Summer is supposed to be for chilling

This week I traveled to New Jersey to deliver my AI presentation, followed by DC to proclaim “The Rise of the Female Investor.” The NJ audience of astute advisors intends to advance their company’s prospects, considering anything AI has to offer. My DC group was standing room only (though, if I’m being honest, not the largest of rooms), with women and men alike appreciating some striking trends—by 2030, two-thirds of wealth will be controlled by us ladies, for instance. That’s just five years away! But for now, the S&P 500 has rallied handsomely off the April lows, where it briefly touched a 20% decline from the February top. After about 40 trading days, the market’s performance is in-line with historic recoveries after a 20% fall. Most of the time, the market shows continued gains three and six months out from such a drop. Additionally, though the route we’ve traveled to get here has been unusual, Fundstrat says much of the overall market action has been typical of post-election years. Volatility could return leading up to the July 9 tariff suspension deadline, especially since the budget bill is (tentatively) due to be voted on in early July as well. That’s also right about when Q2 earnings season will get under way. As for the debt ceiling, it promises to be an (early) August problem in DC. Over on Wall Street, the first quarter marked the seventh in a row with positive earnings growth, at about 13% y/y. Forward earnings have been moving up, even as current earnings per share (EPS) estimates appear to take pretty good account of likely hits from tariffs. Plus, Trump has a track record of suspending or mitigating the most onerous ones. Strategas estimates that a $100 billion drop in revenue due to tariffs indicates $13 billion of lost net income, or about $1.60 in EPS. Seasonality and sentiment both remain supportive for now, while August and September often bring a less-hospitable seasonal environment. Much like “sell in May,” for 2025 this could be a contrary indicator.

If so inclined, investors have plenty of reasons to worry this summer. A controversial proposal under Section 899 of the “big beautiful” budget bill would potentially increase the tax rate on foreign entities by 5% to 20%. As for tariffs, the courts’ involvement may be tantalizing drama for those who don’t care for tariffs, but it also further postpones the arrival of certainty. The exact overall number will remain elusive in the near term both because of Trump’s nature and because trade deals take time. For all the talk of “sell American,” the eurozone has problems of its own. The European Central Bank has been easing and yet growth may struggle to reach even 1% this year without at least some more clarity on trade. The “big beautiful” budget bill is now in the Senate, where majority leader John Thune (like House Speaker Johnson) can only lose three votes for the bill to pass. Elon Musk made headlines by (among other things) calling the bill a “disgusting abomination.” The question of whether it’s more expensive than current policy is somewhat contested, but Wolfe Research emphasizes that current policy is itself unsustainable. Empirical Research notes that taking the “big beautiful” bill together with the tariffs, the net effect on the top 60% of incomes is trivial, but that on the bottom 40% is significant—due, in part, to proposed cuts to Medicaid and the Supplemental Nutrition Assistance Program (food stamps). The Senate’s “Medicaid moderates,” who object to the proposed benefit cuts, may have the momentum in restoring the spending—though of course that would increase deficits.  

Yet in summertime the living is supposed to be easy—so maybe we should just chill? Though it seems like a long time ago, it was only February that the S&P 500 stood at new all-time highs, before investors began to fear what tariffs might bring. Post “Liberation Day” the market tanked but has since largely recovered. Strategas thinks both the appeals court and the Supreme Court are likely to strike down Trump’s use of emergency powers to impose tariffs, which could mean refunds start flowing this summer. If so, it will only continue the theme of looking past the tariffs. Investors went from panic about the unprecedented extent of said tariffs to a certain almost optimistic fatalism—whatever would be would be and, besides, once 145% tariffs were imposed on China, there was nowhere to go but down. China’s rare earth catbird seat is legitimate stuff of drama, but at least Trump and Xi agreed to visit each other. And the two leaders are due to meet in New York this September at the UN, with the prospect of a deal soon afterward. Fundamentals ex-tariffs have been fairly solid of late; GDP, the labor market, inflation and earnings have all provided better prints than doubters feared. That’s a lot! The S&P 500 may well be poised to hit new all-time highs this summer. Where’s my suntan lotion? An important catalyst would be passage of the budget and, particularly, the capital expenditure measures therein. Instant expensing of capex could provide an enormous boost to the economy. Do you think designer flip-flops would be too showy?

