DFG Navigator Archives | May 2025

Your Capital Markets Snapshot: Equities, Bonds, US Dollar Fell Last Week

Equities, bonds, and the US dollar fell last week due to US budget concerns and increased uncertainty surrounding US tariff policies. US debt was downgraded by Moody’s due to concerns about lack of progress from prior Congresses and presidential administrations to curb rising government deficits. Standard & Poor’s (2011) and Fitch (2023) previously downgraded US debt. Now all three major rating agencies align on an AA-rating. A tax bill passed from the House to Senate seeking to extend the 2017 tax cuts with additional provisions. Congressional Budget Office estimates the net impact of tax cuts, new spending, revenue, and additional interest-rate costs to increase the federal budget deficit by $3 trillion over the next decade. Long-term interest rates have been trending upwards since September 2024, when the rate cutting cycle began. The combination of increasing debt levels and higher interest rates are driving federal interest costs to historic highs. Trump threatened the EU with 50% tariffs and Apple with a 25% rate, which served to increase uncertainty around US trade policies and contributed to the down week for equities. As negotiations progress, trade uncertainty should decrease but as last week showed potential for bumps along the way remains.

Your Capital Markets Snapshot: US Equity Markets Sharply Rallied

Last week, US equity markets sharply rallied driven by positive trade negotiation developments and economic data. The U.S. and China agreed to reduce tariffs for 90 days while working towards a longer-term deal, which led to a sharp rally in equity markets. Additionally, the U.S. administration announced plans to ease trade restrictions related to artificial-intelligence chips, further boosting investor sentiment and benefitting the tech sector. Economic data releases showed signs of inflation potentially moderating, with the Consumer Price Index rising by 0.2% and Producer Price Index falling by 0.5% in April. Retail sales posted a small monthly increase but may be showing signs of weakening. Despite these positive developments, consumer sentiment remains low, reflecting ongoing uncertainty in the market. Overall, the markets found comfort in hard data and trade deals, but investors should remain prepared for periodic volatility as policy continues to be determined.

Your Capital Markets Snapshot: US Large Cap Stocks Traded Lower, Then Trended Upward

US large cap stocks traded lower to start the week, then trended upward as positive trade news broke around a trade deal with the UK and developing talks with China. Despite the late week rally, US large caps posted modest losses for the week. US mid- and small caps as well as international stocks posted modest gains. Unsurprisingly, the Federal Reserve left the fed funds rate unchanged, highlighting risks of higher inflation and unemployment. Chair Powell maintained his message of waiting for more data to be available on the impacts of tariffs and other metrics before taking further action. Key economic readings related to the services sector were mixed but remained in expansion territory. The start of positive trade developments is reassuring. The US still has a healthy labor market. Despite slowing, corporate earnings are still projected to grow. Increased trade uncertainty is likely to lead to increased volatility and potentially slower economic growth in the short-term. Potential tax reform or deregulation efforts following these trade negotiations could provide stimulus to the markets.

Your Capital Markets Snapshot: Markets Rebound Amid Mixed Signals

Last week, markets experienced a mix of positive and negative developments. U.S. equities rebounded nicely. The S&P 500 is up about 8% over the last two weeks, driven by solid first-quarter economic and earnings data. Corporate earnings growth for Q1 has been positive. About 76% of S&P 500 companies reported positive earnings surprises. However, guidance for Q2 has weakened due to uncertainty around consumer spending and trade tariffs. U.S. GDP growth turned negative in Q1, largely due to a surge in imports ahead of higher tariff rates. Despite this, the labor market appears resilient, with the unemployment rate steady at 4.2% and a positive surprise in job gains. Overall, uncertainty is still high around trade and tariff policies. As the administration softened its positions, markets have since recovered much of the ground given during early April’s selloff and volatility episode. We expect volatility to be present until more certainty around global trade policies occurs. This should provide opportunities to strategically rebalance portfolios and diversify across markets segments and asset classes.

Your Capital Markets Snapshot: Markets Rally Amid Eased Trade Tensions and Fed Concerns

Last week, equity and bond markets experienced a relief rally as the U.S. administration softened its stance on trade and concerns over the Fed's independence eased. This change of position from the Trump administration appears to have helped alleviate trade uncertainty and market volatility with both measures dropping sharply off their recent highs. While this is a positive shift, equity markets are still below their recent highs and likely require more concrete agreements with major countries to return to those levels. As first quarter earnings season continues corporate profits are in focus. Based on releases thus far, it appears mid-single-digit earnings growth could be achievable if the economic slowdown doesn't worsen. While the US equity market continues recovering from their recent drawdown episodes, US fixed income and international equities continue to deliver positive returns on a year-to-date basis. This highlights the importance of maintaining diversification across markets segments and asset classes when constructing and rebalancing portfolios.

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