The Setup & Where to Focus

Stocks rallied for a second straight week, finishing Friday on a nine-day winning streak, the longest since 2004. 

• The S&P 500 tacked on 2.9% and is now above where it closed back on April 2, Liberation Day. 

• The Nasdaq Composite outperformed with a 3.4% advance—Microsoft (MSFT) and Meta Platforms (META) reported Q1 earnings last Wednesday, followed by Apple (AAPL) and Amazon (AMZN) posting profit results on Thursday. Microsoft snatched the top market cap spot from Apple by week’s end.

The Cboe Volatility Index (VIX) gave back ground for a fourth consecutive week. 

• After printing above 60 less than a month ago, Wall Street’s fear gauge is basically near its long-term average, currently in the low 20s. 

• The immediate volatility catalyst this week is the Fed meeting, while we have to wait until late May for NVIDIA’s (NVDA) quarterly earnings report. CPI and Retail Sales don’t hit until next week.

Zooming in on the sectors, it was rather risk-on. Industrials (XLI) was the best of the bunch, rising 4.3%. 

• It, along with Information Technology (XLK), Utilities (XLU), and Communication Services (XLC), is above its Liberation Day close and higher so far in Q2. 

• Industrials is perhaps the most diverse of the 11 S&P 500 areas; the Aerospace & Defense industry performed particularly well, with the iShares US Aerospace & Defense ETF (ITA) ending the week at an all-time high. ITA lifted on Friday on news that President Trump proposed $1 trillion to 2026 defense spending.

• Strong earnings results lifted the cyclical space—Farm & Heavy Construction Machinery, Building Products & Equipment, and Airlines all soared. 

Comm Services and Info Tech were carried by some of the usual suspects. 

• MSFT’s numbers, namely its Azure cloud growth, were firm, and the stock rallied 11% for the week. 

• Investors also liked what they saw in META—Zuckerburg's stock jumped 9%. And headlines were plentiful around NVDA as shares settled at their highest weekly level since March. 

• Elsewhere among the Mag 7, AAPL was down 2%, while AMZN, Alphabet (GOOGL), and Tesla (TSLA) were up less than 1%. 

• Energy (XLE) was the weakest sector, thanks to oil settling below $59—the lowest since February 2021. 

• Eli Lilly (LLY) and UnitedHealth Group (UNH) reacted negatively to earnings, dragging Health Care (XLV) down.

With growth and cyclicals outperforming and defensives lagging, risk-on small and mid-cap stocks produced alpha. 

• The SPDR S&P MIDCAP 400 ETF Trust (MDY) gained 3.6%, and the iShares Russell 2000 ETF rallied 3.3%. 

• Regional banks (KRE) and biotech (XBI) were up more than 4%. SMID caps’ ascent was all the more encouraging considering that interest rates jumped to end the week—we've often seen more debt-reliant smaller company shares underperform as borrowing rates rise. 

• So, price action on Friday was certainly counter to the recession narrative (stocks up, interest rates up). 

Turning to global markets, international markets kept pace with bullish domestic equity trends. 

• The Vanguard FTSE All-World ex-US Index Fund ETF (VEU) didn’t just gain 2.6% over the five days, but it also registered at a new all-time weekly high close if you include dividends—not exactly the sort of thing you see in bear markets. 

• Breadth was strong across the board, too. Taiwan (EWT) was the standout, but 39 of the 45 country ETFs we track were green. 

• China (FXI) rose big on Friday as rumors swirled that Beijing was weighing a fentanyl offer to jumpstart trade talks with the US; President Xi, not President Trump, may have blinked first. 

• Also on Friday, bullish headlines surfaced that both the European Union and India reaffirmed commitments to concluding a trade deal by year-end.

It was an active week in the bond market. 

• There were obviously plenty of macro catalysts, including a litany of labor market reports, and the benchmark 10-year Treasury note yield settled at 4.32% by the time the dust settled on the first Friday of May. 

• Ahead of the better-than-expected April jobs report, the 10-year was close to 4.1%, with pundits asserting a recession was being priced in, which made sense after the negative Q1 GDP print reported last Wednesday. 

• That all changed on Friday when the jobs report came out. The economy added 177,000, above estimates, while the unemployment rate ticked up from 4.152% to 4.187%. 

• Slowdown fears eased, and the bond market sold off, but the weekly yield change was not dramatic. In short, a 4% to 4.5% 10-year Treasury rate is kind of a sweet spot right now.

