Market Monitor | May Update
Headlines and Highlights
- Trade war shifts to courts: DuelingS. court rulings threw the legal status of import tariffs into question even as President Trump stepped up his push by doubling levies on steel and aluminum imports to 50%. A federal trade court voided many of the tariffs before an appeals court quickly paused that order, with hearings to follow and the Supreme Court likely to have the final say. Meanwhile, U.S. negotiators continued working toward deals with multiple trade partners to lock new tariffs into place. But the European Union warned it may hasten retaliatory measures if Trump follows through on his tariff threats.
- Consumers, corporations growing more cautious: New signs emerged of a cooling U.S. economy even before tariffs’ impact is fully felt. Spending growth slowed significantly in April as more consumers held back while waiting to see how tariff-related uncertainty plays out. Consumer spending inched up just 0.2% compared to 0.7% the previous month. Multiple companies cautioned of higher costs and rising recessionary risks because of tariffs, and numerous major firms withdrew or backed away from forward earnings guidance due to the extreme policy uncertainty. Companies already were under pressure from a slowing economy even before Trump’s sweeping tariffs were announced.
- U.S. stocks see best May in 30 years: The Standard & Poor’s 500 had its best month (+6.1%) since November 2023 and biggest May return since 1995 on hopes the Trump administration will impose far smaller import tariffs than it first announced. It was the index’s first winning month since January and left it marginally higher (+1.0%) for the year and just 4% off its record high. Other markets reflected similar optimism: U.S. small caps rose 5.2%, international developed stocks 4.8%, and emerging-markets stocks 3.8%. Taxable bonds fell as yields rose on mounting deficit concerns and more trade uncertainty. Bond prices move inversely from yields.
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Our Views
- The Trump administration is likely to proceed with tariffs regardless of legal obstacles such as the ruling by the U.S. Court of International Trade blocking most tariffs. The administration has ways to pursue tariffs by alternative means that can circumvent the reach of the courts. It remains committed to tariffs at some level, as Commerce Secretary Howard Lutnick voiced: “Rest assured, tariffs are not going away.”
- Markets remain subject to unusually abrupt swings for the foreseeable future due to on-and-off U.S. tariffs as well as challenges to their legality. The extreme uncertainty over tariffs is likely to restrain returns in the near term, though we do retain a positive full-year outlook.
- The U.S. economy has held up impressively well since the Trump administration’s April 2nd tariffs announcement but faces a truer test in the months ahead once higher costs from tariffs are in the system. The Atlanta Fed says growth is on track for a 4.6% gain in what amounts to a catchup second quarter following the 0.2% decline from January through March. However, some cracks have appeared that will worsen the longer the trade war lasts and the higher the level of tariffs.
- The Federal Reserve will play a significant role in determining how resilient the economy remains. The more cautious the Fed is about lowering interest rates, the less likely that inflation heats up again but also the greater the risk of a mild recession. We expect the Fed to maintain its rate pause until its September meeting and make no more than two quarter-point cuts by year-end given the strength of the labor market.
- The 2017 tax cuts are virtually certain to be extended in the final version of the tax bill that emerges from Congress despite stiff opposition from some Senate Republicans and fiscal hawks. The House-passed plan calls for approximately $3.8 trillion in tax cuts, most of which would come by extending the 2017 cuts that otherwise would expire at the end of this year.
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