May 17, 2025 Market Update

Stocks posted solid gains this week, supported by investor relief after April inflation data came in cooler than expected.  The Nasdaq led major indexes higher, bolstered by renewed interest in large-cap tech and AI stocks.  The S&P 500 and Dow also ended the week in the green, reflecting cautious optimism that inflation pressures may be easing without significantly harming corporate earnings.

Treasury yields declined across the curve, driven by softer-than-anticipated inflation data and rising concerns over consumer sentiment.  Despite the decline, the 10-year yields remain elevated, hovering near - two-month highs as investors assess inflation expectations and the likelihood of rate cuts later this year.  Credit spreads remained stable, suggesting bond investors are not yet pricing in material recession risk despite weaker consumer signals.

Investors have been concerned that tariff-induced inflation could erode corporate profits and drag down stock prices.  So far, however, that does not appear to be the case.

The Consumer Price Index (CPI) rose 2.3% in April from a year earlier and a four-year low.  That was below both the 2.7% annual rate recorded in March and the 2.4% rate economists had expected.  On a monthly basis, headline inflation edged up 0.2%, while core inflation, which excludes food and energy, also rose 0.2%.  However, many economists believe the full effects of tariffs on costs and prices have yet to show up in the data.

Despite a temporary 90-day reduction in Chinese tariffs, the average effective tariff rate on goods from China is still projected to be 17.8%, according to estimates from the Yale Budget Lab.  That could push annual CPI above 3% this summer, potentially slowing the pace of the Federal Reserve’s expected rate cuts or even prompting a rate hike.

While the odds of the Federal Reserve raising rates remain low, the possibility underscores potential turbulence ahead for investors.  Equity markets have shown resilience, with modest volatility, suggesting that investors are still anticipating a reduction in tariffs and eventual rate cuts.  However, a resurgence of inflation or a re-escalation of trade tensions could disrupt this stability and trigger another stock market selloff. 

That’s all for now.  Have a great weekend and invest wisely my friends.