The Holy Grail of Macro | Prometheus Macro’s Aahan Menon on Why Tariffs Won’t Cause A Recession And Why Buying Dips Only Works In An Expansion

Episode Summary

Executive Summary: Ahan Menon argued that the post-Liberation Day market surge has made equities more expensive and less compelling, even though the economy has held up far better than recession fears implied. He sees growth around a steady 1-2%, inflation near target, tariffs as mostly a confidence shock rather than an immediate profit shock, and bonds as mainly trading instruments unless the growth/cutting-cycle backdrop worsens materially.

Main Topics: Equity outlook turned more neutral after the rally (Priority: 5/5): Menon said the model was constructive on stocks in March, but after a sharp rebound and pricing away tariff risks, expected returns look more muted. He is not bearish, just less enthusiastic because prices have outrun fundamentals. Tariffs: big narrative, limited hard-data damage so far (Priority: 5/5): He argued tariff impacts are still uncertain, but the strongest modeled downside would have come through confidence, investment, and durable-goods demand. Since market stress and surveys partly reversed, recession risk from tariffs faded. Growth and inflation remain in a steady-state range (Priority: 4/5): His model sees real growth around 1-1.5% including trade distortions, with private domestic demand closer to 2% and potentially 2.3% ahead. Inflation is near 2.1% headline CPI, with some shelter-driven softening likely. How Prometheus Macro builds signals (Priority: 5/5): He described a multi-factor system using roughly 1,000 inputs, combining business-cycle data, financial conditions, earnings revisions, carry, trend, and mean reversion to time beta and construct portfolios rather than making single-variable calls. Bonds: attractive mainly around cutting cycles (Priority: 4/5): Menon said bonds are currently better suited for trading than passive investing because carry is not high enough relative to volatility, and the market already prices several cuts. He wants stronger growth weakness or a bigger repricing before turning more positive. Commodities and industrial activity improved modestly (Priority: 3/5): He sees commodities as supported by a modest recovery in industrial activity, better manufacturer profit conditions, and some tariff front-running. The view is cautious but constructive as long as goods-demand indicators remain firm. Term premium skepticism (Priority: 4/5): Menon criticized popular term-premium estimates as largely a repackaging of the yield curve rather than a truly distinct forecast. He prefers tradable inputs like yields and policy expectations over model-heavy academic measures.

Key Arguments: The post-tariff equity rally has compressed upside: stocks have already priced away much of the bad tariff scenario, so expected returns are now more sober. Tariffs themselves likely have minimal direct profit effects because the dollar redistribution through customs duties is small relative to total corporate profits. The biggest tariff risk is confidence-driven: if announced tariffs had stayed in place and market/survey conditions remained weak, real growth could have been dragged down about 1.5%. Hard economic data has held up because much of the tariff response was front-loading of imports and spending, which distorted GDP and retail sales. Domestic conditions matter more than trade balances for the U.S. because the economy is far less trade-dependent than many peers. The model tracks changes in earnings expectations, not just their level, because revisions are more informative than consensus levels that are usually always positive. Equities need a catalyst for another major leg higher; without clear acceleration in growth or earnings, the rally lacks fuel. Bonds require a real growth downturn or a deeper cutting cycle to become compelling, since current carry does not compensate for duration risk. Trend following still works, but less broadly than in past decades; the framework therefore blends trend, mean reversion, and carry rather than betting on one style. Carry in equities is better understood as earnings yield, and U.S. equities look expensive relative to global assets, implying lower expected returns and a case for diversification abroad.

Data Points: S&P 500 performance since March: ~7% higher - Host noted the index had risen roughly 7% since Menon’s prior appearance, despite volatility. Equity volatility: averaging in the 30s - Host described volatility in the stock market after Liberation Day. Tariff stress test / announced average rate: about 22.5% tariffs across the board - Menon said Liberation Day tariffs were broadly in line with an extreme stress-test scenario. Modeled growth drag from tariffs: about 1.5% - If tariffs had been applied as announced and confidence had stayed weak, the model implied recessionary pressure. Current headline CPI: about 2.1% - Menon said inflation is near target with some softening from shelter and mixed commodities. Current growth estimate: 1-1.5% YoY - His baseline for total growth, with trade distortions included. Private consumption and investment growth: about 2% - Domestic private activity looked healthier than aggregate GDP. 12-month growth outlook: around 2.3% - Menon said this was roughly unchanged from his prior appearance. Earnings expectations revision view: changes matter more than levels - He emphasized tracking revisions in analysts’ estimates rather than consensus level forecasts. Tariff revenue/customs duties baseline: about $80 billion - Used as the starting point for scaling a direct corporate-profit impact calculation. Corporate-profit impact example: 10x customs duties to about $800 billion - Even this extreme scenario was argued to be small relative to total market profits. Number of model inputs: close to 1,000 - Across Prometheus Macro programs. Drawdown limit: 15% maximum drawdown - Built into the firm’s strategies as a risk control. Allocation to cash: greater than 25% on average - Menon said the systems typically keep meaningful cash exposure unless risk controls are removed. Current market pricing for Fed cuts: about 4 cuts over 18 months - He said this is already priced and not consistent with a sharply weakening economy. U.S. manufacturing employment: close to 13 million - Compared with about 20 million in the 1980s, illustrating structural shrinkage. U.S. healthcare employment in the 1980s: about 5 million - Used to show how employment composition has shifted toward healthcare over time. Prometheus target Sharpe ratio: 0.7 to 1.0 - The stated objective for clients using the diversified macro process.

Pivotal Quotes: "The outlook for equity prices is more sober than it was the last time we were on." — Ahan Menon: His updated view after stocks rallied sharply and tariff risks were partly priced out. "What we're trying to do is basically take all this kind of stuff, systematize it and turn it into portfolios that both retail and institutions can use." — Ahan Menon: He explained Prometheus Macro’s core value proposition and process design. "The publicly available measures, KW and ACM... weren't designed for macro timing." — Ahan Menon: He criticized popular term-premium estimates as poor tools for trading or tactical timing.

Implications: Listeners should read the current environment as neither boom nor recession: modest growth, contained inflation, expensive equities, and bonds that need a clearer downturn to shine. The edge comes from disciplined, multi-factor macro signals rather than headline narratives.