The Setup & Where to Focus

US stocks pulled back last week as the focus re-oriented from tariffs to tax policy. 

• The S&P 500 dropped 2.5%, its worst weekly performance since the start of April. The major laggard within the index was Apple (AAPL). Shares are down eight sessions running, and its loss last Friday was more than 3% on the heels of President Trump’s Truth Social post calling out CEO Tim Cook. The message threatened Apple with a 25% tariff on iPhones manufactured outside the United States. 

• So, while much of the week was centered on Trump’s One Big, Beautiful Bill (OBBB), the Tariff Man reappeared ahead of the holiday weekend.

The Nasdaq Composite also gave back 2.5%, while the Cboe Volatility Index (VIX) ended its string of declines, rising from 17 to 22 during the data-light stretch. 

• This week, we’ll get Minutes from the early May Fed meeting, a second look at Q1 GDP, and PCE prices for April. NVIDIA (NVDA) reports Q1 results Wednesday night amid a host of small retail earnings releases.

Diving into the sector view, all 11 S&P 500 groups were down. 

• Utilities (XLU) outperformed, posting just a 0.4% drop despite increasing interest rates. The power-generation niche of the SPX remained near the flat line in the face of its biggest component, NextEra Energy (NEE), plunging 10%. The Florida-based utility has an expansive solar footprint, and it was seen as a big loser from the passage of the OBBB. 

• Conversely, AI-oriented power producers, like Constellation Energy (CEG) and Vistra (VST), performed well mid-week and were boosted by an Executive Order by President Trump aimed at easing nuclear power regulations and boosting domestic energy production. Moreover, GE Vernova (GEV), while in the Industrials sector, gained 8.5% for the week, notching a new all-time high as it inked a new nuclear power deal. 

• The AI theme is battle-tested and appears to be back in full force.

At the bottom of the sector stack were a handful of cyclical and growth areas. 

• Energy (XLE) dropped 4.4%, though WTI crude oil was off by just 1%. Concerns grew that oil’s current price is too low for exploration and production companies to tap new wells. Still, existing oil patches generally feature breakeven prices below today’s price. 

• Our team thinks that more M&A activity is likely on the way this summer, given the rocky state of the energy industry and the fact that large oil & gas players have higher-quality balance sheets compared to a decade ago.

Elsewhere, Information Technology (XLK) was next to last, ending down 3.5% last week. 

• AAPL certainly weighed on the biggest S&P 500 sector, but NVDA also shed 3%. Along with the 25% tariff aimed at Apple, Trump Truth’d that the European Union has been difficult regarding trade negotiations. Hence, a 50% duty is set to go into effect on June 1. 

• While that hit mega-cap tech hard, the broader market almost shrugged it off entirely by Friday afternoon. For NVDA specifically, CEO Jensen Huang has been currying favor with the POTUS—perhaps he doesn’t want to be in his bad graces (like Tim Cook). 

• Last Wednesday, the president announced that it will continue to tighten AI chip exports to China despite the NVIDIA CEO’s pushback.

Away from large caps, both the S&P MidCap 400 ETF (MDY) and the Russell 2000 ETF (IWM) lost more than 3%, slightly underperforming the S&P 500. 

• Rising interest rates and a bump in the recession probabilities (after the pair of tariff threats on Truth Social) dinged economically sensitive companies. 

• We had been eyeing some relative strength in the S&P SPDR Retail ETF (XRT), but the consumer niche took a dive on Friday—Deckers Outdoor (DECK), maker of the UGG and HOKA brands, was kicked down 20% after offering dismal guidance. Ross Stores (ROST) likewise plunged in the wake of its Q1 report, which included pulled guidance amid tariff uncertainty. All told, domestic SMID caps are close to all-time relative lows to the S&P 500. 

• What will it take for MDY and IWM to sustain a recovery? We really need a Goldilocks macro outcome in which interest rates either hold current levels or rise for the right reasons (improved growth hopes), along with optimism for a durable and organic economic snapback.

Not all stocks were in the red ahead of the Memorial Day weekend. International equities were up across regions. 

• The Vanguard FTSE All-World ex-US ETF (VEU) closed at a new all-time high on a weekly basis for the first time since June 2021. Foreign stocks are now up 15% year to date, dividends included, compared to a 1% SPX drop. 

