TheChek News Flow

Dr. Pangloss, welcome to Wall Street, where it is indeed the best of all possible worlds.

Voltaire’s oblivious optimist fits in well in a place where domestic political violence and escalating global tensions don’t intrude.

And so major equity indexes notched records again in a week marked by an abhorrent assassination in the U.S. while Russia sent drones supposedly intended for Ukraine into Poland and Israel expanded the Gaza war into Qatar. As Peter Atwater observed in his Financial Insyghts missive this past week, it isn’t known if Chinese President Xi Jinping might tag along with an assault on Taiwan or India’s Prime Minister Narendra Modi could up the ante with Pakistan, but global markets have priced in none of this.

Stocks’ advances in the face of these risks may mainly prove President Calvin Coolidge’s observation that the business of America is business. Even if the U.S. economy is slowing, it is still growing, and profits even more so. As noted, stock and bond markets also continue to advance in expectation of a new round of Federal Reserve interest-rate cuts, even with quite easy financial conditions. That’s evidenced by corporate credit offering slim yield premiums, which sent the popular iShares iBoxx $ High Yield Corporate Bond exchange-traded fund (ticker: HYG) to a 52-week high this past week.

Among equities, along with the S&P 500 and the Nasdaq Composite ending the week at new high marks (and the Dow Jones Industrial Average setting a record on Thursday), the market for initial public offerings is back. A highlight was the debut of Klarna Group, which, as Macro Intelligence 2 Partners helpfully explained, “for those of you who don’t finance your Chipotle burritos,” is a popular buy-now, pay-later service. That Klarna describes itself as “a global, AI-driven” payments platform makes its $31 billion market capitalization easier to explain, they wrote in a client note.

Klarna was followed by Figure Technology Solutions and Gemini Space Station, both crypto-related outfits that popped following their debuts. “We assure you that the reopening of the IPO window isn’t usually considered a symptom of tight financial conditions,” MI2 dryly added.

Despite that, the Fed will be easing this coming week, which will only be the ninth time it has cut rates within 10 days of the S&P 500 hitting a 52-week high since 1994, according to Bespoke Investment Group. It would also be only the sixth time the Fed has cut since then after a pause of more than six months between rate reductions. In either scenario, the advisory found the S&P higher a year later with bigger gains than the 12-month median return.

Based on that history, equity investors can safely ignore domestic political risks, international tensions, richly priced bonds, exalted equity valuations, and signs of speculative fervor in the IPO market. And with the Cboe Volatility Index, or VIX, the so-called fear gauge for stocks, trading below 15 and evincing no worries among options trades, could Dr. Pangloss actually be right? Or does complacency reign based on expectations of continued easy money?

Government finances are deteriorating in the U.S., United Kingdom, and France. They are improving in Mexico and Peru, and at least holding steady in most emerging and frontier markets, from Costa Rica to Pakistan.

Investors have noticed. The iShares J.P. Morgan USD Emerging Markets Bond exchange-traded fund has climbed by 8% this year, bringing spreads over U.S. Treasuries to their lowest in a decade. The analogous local currency bond ETF has jumped 13% as Donald Trump’s tariffs and tax cuts counterintuitively spurred flight from the dollar.

“EM is pretty much the same old EM,” says Samy Muaddi, portfolio manager for emerging market bonds at T. Rowe Price. “What’s new is structurally higher volatility in developed market debt.”

The highest U.S. import tariffs since the 1930s have left emerging market debt unscathed for two somewhat contradictory reasons. For one group of large borrowers—China, Brazil, India, South Africa—exports to the U.S. are 3% or less of gross domestic product. “That’s not of the magnitude that would move the needle much on sovereign creditworthiness,” says Cem Karacadag, head of global sovereign debt and currencies at Barings.

Countries with more exposure—Mexico, South Korea, Taiwan, Malaysia—can expect a Trump tariff-driven slowdown, notes Arthur Budaghyan, chief emerging markets strategist at BCA Research. But that, along with an expected fall in U.S. interest rates, will allow their central banks to loosen.

Declining rates are generally positive for fixed-income investment. “U.S. tariffs are deflationary for the rest of the world,” Budaghyan concludes. “That’s bearish for equities, bullish for bonds.”

Opinions divide on where the sweet spot is in a highly diversified asset class. Karacadag is focusing on dollar credits from BB-rated sovereigns, the top rung of high yield. Examples: Turkey, Guatemala, Paraguay, Serbia, Albania. “You’re getting a yield above 6%, and most EM BB is resilient enough for a cyclical U.S. slowdown,” he says.

BCA’s Budaghyan tilts toward local-currency credits, anticipating interest rate cuts and continued dollar weakness. “EM currencies will be flat to up, and even the Asian economies will be cutting,” he predicts.

His top pick is Mexico, where President Claudia Sheinbaum has so far managed to exempt most exports from U.S. tariffs and is nibbling away at the budget deficit left by predecessor Andres Manuel Lopez Obrador. “If there’s one asset of any kind to buy in EM, we recommend 10-year local-currency Mexican bonds,” he says.

Peter Kent, co-head of emerging market fixed income at asset manager Ninety One, sees “super interesting currencies” in Asian trade titans like Taiwan, Korea, and Malaysia. These currencies all climbed as the dollar dove following President Donald Trump’s April 2 Liberation Day. Kent expects more of the same as governments “sell excess dollars to cut their overexposure.”

