Stocks Stabilize as Bond Yields Slip

Stocks traded mixed as the S&P 500 and Dow Jones fell to 1-1/2 week lows following an initial rise in bond yields after President Trump's tax and spending bill passed the House; however, dovish comments from Fed Governor Waller and better-than-expected US economic data, including a drop in jobless claims and a rise in manufacturing PMI, helped stocks recover, while the Magnificent Seven stocks boosted the overall market. The passage of Trump's tax bill, which now heads to the Senate, raises concerns about the US deficit and its impact on investor appetite for US assets, while the markets are also focused on potential tariff news and upcoming G-7 meetings.

Analysis

The U.S. stock market exhibited mixed performance, with the S&P 500 and Dow Jones Industrials retreating to 1-1/2 week lows while the Nasdaq 100 advanced, buoyed by strength in Magnificent Seven constituents such as Alphabet (+3%) and Tesla (+2%). Initial selling pressure stemmed from rising U.S. Treasury yields, with the 10-year T-note yield reaching a 3-1/4 month high of 4.625%, following the House passage of President Trump's tax and spending bill; this legislation, now advancing to the Senate with an expected vote by August, has amplified concerns regarding a potential multi-trillion dollar increase to the U.S. deficit at a time of perceived waning foreign investor appetite for U.S. assets, exacerbated by a recent Moody's credit downgrade and ongoing trade tensions. However, markets found some stabilization from dovish remarks by Fed Governor Waller, who suggested potential for rate cuts in the second half of the year if new tariffs settle around 10%, and positive economic data including a drop in weekly jobless claims to a 1-month low of 227,000 and an unexpected rise in the May S&P manufacturing PMI to 52.3. This contrasts with a -0.5% m/m fall in April existing home sales to a 7-month low. The Q1 earnings season has been notably strong, with 77% of S&P 500 companies beating estimates and aggregate earnings growth at +13.1%, the highest since Q2 2024, though the full-year 2025 corporate profit growth forecast for the S&P 500 has been revised downward to +9.4% from an earlier +12.5%. Sector-specific news saw significant gains in Advanced Auto Parts (+47%) and Urban Outfitters (+21%) on strong earnings, while managed healthcare stocks like Humana (-4%) declined on news of expanded Medicare Advantage audits, and energy stocks fell with WTI crude prices dropping over -1%. Bitcoin also surged over +2% to a new record high on positive stablecoin legislation developments.

Key Decisions for Investors

• Investors should closely monitor the progress of the tax and spending bill through the Senate and its potential impact on Treasury yields and the fiscal deficit, as this remains a key source of market uncertainty and could influence appetite for U.S. assets.
• Given the outperformance of specific growth names and strong earnings reports from companies like Advanced Auto Parts, Urban Outfitters, and Snowflake, selective exposure to fundamentally robust companies may be warranted, while exercising caution in sectors facing specific headwinds such as managed healthcare due to increased regulatory scrutiny and energy stocks pressured by falling crude prices.
• Pay close attention to upcoming G-7 meeting outcomes, any new tariff announcements, and further Federal Reserve commentary, particularly regarding the conditions for initiating rate cuts as hinted by Governor Waller, as these will heavily influence market direction and interest rate expectations, noting markets currently price a low 5% chance of a June rate cut.
• Re-evaluate portfolio allocations considering the robust Q1 earnings performance against the backdrop of a lowered full-year 2025 S&P 500 profit growth forecast, which suggests a potential for increased selectivity and a focus on companies demonstrating resilience and sustainable growth.