Positives

• Fed “wait and see” reports May payrolls rose 139k, more than consensus (126k) and much more than whisper numbers after the very weak ADP. The previous two months were revised down by 95k, but the report was still solid. With the unemployment rate unchanged at 4.2%, the average duration of unemployment declined, suggesting it is still not extremely difficult to find re-employment. The labor force participation rate fell 0.2% to 62.4%. Average hourly earnings increased a broad 0.42% in May, beating consensus (0.28%), which translates into a 3.9% y/y gain for the fifth month in a row, so it’s tough to point to a spending slowdown. Also this week, total industry job openings (JOLTS) rose 191K to 7.39 million in April, above consensus (7.10 million). This release confirms a solid labor market in April, with the low-hiring/low-firing equilibrium only modestly changed at the onset of the tariff shock.
• Only slightly "pessimistic and uncertain" According to the Federal Reserve's Beige Book, overall economic activity "declined slightly" over the reporting period (mid-April through May 23). Employment was characterized as "little changed" overall. Prices increased at a moderate pace, though reports of contacts expecting costs and prices to rise at a faster rate were widespread. “Uncertainty,” mentioned by every district, appeared more than 70 times altogether.
• A potential boost to GDP growth The rush to import that was visible in the first quarter decreased notably in April after reaching a record high in March, falling $76.7 billion to -$61.6 billion, and the March deficit was revised down. April imports of goods and services dropped -16.3%, primarily due to a -19.9% fall in goods imports. Total exports grew by $8.3 billion to $289.4 billion (+3.0%), the first increase in services exports this year.

Negatives

• Slowing down The ISM services PMI fell 1.7 points in May to 49.9, softer than consensus (52.0) and marking the first reading below 50 since June 2024 (only the fourth contractionary print in the last 60 months), reflecting notable downswings in business activity and new orders. The prices index was up 3.6 points to 68.7, now six consecutive months above 60, vs. the 53 to 59 range for 2024. The S&P Global services PMI actually rose from 50.8 in April to a solid 53.7 in the final May print. Because the ISM services Index includes agriculture, mining, utilities, construction, wholesale and retail trade while the S&P Global PMI does not, the two surveys can diverge, with the ISM survey more sensitive to the impacts of tariffs.
• And more slowing down The ISM Manufacturing PMI unexpectedly slid 0.2 points to 48.5 in May, disappointing consensus (49.5). The only positive metric was supplier deliveries, up to 56.1, the highest since June 2022, though probably a reflection of the tariff-related challenges factories face as supply chains are re-routed. Interestingly, despite tariff worries, the prices index dipped 0.4 points to 69.4. The S&P Global US manufacturing PMI was revised down by 0.3 to 52.0 in the May final reading. Meanwhile, construction spending fell 0.4% m/m in April, well below expectations of a 0.2% m/m increase. The decline was most pronounced in residential spending (down 0.9% m/m). Over the last three months, private construction spending has declined 10.6% annualized.
• A bit less productive Nonfarm business productivity was revised downward to a 1.5% decline in the first quarter (prior estimate -0.8%) incorporating an upward revision to real output (-0.2% vs -0.3% previously) and stronger hours growth (1.3% vs 0.6% previously). Unit labor cost growth was revised up to 6.6% vs the prior estimate of 5.7% with growth in compensation per hour revised to 5.0% from 4.8% previously estimated.

What Else

The CBO hires optimists The Congressional Budget Office (CBO) produced an analysis showing the combined effects of tariffs and tax cuts will be a $400 billion surplus over 10 years. Still, Deutsche notes that for the past 25 years, the CBO has consistently been far too optimistic about the deficit outlook. In 2000, it projected the US could completely pay off its government debt within a decade—assuming total surpluses were saved. At the time, there was a serious debate about what a world without US Treasurys might look like given their critical role in the financial system. Quaint.

One Big Bill, anyway The House vote victory was a razor-thin 215 to 214. In the House, all 435 seats are up every two years, suggesting to Fundstrat that a presidential threat to find a primary opponent for a member that opposes him is real. But for Senators, only one-third of the body is up every two years, so Trump may have a tougher time forcing his will. House Speaker Johnson worries that too many changes by the Senate could upset his one-vote win. 

There’s nothing so constant as change If the pressure to relocate most of its iPhone manufacturing back to the US remains, numerous Wall Street analysts think Apple would have to double or even triple its price to consumers. But even if this pressure is removed, several tech experts, including Elon Musk, Bill Gates and Mark Zuckerberg, believe that the smartphone’s days are numbered anyway.