Stocks and Bonds Up on Economic Data and Easing Tariff Concerns

Good morning!

The Dow (+1.6%), NASDAQ (+2.0%) and S&P 500 (+1.9%) all finished the holiday-shortened week with strong gains.  Similarly, taxable bonds gained 0.9% and tax-free municipal bonds gained 0.3%.  The 10-year Treasury yield fell 0.12% to finish the week at 4.39%.

The long-awaited Nvidia corporate earnings report came out last week, and didn’t disappoint, helping propel markets for the week.  At this point, most earnings have been reported, and have seen a nice boost.  According to Manulife, S&P 500 earnings grew at 13.2% for the first quarter of 2025, but mid-caps earnings fell 2.3% and small-cap earnings fell 7.9%.  Forward looking guidance was muted because many companies blamed uncertainty regarding tariffs for not being able to predict earnings for the foreseeable future.

In economic news, the Fed-favored inflation gauge, Personal Consumption Expenditures (PCE), dipped to 2.1% year over year, marking the lowest inflation reading since February 2021.  The core inflation rate (excluding food and energy) came in at 2.5%, lower than the 2.7% from the prior month.  This is very good news, as inflation continues to fall.  The meeting minutes from the last Fed meeting were released and demonstrated that the committee members unanimously voted to keep rates unchanged until they see how tariffs will impact inflation and the economy.  Additionally, the number of existing homes for sale has increased, which is easing the rapid growth rate of housing prices.  The slowing of this rate could also have favorable effects on inflation, too.

The stock markets continue to respond to tariff rumors, but the real risk to markets is inflation and the US deficit and debt.  While not a core “risk”, tariffs play a role in inflation concerns, but it is still unclear the impact, if any, that the tariffs will have on inflation.  Corporations are said to be absorbing some of the tariffs, which also means that their profits may be diminished, which could also put pressure on stock prices.  As for the budget deficit, that continues to drive up (Source:  Yahoo Finance). US debt.  Just the interest on that debt is costing the US over $1 trillion per year, which is about 1/7 of our spending.  The budget deal passed the House and is now in the Senate.  If it passes, then the Congressional Budget Office (CBO) projects that the bill will increase our deficit by $2 - $3 trillion over the next 10 years.  This is spooking the bond market, causing yields to rise.  When yields rise, then the cost to borrow money goes up, causing profits to go down, which subsequently puts share prices under pressure.  In other words, do not underestimate the impact of government spending on the US economy.  To put this into a different perspective, this budget deficit issue has been going on for over 20 years, and the stock market has quadrupled over that time.  In other words, no need to run for the hills!

Have a great day and terrific week.  See attached for the Cornerstone Portfolio Research weekly and monthly reports.

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