
Market Update
The S&P set a record high last week supported by a ceasefire in the Middle East, progress on a US-China
trade deal, and optimism around Europe reaching a trade agreement by July’s deadline. Market sentiment
improved as trade negotiations gained momentum, and the White House signaled flexibility by downplaying
the importance of trade deadlines, suggesting they could be extended. The Middle East ceasefire also helped
push oil prices lower, easing inflation concerns. Regarding inflation, PCE came in line with core PCE at 2.7%
yoy, however looking at the 3-month annualized basis, core PCE has increased just 1.7% which is in line with
the Fed’s 2% target. With tariff-related inflation yet to show up in the data, two Fed governors indicated
support for a possible rate cut as early as July. As a result, the yield curve bull steepened signaling cuts in the
near term due to a weakening economic outlook. Fed Chair Powell on the other hand kept his data dependent
stance, signaling that the Fed is well positioned to wait and learn given the somewhat solid labor market, and
expectations of tariff price pass-through in the June and July numbers, suggesting that earliest timing for
action is in September. This week, we have the jobs report on Thursday, with consensus expecting the
unemployment rate to rise slightly to 4.3%. Besides that, investors will likely be patiently waiting for more trade deal announcements before the July 9th deadline.
Q2 Earnings
Earnings season is about to begin as we wrap up a strong quarter for the market. Consensus expectations are
for S&P 500 earnings to increase 5% year-over-year in Q2, down from 13.3%. This would be the lowest rate
of growth since Q4 2023 when growth was 4%. Q2 revenue is expected to increase 4.2%. Net profit margin
estimates are at 12.3% currently, which would be slightly lower than Q1 when it was 12.7% but above the fiveyear average of 11.7%. The upcoming earnings season will provide us with some clues on how President
Trump's new tariff policies will affect corporate margins, sales, and investment spending. Last quarter’s
earnings were better than expected, however that was before tariffs. We expect the earnings calls this quarter
to continue their focus on tariff mitigation measures and overall consumer health and their anticipated
spending habits in response to tariffs.
Personal Consumption Expenditures (PCE)
The Fed’s preferred inflation gauge, core PCE, rose 2.7% year-over-year in May, keeping it within the 2.5% –
3.0% range that has persisted since early 2024. However, on a three-month annualized basis, core PCE has
increased just 1.7%, still aligned with the Fed’s 2% inflation target. Inflation in services excluding housing
remained modest, rising only 0.13% month-over-month. Over the past three months, that category has risen
just 1.2% annualized, a pace well within pre-COVID norms. On the spending side, real consumer outlays fell
0.3% in May, led by a 1.8% drop in durable goods, as auto sales declined 6% following a surge earlier in the
year. Even excluding auto purchases, spending slipped 0.1%.Spending on transportation services, meals and
accommodation, financial services, and other services, a category that includes net foreign travel, all fell last
month.
The pullback in consumer spending has been sharper than the slowdown in income growth. Real wages,
which rose 2.9% in 2024, have moderated to a 2.3% pace so far this year. Real disposable income shows a
similar trend, rising 2.1% last year and 2.3% year-to-date. This income stability has allowed households to
boost savings, with the personal saving rate climbing to 4.5% in May from 3.5% in December. If the labor
market remains solid and uncertainty, particularly around tariffs and inflation, eases, this higher saving rate
could provide a cushion for a recovery in consumer spending later in the year.
Sources:
https://markets.jpmorgan.com/jpmm/research.article_page?action=open&doc=GPS-5017318-0
https://markets.jpmorgan.com/jpmm/research.article_page?action=open&doc=GPS-5015257-0
https://markets.jpmorgan.com/jpmm/research.article_page?action=open&doc=GPS-5018138-0
