced earnings (about 33% of total) goes down when the currency weakens. But the two thirds of the S&P earnings that are not subject to that translation can be growing if the Trump policies are more bluster and bullying than actual negative outcomes. The pressure on the healthcare sector is likely to remain but might be tempered by a lessened degree of Medicaid cutbacks.

This scenario sends the S&P 500 above 7000 and creates a longer-term trajectory to 8000 or 9000 by the end of the decade.

Are there risks to this best-case scenario? Absolutely. Do I expect it to materialize? I’m not sure about that, but it is possible. Readers may assess the odds for themselves. I will add that the budget mess is currently an apparent intractable contest. But, but, but. The budget differences have to eventually get resolved because the federal government doesn’t just stop. In my opinion, there is such a growing pushback against the deficit that some compromises are coming. As a result, the 5–6–7% of GDP deficits for “as far as the eye can see” may become a more tempered 3–4–5% projection. That’s still too high, but not as high as the uncertainty premia are suggesting. Remember, as this is written, we have no idea what a final budget and reconciliation bill will look like.

Dear readers, after 50-plus years in the financial services industry, I recommend considering all sides of the debate all the time. Listen to all points of view — especially the ones you don’t like and/or flatly disagree with. I watch all news channels, including those personalities I despise. I read all sources of news and data, including those I do not trust. And I try to verify everything independently. But I want to see what is influencing others.

The only certainty is that there is no certainty.

But there are scenarios. Plausibility is debatable, but possibility is real.

There could be a bull case. Have the stock markets already discounted it? I’m not sure. Is the stock market excessively priced now? Maybe. I’m very uncomfortable with a 40% cap weight of the top 14 stocks and their concentration in the tech sector. But the other 486 members of the S&P 500 look reasonably priced to me.

Now it is time for me to take a few hours and go fishing. There is one place where the uncertainty premium is removed. That is why it is called fishing and not called “catching.”

Here’s a photo of my friend and fishing guide Ray Sockabasin standing in front of his rebuilt cabin on Tomah Stream, Passamaquoddy Reservation, Indian Township, near Princeton, Maine. Ray and I have fished together for more than a quarter century.

Also below is a chain pickerel that weighed over six pounds and was caught and released after I took this photo, on Big Lake, Washington County, Maine, about 10 miles or so from Leen’s Lodge.