Weekly Investment Perspective

U.S. equities extended their rally last week, lifted by optimism around global trade talks and a stronger-than-feared May jobs report. The S&P 500 gained 1.5%, the Dow Jones rose 1.17%, and the Nasdaq added 2.18%, while small-cap stocks led the way with the Russell 2000 surging 3.19%. Big tech was broadly higher, although Tesla dropped 14.7% amid a public feud between Elon Musk and President Trump. The S&P 500 now sits 20% above its April low and just 3% below its record high. Still, trade policy remains a key overhang, and hard economic data may soon reflect the impact of rising costs and uncertainty.

Trade and tariff developments were again front and center. President Trump and China’s President Xi held a call Thursday that resulted in a tentative agreement to resume negotiations, with trade officials set to meet in London this week. While the call was described as “very good,” details were scarce and skepticism remains. Rare earth exports—central to U.S. complaints—saw some movement as China pledged to issue more licenses to U.S. automakers.

Friday’s May employment report added to the upbeat tone as the labor market broadly continues to weather the tariff headwinds despite some areas of weakness. Nonfarm payrolls increased by 139k—above consensus of 130k—while wage growth ticked up and the unemployment rate held steady at 4.2%. That said, revisions to the prior two months subtracted 95k jobs, and labor force participation declined slightly, likely reflecting weaker immigration flows. According to Oxford Economics, the slowdown in immigration—particularly unauthorized flows—may limit labor supply growth and could help contain the unemployment rate even as hiring moderates.

While some of last week’s data suggested softening labor conditions—such as a weaker ADP print, a drop in ISM services, and an uptick in jobless claims—markets viewed the overall employment picture as solid. As a result, rate cut expectations edged down slightly, with roughly 45 basis points of easing now priced in for 2025. Fed officials continue to signal patience, awaiting further inflation clarity.

In Washington, the reconciliation bill remains a source of market anxiety. While expected to pass, doubts are growing about whether it will reach the president by July 4. One flashpoint is Section 899, a controversial provision that could impose new taxes on U.S.-based income from companies in countries deemed to have “discriminatory” tax policies. While the Treasury has indicated it could serve as negotiating leverage, Senate leadership appears divided, and a narrower version may emerge.

Beyond Section 899, the broader fiscal implications have also been a point of contention. The CBO estimates it would add $2.42 trillion to the national deficit over the next decade. That projection alongside upward pressure on long-term yields and softening foreign demand for U.S. assets has renewed focus on America’s fiscal trajectory—a theme likely to remain top of mind heading into the second half of the year.

This week’s economic calendar is headlined by the May inflation updates of consumer and producer prices. Consensus expectations call for a 0.3% month-over-month rise in headline CPI, which would push the year-over-year rate up to 2.5% from 2.3% in April. Oxford Economics cautions that tariff-driven price pressures are starting to show through, particularly in goods such as vehicles and recreation equipment, while some transitory disinflationary forces have likely faded.

Beyond inflation, investors will be watching Thursday’s jobless claims and Friday’s University of Michigan consumer sentiment data for any signs of further softening in the labor market or deteriorating confidence. With volatility likely to persist amid fragile trade negotiations and fiscal brinkmanship, the coming weeks may prove pivotal in shaping the market narrative heading into the summer.

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