The Setup & Where to Focus

Stocks ventured ever closer to the February 19 all-time high last week. 

• The S&P 500 jumped 5.3%, its second-best weekly performance since October 2023. Each session from Monday through Friday was positive—a feat that occurred two weeks ago, but you have to go back to August 2020 to find the previous bullish occurrence. 

• Rating agency Moody’s spoiled the bulls’ party last Friday evening, though, as it downgraded the US government one notch to Aa1 from Aaa, joining S&P and Fitch, which lowered their US debt grades years ago. While futures markets were closed, the S&P 500 ETF (SPY) traded 1% lower in the moments after that tape bomb.

The rally continued, though. The Cboe Volatility Index (VIX) cratered for a fifth consecutive week, settling Friday at 17.24--the lowest weekly level since the middle of February. 

• With the bulk of Q1 earnings in the books, no major changes anticipated from the Fed, and receding tariff concerns, we could be in for a classic summertime trading environment after intense volatility to begin the second quarter. Of course, risks can surface quickly in today’s fast-paced markets.

Zooming in on the sectors, it was green across the board, given the bullish macro backdrop. 

• Information Technology (XLK) and Consumer Discretionary (XLY) were the big winners, up 8% each. 

• NVIDIA (NVDA) CEO Jensen Huang joined President Trump in his Middle-East tour to ink deals. The president took a shine to Huang, while calling out Apple’s (AAPL) Tim Cook for not being part of the business trip. NVDA soared 16% over the five-day period, finishing at $135 on Friday, just 11% from its all-time high. 

• Now the world’s second-most valuable company by market cap, NVIDIA shares are +56% from the April bottom. As tariff fears have subsided, AI is back in vogue.

The Magnificent Seven ETF (MAGS) tacked on another 9.5% last week, as it was an all-skate for the world’s most important stocks. 

• The underperformer was the biggest by market cap—Microsoft (MSFT) added just 3.5%. AAPL, Amazon (AMZN), Alphabet (GOOGL), and Meta Platforms (META) each lifted between 6% and 9%. 

• Tesla (TSLA) was among the best S&P 500 performers during the risk-on week, charging higher by 17%. 

With the backdrop of better-than-expected corporate profits, soft inflation prints, and even some M&A, cyclical and value sectors were strong, too. 

• Industrials (XLI) is the closest S&P 500 sector ETF to hitting a new all-time high. Within it, Aerospace & Defense (ITA) has been exceptionally strong, but farm & equipment names, railroads, industrial machinery, and building equipment stocks have been firmly bid—hardly recessionary price action. 

• Non-tech discretionary is on the move, too. We’ve seen (fittingly) a pair of deals in the shoe space. First, Skechers was taken private earlier this month, and then Dick’s Sporting Goods (DKS) agreed to buy Foot Locker (FL) for $2.4 billion last week. Might dealmaking be kicking back to life? It’s a summer trend to watch. 

• Interestingly, KKR (KKR) and Carlyle Group (CG) were both upgraded in recent days, and those private equity stocks rose big last week, too.

Large-cap growth was the star of the show and has led the market’s rebound off the April 7 intraday low, but small and mid-cap stocks have been resilient, as well. 

• Both the iShares Russell 2000 ETF (IWM) and SPDR S&P MidCap 400 ETF (MDY) gained 5%, despite a move higher in Treasury yields. 

• We keep an eye on regional banks (KRE) and biotech (XBI) for clues on the health of the SMID-cap space, and both of those industry ETFs were solid last week, but paled in comparison to gains in the retail area. 

• The SPDR® S&P Retail ETF (XRT) registered a 9% advance—its best week in three years. Despite nonstop recession chatter and fears of a significant consumer pullback once tariffs find their way to store-shelve price tags, the equally weighted retail fund was as bullish as could be. It’s yet another market-based indicator suggesting the economy might just hang in there.

It was also an excellent week for investors in international stocks. 

• The Vanguard FTSE All-World ex-US Index (VEU) tacked on 1.9%. While that was its worst week relative to the US market since the election, the increase was good enough for a fresh multi-year high. 

• On a total return basis, foreign equities have never been better. The iShares MSCI EAFE ETF (EFA) closed at an all-time high, along with the iShares MSCI ACWI ETF (ACWI). So, the global stock market is steadily rising—not exactly bear-market price action. 

• US stocks had all the alpha, outperforming Europe (VGK), for instance, by 3.5 percentage points. India (INDA) was the best among the major overseas ETFs—it tacked on 4.3%.

The tone was outright bullish in stocks, but “tension” best describes the bond market today. 

