What Happened Last Week
- All-Time Highs: Investor optimism on trade and the budget bill in DC sent the S&P 500 to fresh all-time highs.
- Oil Retreat: Crude oil prices fell by over 10% as a sign that investors do not expect any last economic impact from the war in the Middle East.
- Trade Deal Expectations: Progress on trade and efforts to downplay the July 9th tariff deadline added to the bullish momentum.
What We’re Watching This Week
- Labor Market: Thursday’s non-farm payroll report and the job openings data on Tuesday are two key releases that will frame the state of the labor market.
- Political Negotiations: Investors expect progress on the “Big Beautiful Bill” and more details on trade deals to underpin the building positive sentiment in the market.
- Central Bank Conference: A meeting of global central bankers in Portugal may provide clues on where policy rates are headed in the U.S. and abroad.
Investment Management Team’s Views
Fears over the Middle East faded fast as both the S&P 500 and the NASDAQ 100 powered to fresh all-time highs last week. Progress on the budget bill in DC, an indication from Powell that rate cuts are coming, and continued positive rumblings on trade deals added to the bullish price action. As the quarter comes to an end this week, holiday market conditions are likely to prevail across equity and fixed income markets. Investor exuberance is on the rise, with last week’s equity price action showing some signs of “the market can only go up” type of investor behavior last seen in the period immediately following President Trump’s election victory.
Interest rate pricing is beginning to reflect a greater amount of monetary easing over the next 18 months as economic momentum slows and the much-feared inflation bump from tariffs remains absent from the data. We also think rate cuts are likely coming, possibly in the fall, but our reading of the price action this quarter suggests that these are largely reflected in the market. The yield curve has twisted steeper, and rate-sensitive parts of the equity market, most notably small caps, have underperformed dramatically this quarter and year. There may be some tactical opportunities in this beaten-down part of the market this summer as rate expectations adjust, but the overall trend of higher financing costs and greater economic and policy volatility is likely to be an overhang to these lower-quality, smaller firms.
There are plenty of catalysts jammed into this week’s three-and-a-half trading days. The end of the quarter may bring some rebalancing from winners (large-cap growth, international stocks, high yield credit) into the laggards (small-caps, value stocks, and long-term Treasuries). The labor market is the focus of the data calendar this week. Thursday brings the all-important non-farm payrolls release, with the pace of job creation expected to slow. Lastly, investors will be following progress on the reconciliation bill in Congress and the trade deals being negotiated with our key trading partners. There is considerable optimism on these fronts, setting the stage for a potential “sell-the-news” market reaction in the weeks ahead.
