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Week in Review
Equity Markets:
The stock market rallied last week following the weekend news of a positive movement in the trade war between the US and China. The US has agreed to reduce its tariffs to 30%, down from 145%, and China has reduced tariffs to 10%, down from 125%, for 90 days to allow negotiations to continue. The S&P 500 rallied 5.33% and the NASDAQ rallied 7.21% on the news. The development increased the demand for risk assets as the Russell 1000 Growth rose 7.09% while its value peer rose 3.27%1. The S&P 500 has recovered all of its “post liberation day” drawdown and currently sits a modest 3% below its all-time high of 6,147.
Earnings season is nearing completion, with 92% of S&P 500 companies having already reported earnings. Thus far, 78% of companies have exceeded earnings estimates, and 62% of companies have beaten revenue expectations2. Companies have continued their streak of surprising strength with an expected earnings growth rate for the quarter of 14.3%. This is significantly better than the 8% growth that analysts expected on April 13.
Fixed Income Markets:
Yields pushed slightly higher last week, with the 10-year Treasury yield finishing 0.09% higher at 4.43%. Following the rally immediately following the tariff announcement last month, bonds have continued to slide as the bond market assesses the potential for tariffs to keep inflation elevated in the near term.
The major news last week came after the market closed Friday. Moody’s downgraded US debt to Aa1 from the previous rating of AAA. Moody’s was the last of the major credit rating agencies to downgrade the US’s credit rating. Stand & Poor’s lowered their rating in August 2011, and Fitch Ratings followed suit in August 2023. Bond yields sold off after hours, with the 10-year Treasury yield pushing above 4.5%. Moody’s cited “ballooning deficits and interest costs” as major factors in making the determination4.
Economic:
The CPI report came in better than expected last week. On an annual basis, the headline reading rose 2.3% while the core reading, which excludes food and energy, rose 2.8%. We could see volatility in these readings over the next few months as potential tariff price increases could work their way into the index. Consumer sentiment continues to soften. The preliminary reading of the University of Michigan Consumer Sentiment Index fell to 50.8 after closing out April at 52.2. Retail sales saw a modest increase of 0.1% in April following a blowout 1.7% growth in March due to increasing purchases prior to tariffs going into effect.
Looking Ahead
Equity Markets:
The market has rallied back 23% since the early low. The rally has been supported by improving investor sentiment, which is back near recent highs5, and better-than-expected earnings reports. Despite the improvements in earnings, the market has returned to what we consider elevated valuations. The S&P 500 is currently trading at 21.9x forward four-quarter earnings3. This is where the market was trading at earlier in the year. The current multiple does not represent an extremely expensive market, but we believe it could present challenges for the market going forward. Earnings will need to improve to fuel the market in a sustainable rally through the end of the year. Valuations are unlikely to keep expanding, especially given the many uncertainties that remain over the next few quarters.
With the market nearing its all-time high, we believe now is a time for investors to evaluate their current positioning and how they reacted during the recent 20%+ drawdown. Developing a strategic asset allocation that aligns with your long-term investing goals is extremely important, but it should also align with your desired risk. The post-liberation day fallout is a recent test to ensure your portfolio is properly aligned to meet both of those objectives.
Fixed Income Market:
The credit downgrade of US debt has increased the risk of higher rates. We do not believe this will have a material impact on rates in the long run, but it increases the probability of bond market volatility. Rates quickly moved toward the higher end of our range before settling just below 4.5% over the weekend. We see the downgrade as shifting rates up slightly. However, more importantly, it is another headwind for bonds going forward, along with the still uncertain inflation outcome from the new tariff policy.
We continue to believe we are in a new regime of bonds following a multi-decade bull market in fixed income that started in the early 1980s. The income portion of a bond’s return is here once again, and investors who are seeking what we still believe is an attractive risk/reward profile should remain to have long-term positive outlook.
Economic:
This week’s economic calendar is light. To start the week, The Conference Board will release its Leading Economic Index. Existing home sales will be released on Thursday, followed by New Home Sales on Friday. Thursday will also feature the weekly unemployment claims report.
Sources:
1)JP Morgan
2) FactSet Research, Inc.
3)LSEG I/B/E/S
https://lipperalpha.refinitiv.com/wp-content/uploads/2025/05/TRPR_82221_800.pdf
4)BBC News
https://www.bbc.com/news/articles/c4ge0xk4ld1o
5)CNN Business
https://www.cnn.com/markets/fear-and-greed
Important Disclosures:
Investment Advisory Services offered through Krilogy®, an SEC Registered Investment Advisor. Please review all prospectuses and Krilogy’s Form ADV 2A carefully prior to investing. This is neither an offer to sell nor a solicitation of an offer to buy the securities described herein. An offering is made only by a prospectus to individuals who meet minimum suitability requirements.
All expressions of opinion are subject to change. This information is distributed for educational purposes only, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products, or services.
Diversification does not eliminate the risk of market loss. Investments involve risk and unless otherwise stated, are not guaranteed. Investors should understand the risks involved of owning investments, including interest rate risk, credit risk and market risk. Investment risks include loss of principal and fluctuating value. There is no guarantee an investing strategy will be successful. Past performance is not a guarantee of future results. Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio. The S&P data is provided by Standard & Poor’s Index Services Group.
Services and products offered through Krilogy® are not insured and may lose value. Be sure to first consult with a qualified financial advisor and/or tax professional before implementing any strategy discussed herein.
