Among the most volatile quarters in recent history, the stock market proved resilient in the wake of President Trump’s seemingly haphazard tariff proclamation. Rebounding sharply from -18%, -14% and -23% declines at their April lows, the S&P 500, Dow Jones Industrial Average and NASDAQ Composite catapulted higher and finished the quarter with year-to-date gains of 5.50%, 3.64% and 5.48% respectively. The severity of the decline already feels like a distant memory and these major market barometers are poised to set fresh all-time highs. While reaching record highs is quite bullish, only 22 individual components of the S&P 500 concurrently hit new highs.
As the President dialed back his tariff strongarming to more reasonable levels, it became clear that the Negotiator-in-Chief was posturing to make better trade deals for the United States. With trade deals signed with the United Kingdom and China, markets will insist on additional deals or extensions to the 90-day pause. Ten “top deals” are on the way according to Secretary of Commerce Lutnick, with expectations that other deals will soon follow. The deal with China is especially important since the world’s second largest economy has a stranglehold on rare earth minerals required for manufacturing electric vehicles, turbines, computers, smart phones and other electronic devices. China’s rare earth dominance represents a strategic advantage that could become highly disruptive if U.S. – China relations deteriorate. For now, markets have become sanguine that tariff rates will ultimately end up well below levels implemented in early April.
While tariff uncertainty has dampened consumer and business confidence, it has not yet translated to widespread economic degradation. Further, despite fears to the contrary amidst rising inflation expectations, higher tariffs have not coincided with higher inflation, at least not yet. Year-over-year inflation as measured by the Consumer Price Index (CPI) ticked higher to 2.4% in May from 2.3% in April, lower than expectations for CPI at 2.5%. Meanwhile, headline and core PCE, the Fed’s preferred inflation gauge, came in at 2.3% and 2.7% respectively in May. Without clarity on how the cost of tariffs will be absorbed, it is possible that softening demand has left businesses with little wiggle room to raise prices.
Indeed, retail sales declined by 0.9% in May, consumer spending fell 0.1% for the month, and personal income dropped by 0.4%. The control-group of retail sales that excludes autos, gasoline, building materials, and dining still gained 0.4%, matching April’s 0.4% advance. Further, the U.S. economy added another 139,000 jobs in May. While the May jobs report was higher than expected, March and April were revised lower by 95,000 jobs. With unemployment rising to 4.2% since January and continuing unemployment claims rising to the highest level since November of 2021, the labor market is showing cracks. And while consumer spending appears stable, real GDP decreased at an annual rate of 0.5% in the first quarter of 2025 according to the third estimate released by the U.S. Bureau of Economic Analysis.
The Federal Reserve may be at a crossroads. Having held interest rates constant between 4.25% and 4.5% since December of last year, the Fed would seemingly be in position for additional accommodation as inflation glides closer to their 2% target and the labor market softens. After all, the Fed’s dual mandate requires them to weigh both price stability and maximum employment. If not for rising inflation expectations ushered in by tariff uncertainty, the Fed would have ample ammunition to cut rates at the July meeting of the FOMC. CME FedWatch now shows 27% probability for the Fed to cut rates in late July and 92% probability by September, up from 12% and 64% odds just last week. As tariff uncertainty lingers and the President duels with Fed Chair Powell, the Fed’s dual mandate bodes well for rate cuts in the coming months.
As odds increase for a reduction in interest rates, so too will odds grow for the economy to stabilize. Other factors that should help buoy the stock market include the potential extension of the 2017 Tax Cuts and Jobs Act, record buyback activity, deregulation conducive for mergers and acquisitions, reduction of enhanced supplementary leverage ratio capital requirements for banks from 5% to 3.5%, and the rising case for Middle East optimism accompanied by the diminishment of Iran’s nuclear threat.
Meanwhile, the S&P 500 seems fully valued with a PE of 22. As the market reaches new records highs, these positive underpinnings may already be priced in. However, with AI adoption growing exponentially, it is also possible that the stock market is sniffing out the rising potential for an enormous wave of productivity gains that will lead to higher margins, higher profits, and higher stock prices in the years ahead. We expect market breadth to expand in the coming quarters, especially should the Fed relent with additional rate cuts.
The opinions expressed herein are the sole views of Vantage Wealth.
Supporting data and factual information used throughout is deemed to have been obtained from reliable sources.
