Stocks Rally on Hopes of Trade Deals

US equities rallied, with the S&P 500 and Nasdaq 100 reaching new all-time highs and the Dow hitting a 3-3/4 month high, primarily driven by positive trade developments, including a finalized US-China rare earth agreement and imminent broader trade deals. This occurred despite mixed economic data, as May personal spending and income unexpectedly declined, while the core PCE price index rose more than anticipated. Treasury yields climbed on reduced safe-haven demand and stronger inflation data, though dovish Fed comments from Minneapolis Fed President Kashkari, who sees two 25-bp cuts this year, and lower consumer inflation expectations provided some support. Investors are now looking ahead to the Q2 earnings season, which is projected to show the smallest S&P 500 earnings growth in two years.

Analysis

US equity indices are extending their rally, with the S&P 500 and Nasdaq 100 setting new all-time highs, propelled primarily by positive developments in trade policy. A finalized US-China agreement, which includes a Chinese commitment on rare earth materials and a US rollback of certain restrictive measures, has significantly boosted market sentiment. This optimism is further supported by statements from the Commerce Secretary about imminent trade deals with 10 other partners and a G-7 tax agreement. The market is currently looking past a mixed economic data landscape, which featured an unexpected decline in both May personal spending (-0.1% m/m) and personal income (-0.5% m/m), the latter being the largest drop in over three years. While the Fed's preferred inflation gauge, the core PCE price index, rose more than expected to +2.7% y/y, this was offset by a downward revision in the University of Michigan's consumer inflation expectations and dovish commentary from Minneapolis Fed President Kashkari, who anticipates two 25-bp rate cuts this year. Despite this, 10-year Treasury yields rose to 4.277% as risk-on sentiment diminished safe-haven demand. A key risk on the horizon is the upcoming Q2 earnings season, with consensus forecasts pointing to S&P 500 earnings growth of just 2.8% y/y, the slowest in two years, and only six of eleven sectors expected to post positive growth.

Key Decisions for Investors

• Investors should recognize the current rally is driven by trade optimism, but remain cautious given the conflicting signals from weak consumer income and spending data against hotter-than-expected core PCE inflation.
• Monitor the upcoming Q2 earnings season closely, as the projected slowdown to 2.8% growth for the S&P 500 could challenge current market valuations and test the rally's durability.
• The divergence between a hawkish core PCE print and dovish Fed commentary creates policy uncertainty; therefore, positions should be managed with an eye on upcoming inflation data, which will be critical in shaping the timing of potential rate cuts.
• Consider focusing on companies demonstrating pricing power and effective cost management, such as Nike (NKE), which surged on its ability to mitigate tariffs, while being wary of highly volatile names like Coinbase (COIN) and dilutive corporate actions like CorMedix's (CRMD) stock offering.