Markets Climb a ‘Wall of Worry’

Performance for Week Ending 5.30.2025:

The Dow Jones Industrial Average (Dow) added 1.6 percent, the Standard & Poor’s 500 Index (S&P 500) gained 1.9 percent, and the Nasdaq Composite Index (Nasdaq) finished up 2.0 percent. Sector breadth was positive, with 10 of the 11 S&P sector groups closing higher. The real estate sector (+2.7 percent) led the way, followed by technology (+2.4 percent), and communication services (+2.1 percent).

*See below for Index Definitions

MARKET OBSERVATIONS: 5.26.2025  – 5.30.2025

The S&P 500 finished the week solidly higher despite an uptick in uncertainty around the tariff situation. For the month of May, the S&P gained 6.3 percent, it’s best May performance since May 1990, as investors looked past ongoing trade war developments, a debt downgrade from Moody's, and the House passage of a budget bill that has pressured long-end rates higher.

On Wednesday, the Court of International Trade issued a ruling that blocked many of Trump's sweeping tariffs. Less than 24 hours later, the U.S. Court of Appeals for the Federal Circuit ruled the import levies could remain as it reviews arguments from both sides. With the legality of tariffs in question, economic uncertainty will remain elevated. This will also make it hard for businesses to know when and what products to bring into the country and difficult to chart a path forward for trade. Meanwhile, Treasury Secretary Scott Bessent told Fox News that tariff talks with China “are a bit stalled.” Amid the changing tariff landscape, it’s no wonder that C.E.O. confidence suffered one of the biggest drops on record in the second quarter, falling to 34 from 60 in the first quarter, according to a recent report from the Conference Board and the Business Council. A scores below 50 reflects a pessimistic mood. Reflecting the uncertainty, the survey also showed that a majority of corporate boss’s plan to freeze hiring and reassess investment.

Regardless of the final decision by the courts, the Trump administration has other options to keep tariffs in place. These include an expansion of sector-specific tariffs, under Section 232 of the Trade Expansion Act of 1962, which is currently being used on imports of steel, aluminum, cars, and auto parts. Country-specific tariffs, under Section 301 of the Trade Act of 1974, could also be used but require opening unfair-trade investigations against trading partners. In addition, the administration could quickly replace the 10 percent across-the-board tariff with a similar tariff of up to 15 percent under Section 122 of the same 1974 trade law. Those tariffs would last for up to 150 days, after which the law requires Congressional action to extend.

FOMC Meeting Minutes: Last week’s release of the minutes from the Federal Open Market Committee’s meeting ended May 7 indicated Fed officials broadly agreed that heightened economic uncertainty justified their patient approach to interest-rate adjustments. Policymakers believed the risks of both higher unemployment and inflation had risen since their previous meeting in March, primarily due to the potential impact of tariffs. Such a scenario could pit the Fed’s goals of stable prices and maximum employment against one another, according to the minutes. “Participants agreed that with economic growth and the labor market still solid and current monetary policy moderately restrictive, the committee was well positioned to wait for more clarity on the outlooks for inflation and economic activity,” the minutes of the FOMC meeting ended May 7 said.

Q1 Earning Season Wrapping Up: Through Friday, 491 members of the S&P 500 have released fiscal quarter results, with just over 77 percent beating expectations. Aggregate earnings for this group are up 12.5 percent, just mildly below the 13 percent projected growth rate for the overall quarter. On the sector level, communication services and consumer discretionary companies posted the biggest upside earnings surprises, while the strongest growth rates were seen in the healthcare (+43.9 percent) and communication services (+30.6 percent). Full-year growth rates have been trending lower in recent weeks amid uncertainty surrounding the tariff situation. For 2025, the growth rate is currently estimated at 7.2 percent, down from 12.5 percent at the start of the year. For 2026 analysts are looking for growth of 13.3 percent, down from 13.7 percent.

Fed Speak: Federal Reserve Bank of Chicago President Austan Goolsbee said a resolution in trade policy could push the U.S. economy back toward its pre-tariff trajectory, allowing officials to lower interest rates. Dallas Fed President Lorie Logan signaled it may take a while before officials know how the economy will respond to tariffs and other policy changes and thus how they should adjust interest rates. New York Fed President John Williams said pandemic-era price shocks changed American consumers’ inflation perceptions, and policymakers can’t take for granted that people’s estimates of future price increases will remain anchored. “The thing you want to avoid is allowing inflation to become highly persistent, because highly persistent can kind of become permanent,” he said. Federal Reserve Bank of Richmond President Tom Barkin said elevated uncertainty has led businesses to freeze hiring and hold off on future investment decisions. Minneapolis Fed President Neel Kashkari warned against overlooking tariff-induced price shocks, emphasizing the Fed’s 2 percent inflation target remains paramount after four years of elevated consumer prices. Kashkari stated that the ongoing “healthy debate” within the Federal Reserve centers on whether policymakers should treat tariff impacts as transitory inflation shocks while prioritizing economic growth through rate cuts. However, he positioned himself among officials opposing this approach.

Economic Roundup: On the inflation front, core personal consumption and expenditures (PCE) – the Fed’s preferred barometer of inflation -- increased by 2.5 percent on a year-over-year basis, matching the consensus expectation and reflected a step down from the reading of 2.7 percent a month ago (revised up from 2.6%). Weekly filings for unemployment benefits moved higher last week while the number of Americans filing for unemployment insurance on an ongoing basis once again hit their highest level since November 2021 as the U.S. labor market continues to show signs of slowing. Data from the Department of Labor released this morning showed 240,000 initial jobless claims were filed in the week ending May 24, up from 226,000 the week prior and above economists' expectations for 230,000. Elsewhere, the Pending Home Sales Index fell 6.3 percent in April from a month earlier to 71.3, according to the National Association of Realtors. Economists had been expecting a more modest 1 percent decline. On a year-over-year basis, pending contracts slid 2.5 percent nationwide. The Mortgage Bankers Association reported that mortgage applications fell for a second straight week, declining by 1.2 percent in the week ended May 23. During the period, the average rate on the 30-yr fixed rate mortgage rose to 6.98 percent versus 6.92 percent in prior week. Lastly, U.S. consumer confidence rebounded sharply in May from a near five-year low as the outlook for the economy and labor market improved amid a truce on tariffs. The Conference Board’s gauge of confidence increased by 12.3 points to 98, marking the biggest monthly gain in four years. The improvement in confidence was broad across age and income groups as well as political affiliations.

The Week Ahead: On the data front, Friday’s jobs report will be the focal point of the economic calendar. According to Bloomberg data, economists are forecasting that gains in nonfarm payrolls will continue to moderate, dropping to 130,00 in May from 177,000 in April. The unemployment rate is expected to remain steady at 4.2 percent. Apart from the jobs report, investors will also look for labor market signals from the Job Openings and Labor Turnover (JOLTS) survey on Tuesday and the ADP Employment Change report on Wednesday. Other reports of interest include the Institute for Supply Management’s reading on manufacturing on Monday and services on Wednesday. It will be a busy week for Fed speak with ten presentations scheduled, including Fed Chair Powell on Monday afternoon. The central bank is also scheduled to release its Beige Book report on Wednesday. The earnings calendar will continue to wind down with just seven members of the S&P 500 expected to release results.

— 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.