Is anyone else dizzy?!

Shaping up to be the strongest May since the 1990s, market breadth has mostly been strong. Last Tuesday, nearly 90% of Russell 3000 names rose, suggesting that this market could have room to go higher. Still, more than half of Russell 3000 stocks are below their 200-day moving average, so the jury remains out. Although retail investors keep buy, buy, buying, there’s another $7 trillion in cash out there to keep the spree going. And for now, profit margins have held up. Yes, national accounts data shows that US firms’ global operations fell 2.9% before taxes in Q1. But then Q4 was quite strong, so that the average of the two quarters was in line with a 4-5% nominal rate of profit growth. Strategas sees the current rally off the April lows as reminiscent of the market in late 2018 and early 2019. Cool, don’t you think? Back then, we got to a point much like today, having made up most but not all our losses. The market then chopped for several weeks before marking new highs 81 trading days from the bottom. If our path proves to be similar, we could have new highs in August. One possible accelerant: momentum, which is already back to its highs—and June is often a strong month for momentum.  

The House passed the “big, beautiful bill” before Memorial Day—no small achievement in so closely divided a chamber. The bill is now with the Senate, which has historically played a mellowing role with legislation—as the saucer to cool the House’s hot tea. There is talk that the budget bill will be ready for Trump’s signature on July 4, but the Senate is likely to take its time. Instead, the August “X-date” to lift the debt ceiling may provide a deadline for the bill. Once passed, we could see a surge in capital expenditures thanks to provisions in the bill, which should help offset any tariff-inspired weakness. To judge from the Conference Board’s Consumer Confidence Index (CCI), the next labor report is likely to be encouraging. The CCI often sheds useful light on employment; half of respondents (49.6%) said jobs are available, with nearly a third (31.8%) calling them plentiful and only 18.6% saying jobs are scarce. The summer spending season looks to be getting underway and some sentiment survey groups report feeling the best they have in years. The equity recovery has been built on tariff rates going down and earnings staying healthy, with the S&P 500 posting EPS growth of 9% for the first quarter. But retailers are likely to feel the squeeze; consumer prices have not risen as rapidly as tariffs—so for now stores must be eating part of the cost of tariffs. We await Q2 earnings season.

Strategas thinks it’s a mistake to expect the policy volatility we’ve seen thus far in the Trump administration to diminish. One potential source of moderation would be tariffs, but it doesn’t seem likely there will be much moderation there—unless we’ve reached the stage where 15% or so effective tariff rates look centrist. This week, one court struck down many of Trump’s tariffs, quickly followed by another that reinstated them for now. Then there’ll be the Supreme Court. Trump’s at the ready with other statutory authority as grounds for renewing the tariffs if need be (Trade Act Sections 122, 232, and 301). Is anyone else dizzy? Depending on the outcome, we may see higher or lower inflation (transitory or not), higher or controlled budget deficits, and a more benign or stubborn Fed. Ugh. Outside of DC, wages have been growing at a 4% rate for the past year, which is not likely to ease given the halt in immigration. The cry “uncertainty” is for sure the word of the day, so common now that it could be swapped with “wolf.” The wall of worry is alive and well. I’m focusing on earnings and jobs.

Positives

• Tariff inflation remains elusive Headline PCE prices rose 0.10% in April (slightly below the consensus average of 0.15%). Core PCE prices rose 0.12%, in line with expectations (0.17%). Both represented a second muted monthly price change after strong price increases earlier in the year. The y/y increase for headline PCE prices slowed to 2.1%—practically at the Fed’s target—while core slowed to a new cycle low of 2.5%. The core PCE inflation rate was the lowest since April of 2021 at the start of the inflation surge.
• Still working, still spending Personal income data was solid for April, up 0.8% m/m. While wages from salaries increased 0.5%, the surprise came from government transfers, specifically Social Security. Even net of high transfer payments, real income rose 0.3% m/m. Spending rose just 0.1% in real terms—possibly held down by tariff concerns. Indeed, the savings rate jumped to 4.9% from 4.3%, near a one-year high. Given solid incomes, when uncertainty around tariffs dissipates, consumers will be in a good position to reaccelerate spending. High margins and productivity mean big layoffs remain a distant risk.
• Feeling much better The Conference Board’s gauge of confidence increased by 12.3 points to 98, the biggest monthly gain in four years, exceeding all estimates in a Bloomberg survey of economists. Consumer expectations for the next six months surged by the most since 2011. The improvement in confidence was broad across age and income groups and political affiliations. Plans to buy homes and cars, which had been steadily declining, saw a marked uptick. Similarly, intentions to purchase appliances and electronics improved, along with a broad increase in planned spending on services. The survey’s measure of 12-month ahead inflation expectations decreased by 0.5% to 6.5%. Elsewhere, the University of Michigan’s index of consumer sentiment was revised up in the May final report, while one-year inflation expectations were revised down by 0.7% to 6.6% and 5-10-year expectations fell by 0.4% to 4.2%.

Negatives

• Only slightly more affordable US house prices experienced their first monthly decline since August 2022, slipping 0.1% in March according to the Federal Housing Finance Agency, signaling a clear deceleration in the housing market's upward trajectory. The S&P Case-Shiller 20-city index corroborates this slowdown, with a 4.1% y/y increase in March, while the 10-city index registered a 4.8% gain, down from 5.2% the previous month. As to supply, Renaissance Macro reports that over the last 12 months finished unsold new housing inventory has climbed 30%, weighing on home price growth. According to data from Zillow, home values are up less than 1.5% over the last 12 months.
• Cold comfort Minutes from the May FOMC meeting revealed that “almost all” FOMC participants believe inflation “could prove to be more persistent than expected,” revising inflation up “markedly” this year with a “smaller boost” in 2026, and inflation returning to target in 2027. Noting that “difficult trade-offs” could emerge, the Fed staff saw a bigger drag on growth this year and next with the output gap expected to widen “significantly” and unemployment moving above its natural rate this year and remaining above that through 2027. Still favoring a “cautious approach” while they wait for more clarity on the impact of Trump’s trade and other policies, the staff judged that a recession was “almost as likely as the baseline.”
• Sluggish manufacturers Durable goods orders fell 6.3% in April (vs. consensus -7.8%) after four months of gains. Core capital goods orders (non-defense capital goods excluding aircraft), a key indicator of business investment, declined 1.3%. Meanwhile, the Dallas Fed's manufacturing activity index rose 20.5 points in May to -15.3, remaining in contraction at 49.2 on an ISM-adjusted basis. As well, the Richmond Fed's composite manufacturing index rose 4 points to -9, signaling still-contracting activity, but at 50.7 in ISM-adjusted terms. Overall, regional Federal Reserve manufacturing indexes for May showed modest improvement, with several rising above 50 on an ISM-adjusted basis.

What Else

BUY! BUY! BUY! Despite the lack of enthusiasm in the recent rally, Wall Street has never been more positive in terms of "buy" ratings. Currently 419 names in the S&P 500 are rated "buy," the highest number since 2002. Jeffries notes that at least they’re still modeling a "normal" amount of price target upside, which has coincided with normal S&P returns. 

A nickel for your thoughts The US government is ending the production of pennies, citing lower demand and immediate savings. The production cost of the coin has risen to 3.7 cents over the past decade. But, without pennies, more people might use nickels, which cost nearly 14 cents to make.

An easy campaign promise to keep Trump first made the promise to remove the tax on tips at a rally in Las Vegas—a city known for its large service industry. Some 17% of Nevada’s workforce relies on tips. This compares to the national average of 2.5%, some 37% of whom earn so little that they owe no federal income tax.