Retirement Architects Weekly Market Review: May 16th, 2025

Weekly Market Report: May 9th, 2025

Last weekend’s pause in Chinese tariffs generated enough positive momentum to send equity markets sharply higher for a third week of the last four. The S&P 500 (+5.3%) and growth stocks led the way while developed international (+1.5%) and emerging markets (+3.0%) also closing higher but held back by a strengthening USD. Bond yields continued to slowly grind higher leaving the 10yr UST bond yielding 4.43%. Commodity markets were mixed with WTI oil closing up 2.4% to $62.49 and natural gas (-12.5%) and gold (-4.3%) both off sharply.

Market Anecdotes

• In 28 trading days since April 8th, we have gone from a near miss bear market and surging recession calls to a positive YTD U.S. stock market, now a mere 3% below a new record high.
• Gradually rising UST yields despite cooling growth, inflation, and trade tensions likely has the FOMC and investors wondering if the proposed tax cut package is stirring the bond vigilantes.
• Tax bill details last week included an extension of the 2017 TCJA, four key POTUS priorities, increase in SALT deduction, and temporary, not permanent, provisions.
• As written, the draft cost of proposed tax cuts carry a 10yr cost of $3.8t, which rises to $5.3t if cuts are extended, taking total costs including interest to $4.6t or $6.2t, respectively.
• Moody’s joined S&P and FItch in downgrading the U.S. on Friday afternoon, making the sub-AAA rating on U.S. debt official. Validity and timing of that move is facing ample criticism.
• The China tariff rollback was welcomed by risk markets with open arms. In part due to the fact that approximately 7% of S&P 500 revenues originate from China which, given average operating leverage of 2x, implies that China accounts for approximately 14% of EPS.
• Tariff off ramps have influenced strategist calls for recession across the board including Strategas, Golman Sachs, and BCA Research all reducing their recession calls last week.
• Consumer sentiment fell to 50.8 in May, the second lowest reading in survey history while 1-year inflation expectations rose to 7.3% and 5-10yr expectations hit 4.6%. Retail Sales slowed from March 1.7% level to 0.1% but did show some resiliency.

Bullish Asset Allocation Narratives

• Administration officials, bond markets, and public opinion have and will continue to push for expedient resolutions to trade disputes. Peak tariff panic is in the rearview mirror.
• A brief growth slowdown remains much more likely than sustained stagflation given the man-made nature of the trade crisis and ability to course correct/save face abruptly.
• Swift course correction on tariff policies, possible fiscal stimulus (tax cuts), and likely business friendly deregulation encourages focus on the intermediate term horizon.

Bearish Asset Allocation Narratives

• Uncertainty can translate to deferring new hires and negative consumer sentiment risking declines in employment, capex, and consumption.
• The Fed overstaying restrictive policy due to pipeline inflation, high inflation expectations, and strong labor market poses risks to growth in the event tariff de-escalation happens quickly.
• Fundamental and technical factors in U.S. bond markets (upward pressure on rates) present unique challenges for investors and overall cost of capital implications across the economy.