• As budget discussions continued into the weekend, interest rates rose for a third week. The yield on the benchmark 10-year Treasury note increased 6.6 basis points, closing at 4.44% Friday afternoon before the debt-downgrade news. 

• After the bell, rates rose just a few more bps, so it was not a vast selloff by any means. Technical analysts are wont to say, “When in doubt, zoom out.” So, pull back the 10-year's chart, and you’ll see that Treasury rates haven’t done much of anything for almost three years. 

• Now, if intermediate-term yields lift through 5%, that could be cause for concern. Moreover, while the media prints one spook-job story after another, the reality is that stocks and interest rates have risen together for the last few weeks. 

• The upshot: It’s normal to see bonds sold and stocks bought in a risk-on environment.

While stocks took a shine to Trump’s trot across the Middle East, commodities were mixed. 

• Gold cratered 4% to post its worst week of the year. The precious metal is now 10% below its all-time intraday high of $3,500 per ounce. 

• WTI crude oil gained 2% last week but remains below critical resistance between $63 and $65. From a geopolitical perspective, Middle East leaders see the writing on the wall—that the new economy is built on the foundation of tech and AI, and less on oil. Deals brokered by Trump last week centered on tech, as groups like the Saudis and other sovereign wealth funds eye new investments. 

• Trump is also making inroads in de-escalating geopolitical tensions with Iran, which helps keep WTI and brent in check.

• Elsewhere, the US Dollar Index (DXY) was up for a fourth week in a row as the “sell America” trade and “stagflation” narrative fell from the media’s focus. Our team sees what could be a bullish false breakdown on the dollar’s chart. If that plays out, favoring US stocks would make sense over the back half of the second quarter. 

• Lastly, bitcoin (IBIT) was about flat as it consolidated huge gains off its April nadir.

Weekly Calendar Look Ahead

It’s quiet on the data front this week, with the highlights being May preliminary PMI surveys from S&P Global and housing market data. Macro onlookers will focus on Capitol Hill and retail earnings. Fed speak is also heavy over the coming five days.

The Conference Board releases its April Leading Economic Index (LEI) at 10 a.m. ET on Monday before Treasury bill auction bells sound just before noon. 

• Bostic, Jefferson, Williams, Logan, and Kashkari have speaking engagements throughout the day, so we’ll get updates on potential Fed policy. Following last week’s sanguine CPI and PPI inflation readings, there could be some hope for eventual rate cuts. 

• The April Retail Sales report was slightly softer than expected, but several categories were firm, including firm restaurant and bar spending. As recession odds have ticked down, however, just 46 basis points of Fed easing is priced into the futures market for the balance of 2025. 

• Also, look for potential volatility in NVDA as Huang delivers a keynote at the COMPUTEX 2025 conference. Microsoft’s CEO Satya Nadella remarks at the annual Microsoft Build Conference, while JPMorgan Chase (JPM) hosts its annual Investor Day.

After Walmart’s (WMT) solid Q1 report and cautious outlook last week, smaller retailer profit reports begin rolling in on Tuesday. 

• Home Depot (HD) is first up to the plate, while more Fed speak litters the tape. Barkin, Bostic, Collins, Musalem, Kugler, Daly, and Hammack fill the chatterbox. 

• We’ll get the weekly Johnson Redbook retail sales update before the bell—while it cooled to 5.8% last week, consumer spending trends appear resilient. 

• Be on guard for potential volatility in the Nasdaq as Alphabet holds its yearly Google I/O conference.

Wednesday features fewer Fed speakers but more retail reports. 

• Target (TGT), TJX Companies (TJX), Lowe’s (LOW), and Urban Outfitters (URBN) serve up Q1 numbers. Baidu (BIDU) will impact price action among China equities before the bell. 

• In terms of economic data, the MBA mortgage market update should reveal more of the same—mortgage rates remain just below the 7% mark with limited refinancing activity. 

Thursday is the most active on the macro. 

• The Chicago Fed National Activity Index prints in the pre-market, and it will follow troubling regional Fed surveys from last week’s Philly Fed and the NY Empire Fed. 

• Also at 8:30 a.m. ET comes Initial Claims—it held at 229,000 last week, right at consensus. The four-week moving average is also tame at 230,500 despite occasional layoff headlines. 

• After the opening bell, S&P Global Flash PMIs for May cross the wires, and economists forecast modest expansion in the services sector, but a possible sub-50 contractionary manufacturing reading. All survey data is questionable right now, given volatile headlines around tariffs in the past seven weeks. 

• Next up is April Existing Home Sales at 10 a.m., followed by the Kansas City Fed Manufacturing Index later in the session. 

• As for Fed speak, unofficially second-in-command on the FOMC, New York Federal Reserve Bank President John Williams delivers a keynote in the morning.