• Helping ex-US names was a weaker US Dollar Index (DXY). The greenback settled at its lowest weekly level since April 2022, below the 100 mark. Concerns over the US fiscal future following the House passing the OBBB last Wednesday morning were front and center throughout the week. 

• Europe (VGK) rallied 1.1%, China (FXI) gained 0.9%, and international small caps (VSS) were particularly strong—up seven weeks running.

Driving prices across asset classes recently has been the Treasury market. 

• The yield on the benchmark 10-year Treasury note rose another seven basis points to 4.51%. Up four weeks in a row, borrowing costs have increased, but intermediate-term yields have merely consolidated since October 2022. 

• The real action has been on the long end of the curve; the 30-year Treasury bond closed at its second-highest weekly yield since 2007, above 5%. “The long bond” touched 5.15% at the peak last Wednesday before bond buyers stepped in ahead of the weekend. 

• It’s also important to caveat that the 30-year rate’s ascent has come alongside a jump in global yields—so it’s not a US-only story. Japan's super-long bond yields reached new records as the market fretted about demand for fixed income in the world’s fourth-biggest economy. Borrowing costs are also on the rise in the UK and Germany. 

• Thus, investors are clearly rethinking traditional asset allocation maxims—look no further than the two best-performing assets so far this year: gold and bitcoin.

While WTI wobbled in the low $60s, bitcoin soared to a new all-time high of $112,000 last Thursday. 

• Gold notched at a fresh all-time weekly high settle of $3358, jumping 4.8% amid a weaker dollar and growing fiscal jitters. For the year, gold (GLD) is now up 28% and bitcoin (IBIT) is higher by 17%. 

• The metals space was strong away from gold, too. Platinum, copper, palladium, and silver each rallied 4% or more. 

• With oil’s weak performance lately, the record number of US travelers surely appreciated retail gas prices at their cheapest price since 2020 for Memorial Day weekend.

Weekly Calendar Look Ahead

Macro investors will get a little bit of everything this week. Clues on the manufacturing front, FOMC minutes, GDP, inflation, and consumer sentiment litter the holiday-shortened trading week. The Senate is on recess, so there shouldn’t be any headlines on the OBBB, but surely Trump’s Truth Social will be fired up as usual. NVDA and retail earnings are also in focus, along with Fed speak.

Markets are closed on Monday for Memorial Day. 

• The only action will be outside our borders, but it will also be interesting to see how the domestic box office did over the long weekend.

Traders return on Tuesday to April Durable Goods Orders in the pre-market, followed by a March view of the S&P/Case-Shiller Home Price Index. The Conference Board’s Consumer Confidence then comes at 10 a.m. ET, with the Dallas Fed Manufacturing Index right after. Treasury bill auctions cross the wires before noon, and a 2-year note auction occurs at 1 p.m. 

• It’s an active day, and there will be scrutiny on Treasury issuance—last week’s poor 20-year auction helped send interest rates upward, though the demand for that orphaned part of the curve didn’t appear to be all that bad when dissecting its internals. 

• Our team will also be monitoring consumer confidence data—there could be a bump up in the vibes after the immediate panic after Liberation Day. 

• On that note, the bulls outnumbered the bears for the first time in 16 weeks within the AAII Sentiment Survey published last Thursday. 

• Be on guard for potential volatility in the crypto space—Bitcoin 2025 begins Tuesday, and the conference features talks by Vice President JD Vance and Strategy (MSTR) CEO Michael Saylor.

Wednesday begins with Fed speak from Minneapolis Fed President Neel Kashkari overnight, which could move Treasury futures. WTI and Brent prices could also sway—the 60th session of the Joint Ministerial Monitoring Committee of OPEC and non-OPEC countries commences in Austria. 

• After the market’s open, soft survey data from the Richmond Fed and Dallas Fed hit the tape before the minutes from the May Fed meeting are released at 2 p.m. ET. 

• We expect the Fed meeting notes to show widespread hesitation to move interest rates. 

• All eyes will quickly re-focus on NVDA for its earnings report after the bell.

The penultimate trading day of the month is busy. 

• The action gets going at 8:30 a.m. ET with the weekly Initial Jobless Claims report, and it will be interesting to see what revisions are made to Q1 GDP. To be clear, we don’t expect any tape bombs within it, but if there is a surprise upside revision to growth, then it's possible the start of the year could have been a modest expansion, not a contraction. Keep in mind that there will also be adjustments to the first-quarter PCE inflation data. 

