S&P 500 and Nasdaq 100 Post Record Highs on Hopes of Trade Deals

US equities extended their rally, with the S&P 500 and Nasdaq 100 reaching new all-time highs, driven by positive trade news, including a finalized US-China agreement on rare earth materials. This occurred despite weaker-than-expected May personal spending (-0.1% m/m) and income (-0.5% m/m) data, though the May core PCE price index, the Fed's preferred inflation gauge, rose a stronger-than-anticipated +2.7% y/y. The higher inflation print contributed to a 4.3 bp rise in the 10-year T-note yield to 4.285%, even as Minneapolis Fed President Kashkari indicated potential for two rate cuts this year.

Analysis

US equity markets are extending their rally, with the S&P 500 and Nasdaq 100 achieving new all-time highs, propelled primarily by positive developments in international trade policy. A finalized trade understanding between the US and China, which includes commitments on rare earth materials and the removal of certain restrictive measures, has significantly improved investor sentiment. This optimism is further supported by prospective trade agreements with ten other major partners. However, this risk-on sentiment is unfolding against a backdrop of conflicting domestic economic data. The market has so far shrugged off an unexpected 0.1% decline in May personal spending and a significant 0.5% drop in personal income, the largest in over three and a half years, which signals potential consumer weakness. Compounding the complexity, the Federal Reserve's preferred inflation metric, the core PCE price index, rose to +2.7% year-over-year, exceeding expectations and suggesting persistent inflationary pressures. This has pushed the 10-year Treasury yield up by 4.3 basis points to 4.285%, as the market weighs sticky inflation against dovish commentary from Minneapolis Fed President Kashkari, who anticipates two rate cuts this year. In single-stock news, Nike (NKE) surged over 14% after strong revenue and announcing tariff mitigation strategies, while gold miners like Newmont (NEM) fell over 3% as gold prices hit a 4-week low.

Key Decisions for Investors

• While positive trade developments are driving equities to new highs, investors should be mindful of conflicting signals from weakening consumer income and spending data, suggesting a selective approach is warranted.
• Scrutinize companies with significant international exposure, prioritizing those like Nike (NKE) that demonstrate strong pricing power and effective strategies to mitigate tariff impacts, as they are likely to outperform in the current environment.
• The stronger-than-expected core PCE inflation and resulting rise in Treasury yields pose headwinds for rate-sensitive assets, making it prudent to review exposure to sectors like gold mining and growth stocks highly dependent on lower interest rates.
• Insider selling at high-valuation tech names like Crowdstrike (CRWD) and analyst downgrades for market leaders like Uber (UBER) and JPMorgan (JPM) should serve as a signal to review profits and assess position sizing in stocks that have had significant run-ups.