Escalate to De-Escalate
By Crest Capital Advisors on May 19, 2025
Dow: 3.41% to 42,654.74
S&P 500: 5.27% to 5,958.38
Nasdaq: 7.15% to 19,211.10
Russell 2000: 4.46% to 2,113.25
Bitcoin: 104,425
10 Year Yield: 4.44%
Outperformers: Technology 8.14%, Consumer Discretionary 7.72%, Communication Services 5.53%
Underperformers: No negative sectors on the week
US stocks were sharply higher this week as the S&P 500 and Nasdaq both finished up for a third week in the past four. The S&P 500 is now only around ~3% off its February record close, and the Nasdaq ~5% from its December peak.
The major catalyst of the week was the Monday announcement that the US and China would ease trade tensions. Because the agreement was more aggressive than expected, with the US tariff rate on Chinese goods being cut from 145% to 30%, while the China tariff rate on US goods will come down from 125% to 10%. The reductions are effective for the next 90 days as the two sides work on a broader deal. Following the agreement, several Street economists raised their US growth forecasts, cut inflation projections, and now see substantially less risk of recession. (more on this topic below)
Data this week included April core CPI and PPI, both coming in cooler than expected. However, economists said the impact of the trade disruptions since the Trump tariffs were implemented may not be apparent until May. So hence the Fed will likely continue to remain in a holding pattern.
Overall, Wall Street rejoiced this week on the US/China 90-day tariff pause, one that many investors hope (and expect) will become permanent. In the end, we may end up with more tariffs than there were at the start of 2024, but the feared outcome of recession inducing tariffs is quickly being priced back out of the stock market. So, here’s to tariffs, the cause of, and the solution to all of 2025’s market problems.
Speaking of Recession Odds
As regular readers of the CMD are aware, with the onset of the tariffs, we saw major revisions higher to Wall Street recession odds. At the time, it seemed the administration did not care at all what the ramifications of the most radical tariff policy in nearly a century would be, but now that they have made clear the intent is to negotiate the vast majority of tariffs to a more reasonable level, recession odds are being ratcheted down.
• Recent trade negotiations indicate that the US administration is interested in making deals. Progress is promising, though not complete.
• A delay in the most extreme U.S/China tariffs also gives time for other cushions to be implemented, eg, US tax cuts & deregulation.
Bottom line: Research firms are lowering their odds of a US recession in 2025, and one of our go to firms for insight (Strategas Research Partners) has lowered their odds to 35% from 45% previously. They go on to note that some hit to confidence has already happened, and this should temper growth over the next several quarters, but probably not enough to tip us into recession. They caution that they would flip the recession odds back higher if trade deals do not materialize. But for now, there’s another few months of hope. Markets seem satisfied with the hope narrative for now.
Getting more granular, Strategas notes that only 3 of 8 recession indicators are checked currently. And we would argue the U of Michigan Consumer Expectations indicator has been completely taken over by partisan political biases and is no longer relevant. So, we here at CMD would say only 2 of 8 are actually checked, indicating we still have quite a bit of breathing room before risks would be elevated enough to warrant portfolio actions.
Inflation Update: “Always Too Late” Powell
This week saw yet another “better than expected” inflation report, marking 3 in a row of “cooler” than forecast results. The Fed, which went on hold on a short-term blip up early in the year, has continued to sit on its hands, thus earning the criticism from President Trump of “Always Too Late” Powell. While we’re no fans of Trump’s hyperbole, we here at CMD have been frequent critics of the Fed’s inaction over the years…starting with “transitory” and waiting too long to hike rates before the inflation genie was let out of the bottle. To us, some of the “too late” criticism is probably warranted, and we do believe the Fed should be cutting rates now, pre-emptively, before any weakness in the employment data becomes obvious.
Here’s the details from this week’s inflation data…
April Core CPI increased just 0.2% month over month, below consensus for a 0.3% rise, with an annualized number now sitting at 2.8%. The Headline CPI also rose 0.2% month-over-month vs 0.3% consensus, and an annualized headline now at just 2.3%! Tariffs. Airline fares fell (2.8%), adding to March’s (5.3%) drop and February’s (4.0%) decline. The cooler CPI report comes despite analysts noting April would likely be the first month to show tariff pressure on the goods side. That did not materialize in the data. (Note: If the Fed is truly data dependent as they insist, this should be enough to resume cutting.) Here’s a chart of the CPI over the years. Still pointed lower in our read.