T. Rowe’s Muaddi is inclined to caution, as bond values everywhere look rich. “We’re three years into a very strong rally in leveraged credit products globally,” he says. “One portfolio theme for us is a rotation out of frontier into investment-grade debt.”

A borrowing splurge by advanced economies since the pandemic erupted five years ago has eroded the certainty that they are safe and emerging markets risky. Trump’s economic gamesmanship since January undermines it further. “The breakout event this year is higher policy uncertainty in the U.S., while EM governance inches forward,” Barings’ Karacadag says.

Investors will remain uncertain for a while about where the global dust settles. Emerging market credit still offers opportunity.

The Trump administration’s dramatic reworking of U.S. public-health agencies’ approach to vaccines is creating a difficult and unpredictable situation for drugmakers.

Pfizer, in particular, could be challenged by the administration’s policy shifts around the preventive shots.

U.S. Big Pharma companies are generally less exposed to the vaccine market than their European peers such as Sanofi and GSK. But Pfizer is in a unique position, with a long list of its drugs set to lose patent protection in coming years. As that happens, the company’s vaccines are projected to comprise a growing portion of total company revenue, according to a Barron’s analysis of Wall Street estimates.

The shift in the company’s revenue base comes at an uneasy moment for the vaccine industry. Robert F. Kennedy Jr., the U.S. health secretary, is leading a sweeping campaign against the vaccine status quo, announcing funding cuts to messenger RNA-based vaccine research, the firing of the director of the Centers for Disease Control and Prevention after she resisted his changes to vaccine policy, and the wholesale replacement of all of the members of the CDC committee that guides how vaccines are used in the U.S.

There are hints of even more significant changes to come.

The CDC vaccine advisory committee, handpicked by Kennedy, is now stacked with critics of messenger RNA-based vaccines. It will vote late this month on a recommendation for how the mRNA-based Covid-19 shots should be used, and is expected to issue narrow recommendations that could severely limit how insurers cover the vaccines.

The committee has also said it may vote at the same meeting on other shots, including respiratory syncytial virus vaccines and the measles, mumps, rubella, and varicella vaccine. During his confirmation hearing in January, Kennedy refused to say that the MMR vaccine doesn’t cause autism, echoing an antivaccine attack that has spawned years of conspiracy theories. (Kennedy has since endorsed the shot.)

Kennedy’s interventions have sapped investor enthusiasm for the vaccine sector. Shares of Moderna, the mRNA-focused biotech that sells Covid-19 and RSV vaccines, are down more than 40% since President Donald Trump announced his intention to name Kennedy to lead the Department of Health and Human Services last November.

In August, Australian conglomerate CSL, which owns CSL Seqirus, a major supplier of flu vaccines in the U.S., announced sweeping layoffs and a plan to spin off the vaccine subsidiary. Its stock, which trades on the Australian Securities Exchange, is down more than 30% over the past year.

For U.S. Big Pharma names, vaccines are mostly an afterthought. Vaccines accounted for roughly 6% of the combined revenue of Merck, Pfizer, Bristol Myers Squibb, Eli Lilly, and Johnson & Johnson in 2019, according to a Barron’s analysis, and 8% in 2024.

But vaccine exposure isn’t distributed evenly across the Big Pharma peer group. Bristol, J&J, and Lilly have had effectively no vaccine revenue in recent years. (J&J did sell a Covid-19 vaccine, though the shot wasn’t competitive and is no longer on the market.)

Merck and Pfizer, meanwhile, have significant vaccine businesses. Merck sells the HPV vaccine Gardasil, the MMR vaccine, and a number of other shots. Pfizer sells the Covid-19 vaccine it developed with BioNTech, called Comirnaty, plus the Prevnar pneumococcal vaccines, among other, smaller products.

Gardasil is Merck’s second-best-selling product, and vaccine sales account for roughly a fifth of its revenue. In 2030, FactSet estimates have vaccines making up around 19% of Merck’s sales.

Pfizer’s reliance on vaccine sales has historically been less than Merck’s. In 2019, vaccines accounted for 13% of its revenue. In 2024, with the addition of its Covid-19 vaccine, that rose to 20%.

FactSet consensus estimates have 20% of Pfizer’s revenue coming from vaccines once again in 2025.

But as patent expirations hit Pfizer products such as the cancer drugs Xeljanz and Ibrance and blood thinner Eliquis, the company’s revenue stream will grow increasingly concentrated in vaccines, which don’t face the same kind of competition.

In 2030, vaccines are projected to roughly amount to a quarter of Pfizer’s total revenue, potentially topping the list of U.S. Big Pharma vaccine exposure.

These projections could change as Pfizer’s pipeline evolves. Pfizer told Barron’s that it has a number of drugs under development that could drive significant revenue.

“While vaccines remain a core aspect to our portfolio, we are excited by multiple assets that we believe have significant future revenue potential across all four of our core therapeutic areas to help address substantial patient need and drive Pfizer’s growth in the coming years, with the greatest research investment centered on our oncology franchise,” says a Pfizer spokesperson.

Until then, investors are left with a business where vaccines are increasingly important, in a world where their future is increasingly unpredictable.