Over in commodities, oil was the big story. 

• Soft energy prices are no doubt a boon for consumers as the summer driving season is set to begin later this month, but sub-$60 per barrel on WTI flashes a recession warning. 

• One thing our macro team has noticed is that gasoline prices have not retreated commensurate with oil—it’s likely due to weak refining activity at home. AAA reports that the current pump price is $3.17, but RBOB futures (gasoline) are down at $2.02--that’s a large spread, historically speaking. If conditions normalize, there’s still a chance the retail average could drop below $3. Of course, most states in the South and Central are below $3 already.

• Elsewhere, gold (GLD) was down for a second week in a row as it drifts further back from $3500 per ounce. 

• Bitcoin (IBIT) gained 1.7%, clawing back into the upper $90,000s before easing over the weekend. 

• Finally, the US Dollar Index (DXY) notched back-to-back weekly gains but remains below resistance around 100.50.

Weekly Calendar Look Ahead

It’s quiet on the data front this week, with the focus being on Wednesday afternoon’s Fed interest rate decision and Powell press conference. That macro air pocket offers the Trump administration plenty of airtime to get out their latest trade messages. Stocks rose last week during media appearances by Commerce Secretary Lutnick and Peter Navarro. While market reactions are influenced by many factors, it’s unclear if these events had a direct impact. Recall that in March, whenever those two appeared in front of cameras, it generally corresponded to spikes in the VIX. This week, Treasury Secretary Bessent speaks Monday at the four-day Milken Institute Global Conference. 

Following Berkshire Hathaway’s (BRKA) annual shareholder meeting last Saturday, we’ll get Services PMI from S&P Global (a second look) and the ISM’s version on Cinco de Mayo morning. 

• The consensus calls for slight expansion from both outlets, and we expect the same. Right now, though, there is an apparent gap between regional survey data (weak) and better national PMI figures—something to watch as Q2 unfolds. 

• Last week’s Manufacturing PMIs were tepid, as anticipated. That afternoon, the Federal Reserve's Senior Loan Officer Opinion Survey (SLOOS) on Bank Lending Practices will be released, though that update on bank loan activity is less impactful than it was two years ago. 

• Still, clues on the supply and demand for borrowing may turn more important if recession fears increase.

Bessent is scheduled to testify to the House Appropriations Committee, so that will be the highlight on Tuesday. 

• March trade data hit in the premarket, and another massive deficit will be reported as consumers and businesses stockpiled ahead of Liberation Day. 

• Later in the morning, the Johnson Redbook Retail Sales report will likely show another firm consumer spending print, perhaps north of 6%. Despite all the fear of a growth slowdown, so long as employment holds up, households are likely to continue spending at a solid pace. 

• A 10-year Treasury note auction takes place at 1 p.m. ET, and it’s also a busy day for Q1 earnings.

Wednesday is all about the Fed. 

• The FOMC will leave its policy rate unchanged, so tweaks to the 2 p.m. statement will be scrutinized, as will be off-the-cuff comments from Powell in the media Q&A beginning at 2:30 p.m. 

• The weekly mortgage market update comes before the bell, and the EIA’s oil report, perhaps more in the spotlight this week given weak price action in WTI, hits at 10:30 a.m. 

• Consumer Credit for March comes at 3 p.m. Manheim reports April used car price data—a key inflation gauge. 

• Lastly, Costco (COST) provides an early read on the consumer via its April same-store sales report after the close.

Thursday’s notable macro update will be a Q1 view of productivity. 

• It could be a light number. Here’s why: With the Q1 GDP report in hand (a contraction), the number of hours worked has been decent. 

• Basic math asserts that output per hour worked is then likely to be light. So, Q4 2024’s 1.5% nonfarm productivity (QoQ) gain may turn negative. 

• But we’ll be watching the Unit Labor Cost percentage—if that is low, it will help keep Treasury yields in check, possibly increasing the chance of a June Fed rate cut. 

• Concurrent with those data points, Initial Jobless Claims arrive; last week, a jump to 241k in first-time applications for unemployment benefits printed, but that was due to a quirk in New York—education workers there can technically claim benefits during its spring break. 