Following up on the CPI data, we found out on Thursday that the Producer Price Index (PPI) is in In outright deflation territory with headline down by -0.47% and Core down by -0.44% The overall April PPI came in at 2.4% year-over-year vs. 3.4% prior and the Core PPI +.1% vs. 4.0% prior. The chart below shows the sharp drop-off in producer prices, an indicator many believe leads the CPI report.
Wall Street Strategist Update
If you’re still not convinced that Wall Street Strategists are reactionary with their price targeting, then consider this headline which occurred on Tuesday:
Goldman Sachs raised the S&P 500 target back to 6,100 from 5,900.
We’re expecting many more of this as analysts begin to reverse the projection models that were revised under the tariff announcements of March and April.
The reason why we believe not much can be gleaned from Wall Street strategists (other than to get a sentiment check) is that they are inherently reactionary to data. Financial markets are dynamic, and new economic indicators, earnings reports, and geopolitical events can swiftly reshape investment outlooks. Their forecasts depend on constantly shifting variables like inflation trends, interest rate movements, and corporate performance, but the issue is they tend to make linear extrapolations of these trends rather than taking a more dynamic and flexible point of view. This propensity for linear analysis often forces strategists to adjust targets as fresh data emerges.
Rather than relying solely on long-term projections, they revise their views to align with the latest developments, ensuring their analyses remain relevant to investors navigating uncertain market conditions. This adaptability, while necessary, often leads to a cycle where sentiment and outlooks change frequently based on short-term signals rather than long-term fundamentals.
Here’s a check in of where they were at the start of the year versus earlier this week. As you can see from the table below, they’ve shaved 676 points from the collective S&P projected year end 2025 levels. As more tariff deals are announced, we expect this number to shrink as bullish optimism returns.
Q1 Earnings Season Update
With earnings season about 90% complete and only a few tech and consumer companies left to report, first-quarter earnings growth is expected to come in around 14%, with growth excluding the energy sector exceeding 16%. Sales growth also surpassed initial expectations, rising by 4.9%. While energy and materials were notable weak spots on the top line, the only two sectors that actually missed expectations were discretionary and staples. Hard to believe there was a dramatic pull forward of consumer goods purchases, with both sectors missing revenue.
Economic Funnies
Crazy Stat(s) of the Week
• Another V Recovery! The S&P 500 was down 15.3% year-to-date (YTD) on April 8th, but it completely reversed its decline in the five weeks that followed with a V-shaped rally of 18.1%. The last time the S&P 500 erased a 15%+ YTD decline in less than six weeks was in September 1982.
• Just One Stock. UnitedHealth, a major component of the Dow Jones Industrial Average has been experiencing a very difficult run of late, with the stock having fallen more than -58% from its 2025 YTD high to this week’s YTD low. This single stock decline has negatively impacted the Dow Jones Industrial Average by 4.6%. Put another way, the Dow would be 4.6% higher today if UNH were not part of the index.
Quote of the Week
“In Private Equity, our peers are too focused on the macro. The fact is, there is so much liquidity in the market from private credit, from private equity, people are under-invested, as well in the private markets. And the world is full of high-quality companies that can be improved by good owners, and with good operations. And we just put our heads down and we focus on that.”
– Orlando Bravo, Founder & Managing Partner Thoma Bravo
Calendar of Events to Watch for the Week of May 19th
As Q1 earnings begin to tail off, more and more of the market focus will be on global macro (trade & tariffs) headlines. There are still a few high-profile earnings reports we’re tracking, probably most notably Nvidia in the final week of May, but we expect trade deal updates and Fed policy factors will have the largest impact.
On the US Economic front, this will be one of the quietest weeks in some time. All in all, we see the market trailing off in terms of volume as we head into Memorial Day Weekend, marking the official beginning of summer.
Monday 5/19 – No major US economic news today. Looking overseas, Eurozone CPI for April will be released with economists expecting a 2.2% year-over-year headline rate.
Tuesday 5/20 – Once again, no major US economic news today. Canadian CPI will be out for April with economists expecting an anemic 1.6% year-over-year rate and outright deflation of -0.2% for the monthly change.
Wednesday 5/21 – A 3rd straight day of no major US economic news.
Thursday 5/22 – The May Markit PMI’s (preliminary) for Manufacturing and Services are expected to come in at 50.7 and 51.0, respectively. The weekly jobless claims data will continue to get scrutiny as well.
Friday 5/23 – April New Home Sales are expected to decline by nearly 8% from the month prior as stubbornly high mortgage rates continue to keep a lid on housing activity.
Source: MarketWatch / FactSet (May 2025)
