Summer of unrest?
Storm clouds on the horizon, but confidence is rebounding.
Published June 13 2025
Bottom line
In the ultimate V-bottom recovery, the S&P 500 has surged more than 25% over the past nine weeks, recovering all the ground lost in the 15% post-Liberation Day waterfall decline. Benchmark 10-year Treasury yields shot up from 3.9% to 4.6% after the tariff announcements, but bonds have since rallied back down to a 4.4% yield over the past three weeks. The volatility index (VIX) spiked from 17 to 60 when the tariff chaos unfolded but has since taken a roundtrip back to 16.
Yet a series of storm clouds are gathering that could spark modest profit-taking of around 5% in the summer. Such a correction would be healthy, in our view, reducing some of the recent froth and shaking off weak hands. At the same time, several confidence metrics that have been negative this year are exhibiting stronger-than-expected rebounds. As a result, we are re-affirming our 6,500-year-end target for the S&P.
Potential market headwinds
Israel launches military strike Israel struck Iran’s nuclear program and military leadership early Friday morning, killing many of Iran’s senior leaders and scientists. Israeli Prime Minister Benjamin Netanyahu said the action was necessary to stop Iran from assembling a nuclear bomb that it could use to annihilate Israel. While the Trump administration said the US was not involved in the attack, it could terminate its nuclear disarmament negotiations with Iran.
Crude oil prices soar The per-barrel price of Western Texas Intermediate (WTI) had plunged 30% this year, from $80 in mid-January to $55 in early May. But it has since surged 40% to an intraday high of $77 this morning. If the attack escalates into a full-blown war, crude could rise to at least $100. That could reverse the decline in US CPI, which reached four-year lows in recent months.
Senate on the clock The House of Representatives narrowly passed an extension of President Trump’s 2017 tax cuts, along with some additional economic stimulus. Failure to extend the previous tax cuts will result in a $4.5 trillion tax increase in 2026, which likely would push the economy into recession. To pay for the bill, the House proposed a combination of tariff revenue; DOGE budget savings; removal of green energy and electric vehicle credits; and tighter eligibility for the ACA, Medicaid and SNAP benefits. The GOP also expects the cuts to lead to stronger economic growth that would help to balance out the cuts.
The Senate is reviewing the bill now, but its spending and revenue priorities are somewhat different. Trump has set an aspirational goal of signing their compromise legislation into law on Independence Day, but that may be overly optimistic.
Trade uncertainty The administration’s ham-handed implementation of the Liberation Day tariffs were rescued by extending the deadline for most levies to July 9. That has allowed the White House to orchestrate bilateral negotiations among our major trading partners. But the global trade situation remains highly fluid.
Fed mileposts The labor market is softening, and inflation has declined so far this year through May, with core CPI now sitting at a four-year low. At the Federal Reserve’s next policy-setting meeting on June 18, FOMC will update its quarterly Summary of Economic Projections. With its dual mandate, the Fed needs to reconcile its restrictive monetary policy, as the upper band of the fed funds rate is now at 4.5%, while the nominal annualized CPI sits at 2.3%.
We anticipate two quarter-point cuts later this year, in September and December, and we expect the Fed to set the table for these cuts at its June and July 30 FOMC meetings, as well as its annual Jackson Hole monetary policy symposium on August 21-23. But Chair Jay Powell has stated that the Fed is taking a wait-and-see approach to future rate cuts, given policymakers' trepidation about Trump’s tariff policies.
Tragic airplane crash An Air India 787-8 Dreamliner passenger jet carrying 242 people to London crashed into a residential neighborhood on Thursday, killing all but one survivor on the plane, and more on the ground. Increased concern about flying could impact summer travel plans in the US and abroad. Moreover Boeing, the airplane’s manufacturer, is an important component of both the Dow Jones and S&P 500 indices.
Protests could impair employment The recent demonstrations in support of immigration in Los Angeles and other cities comes amid the Labor Department’s survey week for the June jobs report, which will be released on July 3. The participation rate among foreign-born workers has deteriorated over the past few months, so any additional labor-market disruption this week could result in weaker-than-expected June nonfarm payrolls.
Second-quarter reporting season starts July 15 Although first-quarter results were good, with revenues and earnings rising about 5% and 12% year-over-year, respectively, tariff trade winds and other factors could mean softer trends and cautious management guidance.
Business and consumer confidence rebound Business and consumer confidence had reverted after a post-election surge in enthusiasm, in large part due to the uncertainty of the administration's tariff policy. But results have turned on a dime over the past fortnight, which suggests that many are looking through the fog:
- University of Michigan’s Consumer Sentiment Index plunged to a three-year low of 50.8 in May 2025, the second lowest reading on record and the lowest since the all-time level of 50 in June 2022. Moreover, Michigan’s one-year inflation expectations in May were at a 44-year high of 6.6% in May 2025. But sentiment surprisingly leapt to 60.5 in June (consensus at 53.6), and inflation expectations plunged to 5.1%.
- NFIB Small Business Optimism Index plummeted from a six-year high of 105.1 in December to a six-month low of 95.8 in April. But May soared to a stronger-than-expected 98.8 (consensus at 96).
- Conference Board’s Consumer Confidence Index fell from a 16-month high of 112.8 last November to a five-year low of 85.7 in April. In addition, its expectations index plummeted from a three-year high of 93.7 in November 2024 to a 14-year low of 55.4 in April. But May’s confidence surged to 98 (consensus at 87.1) and expectations spiked to 72.8.
- NAHB Housing Market Index, a measure of homebuilder confidence, dove from a 9-month high of 47 in January to a 19-month low of 34 in May. But June is expected to rise to 36.
- Leading Economic Indicators Index fell by a weaker-than-expected -1.0% month-over-month in April 2025 and has now declined for five months in a row to a 9-year low of 99.4. Seven of the 10 components were negative last month, led downward by average consumer expectations. May is expected to decline by a much smaller 0.1%.