Strength through Uncertainty

1. Tariffs On, Tariffs Off. It’s been a newsworthy few weeks related to news on tariffs.  Just ahead of the Memorial Day weekend, President Trump announced that trade negotiations with the E.U. (European Union) were going nowhere and that he would impose a 50% general tariff starting June 1^st. The markets reacted as we would expect, with the S&P declining 0.7%, the Nasdaq falling 1%, and the Dow Jones falling 0.6%, headed into the long weekend. The response reflected the revival of fears of uncertainty and concerns that Trump’s tariffs could stall economic growth.

However, those concerns were short-lived. Over the holiday weekend, Trump announced a delay to the new wave of E.U. tariffs, pushing implementation back from June 1^st to July 9^th. The E.U. stated that they are fully committed to reaching a trade deal by the July 9^th deadline. This provided the market with a temporary reprieve regarding tariffs and the ongoing trade war. U.S. stocks rose sharply to start the week, with the S&P rising 2.1%, the Nasdaq rising 2.5%, and the Dow Jones rising 1.8%. Treasury yields also retreated, and the dollar strengthened.

And then last Thursday, the Court of International Trade (CIT) unanimously ruled against President Trump’s tariffs imposed through the International Emergency Economic Powers Act (IEEPA). The decision would remove $220 billion of tariffs and within days, 30% tariffs on China, 25% tariffs on goods from Canada and Mexico, and 10% on most other goods entering the U.S. would be eliminated. As expected, this ruling did not come to fruition as the U.S. Federal Appeals Court temporarily paused the initial ruling, leaving the current tariff policy in place. Proceedings will continue and will likely go through a lengthy process of appeals that may eventually see its way into the Supreme Court.

These headlines may cause negotiations to be more difficult in the short term for the Trump Administration, given that trading partners may feel less pressure to have to cut a deal. That said, there are other authorities that the Trump Administration can pursue to potentially work around the CIT, but it remains to be seen. 

While the volatile tariff news and upcoming negotiations bring uncertainty to the markets, we believe that the economy has proven to be resilient and will handle what is to come. In fact, the Atlanta Fed GDP Now rose to a remarkable 3.8% growth for the 2Q in the latest reading, driven by the continued strong weekly jobless claims, stronger personal income (the highest since May 2021), and solid personal consumption data. In addition, the Personal Consumption Expenditure (PCE), which is the Fed’s favorite gauge on inflation, came in at 2.1% last month – clear progress to one of their dual mandates in deciding interest rate policy (the other being the labor market).  While the economy continues to be resilient with better growth and lower inflation, the Fed doesn’t need to lower interest rates, but they should begin to consider it.   

Chart 1: Trump 2.0 Tariff Revenue^[1]

2. Continued Hard-Data Strength. Regardless of this week’s tariff noise and market volatility, the data continues to show us that the economy is strong and will not quit. As of May 30, weekly jobless claims remain low at 240k. The 4-week moving average remains quite low at 230k vs typical recessionary periods at 350k-375k. The overall Personal Consumption Expenditures (PCE) showed an increase by only 0.1% m/m in April, and the core PCE (excluding food and energy) also only rose by 0.1% m/m. Again, this proves that inflation is showing signs of cooling down, which is positive news for the consumer.

Chart 2: Personal Consumption Expenditures Year-over-Year Change^[2]

3. Earnings Driving Returns. Markets have rebounded from the April lows, with the S&P 500 up 18% since “Liberation Day:. NVDA, MSFT, AAPL, AVGO, TSLA, AMZN, META, GOOGL, NFLX, and JPM are responsible for nearly 50% of that rally, with NVDA and MSFT accounting for 22% on their own. This V-shaped recovery has been a healthy bounce, and the first quarter earnings have proven that. With almost all companies having reported, we saw 12.5% earnings growth, versus the 7% expectationsand marks the second consecutive quarter of double-digit earnings growth and 18% growth in all of 2024. The earnings momentum continues and is the most important driver for equities, which is why we’ve seen the recovery we’ve had. U.S. equities ended the week with modest gains, with the S&P 500 up 1.88%, the Nasdaq up 2.01%, and the Dow Jones up 1.60%. The S&P and Nasdaq notched their best months since November 2023.

4. Fixed Income. Last week, US Treasury yields fell across the curve as markets reevaluated softer risk sentiment and cautious Fed rhetoric. In summary, the 2-, 10-, & 30-year yields were lower by 9, 11, & 11 basis points, respectively. Markets will digest a heavy slate of new economic data this week, including ISM & PMI manufacturing and services data, payrolls, and labor reports, all of which could influence near-term policy trajectories.

Credit markets rallied last week; Investment-grade spreads tightened 1 basis point to +134, and high-yield spreads narrowed 13 bps to +371. The narrowing of credit spreads has also brought back a wave of new issues as $155 billion of Investment-grade bonds were brought to market in May, 22% higher than the average issuance in May over the last 4 years. In terms of credit quality, the main rating agencies downgraded ratings 44 times and upgraded them 26 times last week. High-yield issuers led the downgrades with 30.

Tax-exempt yields were lower across the curve last week by 1-9 basis points, led by a decrease in front-end yields. This upcoming week will have a record calendar of new issuance as $18 billion of tax-exempt issuance is expected, the 2nd largest weekly total of all time. The record new issuance will be met with strong demand as $43 billion of reinvestment capital is due in June, with $27 billion in the first two weeks.

5. The Week Ahead.

Economics – Monday: PMI Manufacturing, ISM Manufacturing; Tuesday: Durable Orders, JOLTS Job Openings; Wednesday: ADP Unemployment, ISM Services; Thursday: Initial Claims, Unit Labor Costs, Productivity; Friday: Hourly Earnings, Manufacturing Payrolls, Nonfarm Payrolls, Unemployment Rate

Earnings – Monday: CPB, Tuesday: DG, CRWD, HPE; Wednesday: DLTR; Thursday: BF.B, LULU, AVGO

Stephanie Link’s TV Schedule:

Return for Selected Indices^[3]

Sources:

^[1] Source: Strategas. As of May 29, 2025.

^[2] Source: U.S. Bureau of Labor Statistics. As of May 30, 2025.

^[3] Source: Bloomberg. As of May 30, 2025

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