Stocks Post Summer Gains
What happened last week?
- The S&P 500, Dow, and Nasdaq advanced by 2.43%, 1.35%, and 3.87%, respectively.
- A wave of new tariffs unsettled investors.
- Markets also grappled with soft ISM Services data coupled with a firm prices component as signaling a “stagflation-lite” scenario. Afterwards, strong earnings, solid productivity, tariff exemptions for producing in the US and growing Fed rate cut hopes shored up sentiment.
3 Things to Know
How Long Will Corporates Prioritize Market Share Over Margins?
We believe firms may have been willing to take a bit of a hit to margins but will plan to pass on more of the expense when tariffs are more settled.
Consensus expectations are for S&P 500 gross margins to contract by about 1 percentage point in H2 ‘25 before recovering in early ’26 — though we typically take out-year estimates with a grain of salt.
If firms make a more forceful effort to pass on tariffs later this year, inflation could remain sticky even as the labor market is cooling. Political pressure aside, this tension will make the Fed’s job a lot harder in 2026 and is a key reason why we aren’t rotating into rate sensitive equities just yet.
Trump’s Fed Pick Miran Seen Bolstering Case for Fed Rate Cut
In addition to this pass-through question on inflation, fixed income investors are focusing on President Trump’s appointment of outspoken Council of Economic Advisors Chairman Stephen Miran for Fed Governor Kugler’s seat following her early resignation.
The appointment is expected to be temporary (through end of Kugler’s original term which ends in January), but once his tenure begins following confirmation, he will likely strongly support rate cuts.
Futures markets currently price about a 90% chance of a rate cut in September, and while Trump’s pick only slightly increased those expectations, it does signal to us that for now the President will continue to exert significant pressure on the Fed to cut rates, as Miran has been quite vocal about tariffs being at most a “one-time” effect on goods inflation.
Fed Prioritizes Inflation Fight Over Labor Market Softness
Prices may continue to edge higher as they did in the services ISM reading released last week. In our view employment is frozen – limited hiring with few mass layoffs, so absent weaker inflation data we think rate cuts risk the Fed’s credibility around one branch of its dual mandate.
Currently the 10y yield is reflecting the “weaker labor market, sticky inflation” narrative, trading just slightly higher than its 3-year average yield of about 4.10%. We remain cautious on adding duration even though slower growth might soon lead a rate-cutting cycle because inflation has not move durably lower.
In addition to tariff, immigration, and fiscal deficit risks to inflation upside, bond investors might also determine that the Fed may become overly dovish and accordingly could demand higher term premiums for longer-dated yields, pushing them higher.
See our weekly CIO Strategy Bulletin for more details