Geopolitical Uncertainty and Risk of Higher Inflation Keep Investors on the Sidelines

Performance for Week Ending 6.20.2025:

The Dow Jones Industrial Average (Dow) finished little changed, the Standard & Poor’s 500 Index (S&P 500) declined 0.15 percent, and the Nasdaq Composite Index (Nasdaq) added 0.2 percent. Sector breadth was negative, with eight of the 11 S&P sector groups closing lower. The healthcare sector (-2.7 percent) was the worst performer while energy (+1.1percent) was the strongest.

*See below for Index Definitions

MARKET OBSERVATIONS: 6.16.2025  – 6.20.2025

The S&P 500 finished the week modestly lower as investors assessed comments on U.S. military involvement in the Middle East conflict, a drift higher in oil prices, and comments from Federal Reserve (Fed) Chair Powell who warned of risks of rising inflation in the months ahead. As the war between Israel and Iran entered into its second week, the White House said that President Trump would decide in the next two weeks whether the U.S. will get involved on Israel's side. However, over the weekend Trump gave the go ahead to strike by issuing a military order to drop bombs on Iran’s underground nuclear facility. In response, Iran threatened to close the Strait of Hormuz, a key oil shipping route, which would severely curb supply and put upward pressure on the price of oil. Meanwhile, with a mandate to balance the risk of slowing growth and higher inflation, the Fed kept interest rates unchanged, in line with market expectations. Policymakers, however, cautioned about inflation picking up pace over the summer as the economic effects of steep import tariffs kick in. Bloomberg’s World Interest Rate Probability tool shows futures markets pricing in about 51 basis points of rate cuts by the end of 2025, with a 65 percent chance of a 25 basis point rate cut in September.

FOMC Meeting: As widely expected, the Fed maintained its interest rate target range of 4.25–4.50 percent for the fourth consecutive meeting at the conclusion of last week’s Federal Open Market Committee (FOMC) gathering. The move was in line with the consensus expectation, with all 95 economists surveyed by Bloomberg calling for rates to remain steady. Few changes were made to the post-meeting statement, though the FOMC changed the language to indicate that unemployment “remains low” versus prior language saying the labor market had “stabilized at a low level in recent months”. The committee also noted that uncertainty about the economic outlook had “diminished but remains elevated” compared to prior language stating that uncertainty had “increased further.” Initial takeaways from the committee’s summary of economic projections skewed toward stagflation given expectations for a lagged impact from tariffs, with projections for inflation moving higher and gross domestic product (GDP) growth falling in 2025 and 2026.

Turning to the closely watched FOMC “dot plot,” the median forecast of 3.875 percent, or two cuts, did not change for 2025, a move that was seen as somewhat dovish as whispers on the street were that the FOMC may move to just one cut in 2025. That said, the FOMC’s new forecast did show a somewhat hawkish slant when looking at the distribution of expected rate cuts planned for 2025. More specifically, seven of the FOMC’s 19 members are now calling for no rate cuts by the end of 2025 (up from four members last meeting, and just one in December) and just two members are calling for more than 50 basis points of cuts this year (unchanged from last meeting). Looking further ahead, the committee removed an expected 25 basis point rate cut for 2026 and 2027, with the Fed now forecasting a year-end target rate for 2026 of 3.625 percent and a 2027 target of 3.375 percent. As a result, the Fed continues to expect 50 basis points of cuts in 2025, but just 25 basis points in 2026, and 25 basis points in 2027—for a total of 100 basis points of additional cuts, instead of 125 basis points. The Fed’s long-term (or neutral) rate target also remained steady at 3 percent after rising in recent projections.

Fed Speak: While the speaking calendar was light last week due to the Fed meeting, two Fed officials delivered mixed messages on Friday. Fed Governor Waller said he felt the inflation risk from tariffs was small, and that the Fed could cut rates as soon as its July meeting because recent price increases have been moderate while he sees some worrying signs for the job market such as a high unemployment rate among recent college graduates. In a Reuters interview, Richmond Fed President Barkin took a more tempered view, arguing that with inflation still above the Fed's 2 percent target after a multi-year battle to contain it, key tariff debates still unresolved, and with the unemployment rate at a low 4.2 percent, there was no urgency to cut rates.

Economic Roundup: It was a mixed bag on the economic front last week with a report showing weaker than expected retail sales data during May. Headline retail sales fell by 0.9 percent, dragged down by declines in gas and auto purchases. There was some positive news in the release with control group sales—which is viewed as a proxy for business spending and factors into the GDP—rose 0.4 percent. That compares with a 0.1 percent decrease seen in April and economists’ expectations for a 0.3 percent increase. On the labor front, weekly claims for unemployment benefits remained near their highest level in eight months during the second full week of June, while the number of Americans filing for unemployment insurance on an ongoing basis also remained near the highest level since November 2021. The latter suggests that those out of work are taking longer to find new jobs. Elsewhere, housing starts declined 9.8 percent in May to hit an annualized rate of 1.256 million, the lowest level in five years.

The Week Ahead: The latest developments in the Israel-Iran conflict and whether the United States might again strike Iran will remain front and center for markets next week. Against this backdrop, the NATO summit will be held in the Hague on June 24–25, with President Trump expected to attend. The focus will also be on monetary policy, with Fed's Chair Powell's testimonies to Congress on Tuesday (House Financial Services Committee) and Wednesday (the Senate Banking Committee) following last week’s Fed decision. Away from Powell’s testimony, 15 other Fed members are scheduled to speak throughout the week. The central bank will also release its annual bank stress tests report on Friday. On the data front, the week will kick off with the S&P Global flash PMIs for June on Monday. On Friday, the focus will shift to inflation with the May PCE in focus following the weaker than expected CPI print earlier this month. A number of consumer sentiment indicators will also be released globally, including the Conference Board's consumer confidence index in the United States on Tuesday and the University of Michigan Sentiment report on Friday. It will be a relatively quiet week on the earnings front with just nine members of the S&P 500 expected to release fiscal quarter results, notables include Nike, Micron Technology, and FedEx.

— By Michael Schwager, Chief Market Strategist, Managing Director

Definitions

The Dow Jones Industrial Average is a price-weighted average of 30 blue-chip stocks that are generally defined as the leaders in their industry. It has been a widely followed indicator of the stock market since October 1, 1928.

Wilshire 5000 Total Market Index^SM represents the broadest index for the U.S. equity market, measuring the performance of all U.S. equity securities with readily available price data. The index is comprised of virtually every stock that: the firm's headquarters are based in the U.S.; the stock is actively traded on a U.S. exchange; the stock has widely available pricing information (this disqualifies bulletin board, or over-the-counter stocks). The index is market cap weighted, meaning that the firms with the highest market value account for a larger portion of the index.

Standard and Poor's 500^© Index is a capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

The NASDAQ Composite Index is a broad-based capitalization-weighted index of stocks in all three NASDAQ tiers: Global Select, Global Market and Capital Market. The index was developed with a base level of 100 as of February 5, 1971.

This material contains opinions of the author, but not necessarily those of Guggenheim Partners, LLC or its subsidiaries. The opinions contained herein are subject to change without notice. Forward looking statements, estimates, and certain information contained herein are based upon proprietary and non-proprietary research and other sources. Information contained herein has been obtained from sources believed to be reliable, but are not assured as to accuracy. Past performance is not indicative of future results. There is neither representation nor warranty as to the current accuracy of, nor liability for, decisions based on such information. No part of this material may be reproduced or referred to in any form, without express written permission of Guggenheim Partners, LLC.