• Pending Home Sales hits after the market’s open, and Austen Goolsbee from the Chicago Fed, a dove, speaks right after. Kugler, Daly, and Logan have public engagements in the afternoon and evening. Costco (COST) reports results after the close, so that will offer a fresh view of the consumer too.

Friday is all about inflation. 

• The major report of the week is April’s Personal Income and Outlays and PCE Price Index, which comes out in the morning. The market expects a soft 0.1% rise in both the headline and core rates, which would bring the annual gauges to 2.2% and 2.6%, respectively. 

• Above the Fed’s 2% target, those could be the low marks for the near-term cycle as tariffs seep their way through the economy and to store shelves. Allio will also monitor trends in the Personal Saving Rate—we anticipate it to have ticked up, perhaps to a multi-year high, amid consumers’ collective unease. 

• From there, Chicago PMI prints at 9:45 a.m. ET and a final update to the University of Michigan Surveys of Consumers is published 15 minutes later. 

• As we have called out many times before, UMich has been relegated to a laughingstock on Wall Street, so the market won’t pay attention to it. 

• Goolsbee talks once again that night. 

Fiscal Policy Framework

The House narrowly passed the OBBB, garnering 215 yeas to 214 nays along party lines. Broadly an extension of Trump’s signature 2017 Tax Cuts and Jobs Act (TCJA), the bill includes no tax on tips and overtime, increased business incentives, a higher small-business income deduction, and an increase in the hotly debated state and local tax deduction cap. Though the OBBB is said to potentially add $3.8 trillion to the federal budget deficit through 2034, it's mainly a continuation of current policy, which we expected. 

The OBBB now makes its way to the Senate, but nothing will happen until June when the that chamber of Congress returns from recess. Republicans will likely propose larger business tax cuts while scaling back cost-savings identified by the House majority. Green energy credits and changes to Medicaid will be contested between the two parties. The big risk for markets is if the agreed-upon OBBB has even larger impacts on the deficit upon the revisions—the bond market surely wouldn’t like that. Trump has set an Independence Day target for signing it into law, but we see August as a more likely timeframe—that's the so-called “X-date,” when the US debt ceiling must be raised.

Meanwhile, the president turned up the heat on the trade front, calling for a straight 50% tariff on imports from Europe, along with a special 25% levy on Apple (and Samsung) products made overseas. Our view was that it was a negotiating ploy, considering that the US and EU held trade talks later in the day last Friday. The market obviously didn’t believe the 50% tariff on EU imports would stick, but AAPL’s decline Friday gave credence to the 25% targeted duty.

Risks & Opportunities

With drama on both the budget and tariff fronts, macro volatility appears to be back on the rise. It’s clear that the last 10 basis points jump in the 30-year bond rate was troublesome for stocks, so if we see the long bond crack, say, the 5.2% mark, investors should brace for volatility. Conversely, a steady yield drop this week, perhaps helped by cooler inflation readings, may help support the S&P 500. As we witnessed last week, however, goings-on in Europe and Japan play critical roles in how US fixed income performs. 

The good news is that retail earnings reports have been solid so far, asserting that household spending has held up well in the face of intense macro uncertainty. So long as the labor market hangs in there—which most indicators keep showing—then 2026 recession odds should keep ebbing from their peak a month ago. 

We aren’t pinning rally hopes on the Fed today—they are in firm wait-and-see mode. It will really be all about the bond market and potentially key trade deals announced over the coming weeks. What’s bullish is a general buy-the-dip attitude among the retail crowd—the S&P 500 has routinely closed above the open in the last handful of weeks. The latest dip brings the SPX right back to its now-rising 200-day moving average, with 5670 to 5800 being support. 

Quick Hits

• China’s 30-year government bond yield is now lower than the Japanese yield.

• In a healthy breadth sign, 84% of MSCI country equity indices trade above both their 50-day & 200-day moving averages.

• Shipping volumes from China have dropped in recent days ahead of early June, which is a key holiday-ordering period.

• The US oil rig count fell to the lowest level since November 2021 amid soft WTI prices.

• The market-implied recession chance stands at 40%.

• Investors price in a max YoY CPI rate of 3.7%.

• Comscore confirmed a record Memorial Day weekend at the box office.

• The 30-year TIPS yield reached 2.74% last week, the highest since 2002.