Elizabeth Regis

Recent court decisions keep tariff policy in the spotlight. 

Tariff update: mixed signals from the courts 

In recent weeks, U.S. trade policy has returned to the spotlight. A ruling by the Court of International Trade suggested potential changes, but a federal appeals court has temporarily blocked that decision. As a result, current tariffs—covering sectors like steel, aluminum, and autos—remain in place. 

This ongoing legal tug-of-war is prolonging uncertainty for businesses and investors. Here’s a quick summary of the potential impacts: 

• Economic impact: A hypothetical reduction in tariffs could lift GDP by 0.1% for every one percentage point drop in average rates, with a similar effect on inflation. But for now, it’s all still under negotiation. China has pushed back against the latest U.S. accusations. 

• Market reaction: While the S&P 500 has shown signs of recovery, several headwinds remain—high valuations, 10-year Treasury yields hovering near 4.5%, fiscal uncertainty, and pressure on corporate margins. New tariffs could also emerge in sectors like semiconductors or pharmaceuticals. 

Market implications: 

Tariff policy remains uncertain — and likely to stay in focus. Until there’s more clarity, volatility may continue across markets. 

CEO confidence just saw its sharpest quarterly drop in nearly 50 years, driven in part by trade policy uncertainty. 

Source: Raymond James 

A look at summer market prospects: Between strong historical trends and new risks on the horizon. 

This old Wall Street saying tends to resurface around Memorial Day, suggesting investors reduce their exposure to stocks during a seasonally weaker period. But history doesn’t fully support that view. Over the past decade, the S&P 500 has averaged a +3.9% gain between Memorial Day (May 26) and Labor Day (September 1), closing higher 80% of the time. 

Still, summer isn’t without risks. Trade tensions, downward revisions to earnings estimates, and a recent rise in interest rates could weigh on investor sentiment. For example: 

• Tariff effects may catch up: While the economy has shown resilience, growth is expected to slow in the second half of the year as tariffs begin to more noticeably impact consumer spending and business investment. 

• Corporate earnings outlook: Q1 2025 surprised to the upside. However, many earnings reports still don’t fully reflect the new trade environment. Full-year EPS estimates have started to come down, though they remain relatively optimistic, projecting +10% annual growth. 

• Rising long-term rates: With the 10-year Treasury yield now above 4.5%, valuation pressures are building – especially in interest-rate-sensitive sectors like real estate. 

Market implications: 

While history suggests summer can be a constructive period for markets, current conditions make it harder to rule out potential volatility. 

On average, the S&P 500 has seen a drawdown of roughly 7% at some point between May and September over the past decade. 

Source: Raymond James

Moody’s has lowered the U.S. credit rating to Aa1, citing the ongoing rise in public debt and the increasing cost of servicing that debt in today’s high-rate environment. This move means the U.S. has officially lost its last AAA rating, after similar downgrades by S&P in 2011 and Fitch in 2023. 

While the news highlights growing fiscal concerns, it’s not entirely unexpected: the federal deficit now exceeds $2 trillion per year, and interest payments already absorb 18% of tax revenues. 

So far, markets have reacted calmly, with a few key takeaways: 

• Rates and investments: No major sell-off of Treasury bonds is expected, though yields might rise slightly, similar to what happened after Fitch’s downgrade. If volatility spikes, the Fed could step in. 

• Equities: The impact on stock markets may be muted, since all three major rating agencies have now issued downgrades. Investors remain more focused on trade policies and tariffs. 

• Credit confidence: Despite the downgrade, the U.S. retains strong credit fundamentals, backed by a deep capital market, the dollar as the world’s reserve currency, and strong repayment capacity. 

What this means for markets: 

While the short-term impact is likely limited, persistent fiscal imbalances could pose long-term risks for financial markets. 

U.S. Federal Deficit and Net Interest Payments (% of GDP, 1973–2035) 

*TCJA refers to the Tax Cuts and Jobs Act of 2017. 

Source: JP Morgan. 

Q1 2025 ended on a strong note, despite ongoing challenges in the economic landscape.

With nearly 85% of S&P 500 companies having reported, the first-quarter earnings season for 2025 showed encouraging strength. Earnings per share (EPS) grew 12% year over year, well above expectations. But corporate commentary also reflected a more cautious tone: mentions of terms like “tariffs” and “recession” rose sharply in investor calls. While consumer spending held up, some pressure is beginning to show in industries like restaurants, airlines, and premium retail. 
On the other hand, mega-cap tech companies stood out. Their earnings grew 29% year over year (vs. 9% for the rest of the S&P 493), driven by strong AI investments. Interestingly, their valuations relative to the broader index are now at their lowest since 2017. 

Market implications: 

Q1 2025 earnings helped support the S&P 500’s rebound in April, but they reflect past performance. Expectations for the rest of the year continue to trend lower and could be revised further as economic headwinds persist. 

Q1 2025 Earnings: Double-digit growth delivered. 

Source: Goldman Sachs. 

The Federal Reserve kept rates unchanged but struck a more cautious tone.  

A Pause Amid Uncertainty  

Job Market Stays Strong, But Economic Uncertainty Tempers Expectations for Quick Changes  

As expected by markets, the Federal Reserve kept its benchmark interest rate steady at 4.25%–4.5%, a level it has maintained since December. While the labor market remains solid, with 177,000 new jobs added in April, the Fed acknowledged growing economic challenges.  

Inflation remains high, and after the GDP contraction in Q1, the Fed’s statement highlighted a rise in economic uncertainty. The Fed stressed its commitment to monitoring risks that could impact its dual mandate: keeping inflation under control and supporting employment.  

According to Jerome Powell, weaker consumer and business outlooks are largely due to an uncertain trade environment.  

Looking ahead, the Fed reiterated that it’s prepared to adjust its policy stance if needed. Following the announcement, expectations for a rate cut in June dropped significantly.  

Market Implications  

The outlook remains uncertain. While the Fed held rates steady, the lower likelihood of immediate cuts highlights the importance of closely watching the economic and trade landscape.  

Fed Funds Rate Expectations  

Source: JP Morgan