The week wraps up with New Home Sales data for April on Friday morning before the three-day weekend. 

Overall, we expect continued low volatility from macro data as eyes center on budget talks, Trump’s new tariff rates and potential deal announcements, and Fed guidance in light of last Friday night’s US credit rating downgrade. Outlooks from retailers will also be critical.

Fiscal Policy Framework

President Trump returns from a very successful round of deals inked in the Middle East. He was in his element—full of pageantry, handshakes, red-carpet welcomes, and photo ops with foreign leaders and CEOs in lavish gold-trimmed reception rooms. Saudi Arabia agreed to $600 billion in US AI, semiconductor, defense, and energy investments, and NVIDIA and AMD shook hands with the Saudis over commitments of their own. Qatar and the UAE were also part of a reported $2 trillion overseas investment into the US economy. Stocks reacted well to the financial developments—look no further than the huge move in shares of domestic chip companies.

Trump’s Middle East tour took the spotlight off tariffs. Of course, the major bullish catalyst to begin last week was the announcement of a US-China truce, which included a 90-day pause on the steep tariff rates announced earlier in the quarter. Markets widely expect cooler heads to prevail, and perhaps a 30% effective levy on Chinese imports in some form of a longer-term agreement.

On Capitol Hill, House Republicans continue working to pass a reconciliation package, but internal divisions over Medicaid cuts and energy tax credits put the “Big, Beautiful Bill” in jeopardy. It was voted down by the House Budget Committee last Friday after four hard-liner Republicans sided with the Democrats. We believe GOP lawmakers in the House will sort it out, and key provisions of the spending bill and tax-cut extensions will be agreed to, but the Senate is preparing legislation that may pare back spending cuts proposed by the House. All of it may lead to a contentious battle before Congress goes on recess in August. For investors, tax cuts are likely to go through—the spending side of the equation is most in flux. The credit downgrade last Friday evening put more pressure on Congress to rein in outlays.

Risks & Opportunities

So, Wall Street, Main Street, and Capitol Hill are all in focus today. Stocks have soared since April 7 as corporate earnings have come in strong and equities have grown all the more battle-tested. Consumer spending is holding up, and retail investors have bought the dip in earnest. Republicans and Democrats, meanwhile, are working to ensure that the 2017 Tax Cuts and Jobs Act lives on. 

We are indeed transitioning from ‘all-tariffs, all the time’ to the good stuff—tax cuts and deregulation. Such a shift won’t come without rifts and uncertainty, though. We see that already by the bond vigilantes and uncertainty regarding how much macro damage has been done. Furthermore, the S&P 500 now trades close to 22x forward earnings estimates—near the peak valuation from February—so optimism has clearly been priced back in. Investors had a hot minute to buy at an 18x P/E on the S&P 500. 

With many market participants likely stuck in cash (since equities haven’t let the bears back in over the past few weeks), a melt-up is quite possible, volatility after the Moody’s downgrade news notwithstanding. Consider that from May through July, since 2016, the S&P 500 has had just a pair of down months (that’s two out of 28), so capitulation to the upside would be a reasonable course of events. If the SPX breaks out above the 6147 February all-time high, short-term bears will run out of excuses from a price action point of view. 

We will keep watching the bond market—stocks are just fine with a 4.5% 10-year and a 5.0% 30-year, but if those yields jump another half point, it will be a different story. We feel good about other indicators, such as tame high-yield bond spreads and the reality that markets digested a black-swan, de-risking event and then went out to print a V-bottom on the chart.

Quick Hits

• While the 30-year Treasury rate touched 5.0%, increasing global yields were partly responsible.

• Hedge funds posted their second-biggest weekly net buying last week, in an apparent capitulation move.

• Recession odds, per online betting markets, have halved from above 70% to near 35% in the last three weeks.

• The University of Michigan Surveys of Consumers revealed the most downbeat household sentiment on record when combining current situations, future outlooks, and feelings on inflation, but the S&P 500 didn’t react to the flawed report.

• Moody’s expects the US budget deficit to grow from 6.4% of GDP in 2024 to nearly 9% by 2035. It revised its outlook from negative to stable.

• China has dropped to the No. 3 holder of US Treasuries, falling behind the UK.

• US companies are pacing for a record year of buybacks, helping to support equity prices.

• The Atlanta Fed’s GDPNow model, the NY Fed’s GDP tracker, and Goldman’s real-time GDP gauge all point to 2-2.5% US real growth in Q2.

• April US CPI inflation fell to its lowest level in four years.

• Coinbase (COIN) replaces Discover Financial Services (DFS) in the S&P 500 on Monday, a poetic move as the first crypto SPX company enters the index as a TradFi name exits