• Back out NY, and the figure was tame; Continuing Claims, however, printed a fresh cycle high. Then, at 11 a.m., the New York Fed releases its monthly Consumer Inflation Expectations report, a much better gauge of the public’s collective inflation outlook than the University of Michigan Surveys of Consumers.

Finally, on Friday, Fed members are back on the talking trail after the FOMC’s blackout period. 

• Chicago Fed President Austan Goolsbee (a dove), New York Fed President John Williams (a centrist), and Cleveland’s President Beth Hammack (a centrist) are the notable presenters, but the calendar is littered with Fed speak.

Fiscal Policy Framework

Stocks reacted well to encouraging developments on the tariff front. It’s becoming increasingly clear that President Trump seeks better and fairer trade deals with allies, partners, and even adversaries. There’s also evidence suggesting that China is more negotiable than it was letting on in April. China is, of course, important, but a memorandum of understanding with Europe would potentially be a harbinger of many more country-specific trade truces in the months ahead; an agreement in principle with China may take longer.

On Capitol Hill, House Republicans continue to push forward a budget reconciliation package, but it was stalled last week due to resolved social welfare and tax provision issues. That has some DC pundits doubting a bill can be passed by Bessent’s July 4 deadline. The White House, meanwhile, submitted a “skinny budget” for fiscal 2026, proposing significant nondefense spending cuts but avoiding trims to Medicare, Medicaid, and Social Security. That fiscal outline would require bipartisan Senate approval, which is unlikely. 

On the international front, the US and Ukraine announced a new minerals and energy agreement, which strengthens the alliance and further cools the air after a tense Oval Office meeting between President Volodymyr Zelenskyy, President Trump, and Vice President Vance earlier this year. Also from a geopolitical perspective, Mike Waltz was removed from his National Security Advisor role and inserted into the U.N. ambassador position. Secretary of State Marco Rubio now takes on added responsibility, filling the spot left by Waltz.

Risks and Opportunities

Despite the –0.3% Q1 GDP print reported last week, recession fears have ticked lower. Prediction markets peg the chance of two consecutive quarters of negative US economic output in 2026 at 62%, down from 72% immediately after the Commerce Department published Q1 growth numbers. There were different takes on GDP’s internals, but the high net import figure was generally offset by other components (high consumption and business investment). Early indications point to a rebound in US macro activity this quarter. Moreover, lower oil prices and interest rates from just a few weeks ago are tailwinds. 

Another opportunity is seen in EPS growth estimates. With about three-quarters of the S&P 500 having reported Q1 results, the blended earnings growth rate is up to 12.8% YoY, sharply above the consensus rate of just 7.2% as of March 31. While the profit picture spans just the January through March period, it’s clear that American companies are still executing well. Additionally, the April jobs report was strong, and it was all the more impressive since the survey week was immediately after Liberation Day—when volatility and uncertainty were highest.

The bulls should cool their heels, though. The S&P 500 now trades close to 21x earnings after Friday’s rally, all while remaining below its long-term 200-day moving average. Historical trends show that performance in the weeks after nine-day SPX rallies are under 1%, with negative returns about 40% of the time. Seasonally, we are now in the notorious May through October stretch, the worst six-month calendar period for US large caps in data going back to 1950. May has, however, been up in 9 of the past 10 instances. There have been just four negative months from May through July over the past decade, too.

Internationally, momentum asserts that more gains could be had in Europe and Latin America. EWW experienced a pullback last week and may attract investor attention if macro conditions improve, and European Financials (EUFN) have outperformed year-to-date relative to other sectors, based on recent returns. If the DXY surpasses 100.50, US markets may benefit from strengthened currency positioning, historically associated with equity flows.

Quick Hits

• The three-month moving average of jobs created rose to 155,000 from 135,000

• The household labor market survey, used to calculate the unemployment rate, revealed a very strong 436,000 jobs gained in April

• Permanent job losers as a percentage of the labor force touched a new cycle high last month

• US employment growth has eased to 1.19%, a figure historically associated with the economy headed into recession

• Average hourly earnings growth verified at 0.17% on a month-over-month basis, the weakest since August 2023, helping to stymie inflation fears

• Gold funds saw their first weekly outflow since January

• Berkshire Hathaway confirmed that its cash pile swelled to $347.7 billion as of the end of Q1 as Warren Buffett announces he’s stepping down from the CEO role

• Barron's Big Money Poll found the most bears in 30 years. More than 60% expect a bear market this year. Only 7% of clients are bullish.