Market Gains Amid Mixed Signals on Tariff Developments

Stocks rose last week despite conflicting developments on the tariff front as the major indices closed out a strong month of gains. Last week’s ruling by the Court of International Trade that struck down many of the tariffs the Trump administration added yet another wrinkle to evolving trade policy, which began with the president’s executive order implementing tariffs on goods from Canada and Mexico. While there was some speculation that the Court would rule against a portion of the tariffs announced over the past several months, the breadth of the ruling was unexpected. Under the decision, all tariffs initiated under the International Emergency Economic Powers Act (IEEPA) must “be vacated and their operation permanently enjoined.”

The tariffs imposed under IEEPA included:

• The “universal” 10 percent tariff on all countries;
• The 25 percent tariff on non-USMCA-compliant goods from Mexico and Canada;
• The 30 percent China tariffs (negotiated down from 145 percent); and
• The prospective July 9 “reciprocal” tariffs, which haven’t been imposed but were being negotiated.

The ruling does not apply to:

• The 10 percent tariffs that President Trump imposed on China during his first administration;
• The 25 percent tariffs on autos and auto parts;
• The 25 percent tariffs on steel and aluminum; or
• Potential tariffs on semiconductors, pharmaceuticals, copper, lumber and ships.

While the ruling was put on hold by an appeals court on Friday, some investors viewed the original ruling as an opportunity for the administration to scale back its stance on tariffs, which could pave the way for an uptick in economic growth and pave the way for the Federal Reserve to cut rates should inflation continue to decelerate. Indeed, Austan Goolsbee, the president of the Federal Reserve Banks of Chicago, said last week, "If on the back end of this thing, either we don't put the tariffs in, or they reach some deals that allow us to avoid doing that, we could go back to what we were prior to April 2," adding, "If you have stable, full employment and inflation going to target, rates can come down." Although Goolsbee’s comments weren’t in direct response to the court’s ruling against the tariffs, they gave some insight into the thinking of the Federal Open Markets Committee.

However, even if the decision that the tariffs invoked under the IEEPA need to be scrapped, we don’t believe that it will spell the end to the Trump administration’s efforts to recast the global economy and the role of the U.S in it. Our belief is supported by details in the recent spending bill that was passed by the House of Representatives and is now under consideration by the Senate. An item in the bill proposes increasing tax rates for individuals and companies from countries whose tax policies the U.S. deems “discriminatory”—mainly those countries such as Canada, the United Kingdom, France and Australia that impose “digital services taxes” on large U.S. technology companies. The clause also targets countries that are part of a multi-country agreement to charge a minimum corporate tax. This includes raising tax rates on passive income, such as interest and dividends, earned by investors in American assets. For context on the impact of this provision, currently that could potentially apply to $7–$8 trillion in Treasurys and $18 trillion worth of equities held by investors outside the U.S.

Additionally, the administration has alternate routes it can take to implement tariffs in a piecemeal approach. For example, shortly after the ruling nullifying the tariffs, President Trump announced that he would double the levies applied on steel and aluminum from 25 percent to 50 percent and threatened additional actions against China.

While the recent ruling may ultimately derail the use of the IEEPA to implement widespread levies, it is unlikely to end the uncertainty that has loomed over the markets and economy for the past several months. In the meantime, we believe investors will be stuck in a holding pattern as they watch to see if recent soft data (such as consumer and business surveys) begins to seep into hard data (such as employment numbers, inflation and consumer behavior). Further complicating the waiting game is the fact that the unresolved threat of tariffs is likely resulting in mixed signals in the hard data as consumers and businesses change their behavior based on their expectations of how things may ultimately play out. Indeed, economic reports from last week, which we detail later in this commentary, show that the threat of tariffs continues to impact the soft data and may be producing a short-term spurt of activity captured in hard data. Indeed, data out last week offered a view of how economic activity has been distorted by concerns over tariffs. The latest estimates of first-quarter gross domestic product (GDP) show a spike in imports (which shows up as a decline in GDP) and a jump in business spending, while more recent data shows a significant decline in both imports and business spending. Going forward, investors will be watching to see where the gyrations in demand settle as tariff policy eventually becomes clearer. There has been one area that has seen a consistent trend the past few months—a softening in consumer spending.

While risks and uncertainty may be elevated, we do not believe they call for dramatic changes to your investment plan. Instead, the current environment serves as a valuable reminder that an unpredictable future will lead to unpredictable opportunities for investors in the intermediate and long term. And capitalizing on these unforeseen opportunities is best done through diversification.

Conversely, investors who sell during periods of volatility help to create opportunities for extra returns for those who stay true to their asset allocation. While we believe uncertainty will remain elevated for a while, we also believe the best way to address it is by focusing on the long term and staying diversified to avoid concentrating too much on any one market segment or asset class.

Wall Street wrap

First quarter GDP revised modestly higher: The second estimate of first-quarter real GDP from the Bureau of Economic Analysis showed that the economy shrank at an annual rate of 0.2 percent, better than initial estimates of a 0.3 percent decline. Among the noteworthy updates to the initial estimate was a drop in consumer spending (which was up 1.2 percent quarter over quarter), down from 1.7 percent in the initial estimate and is now at the lowest level since the second quarter of 2023. For further context, consumer spending was up 4 percent in the fourth quarter of 2024. Strong spending in the fourth quarter may be the result of consumers buying ahead of anticipated tariffs and could result in depressed spending in the near term.

Business spending was revised upward to 24.4 percent on a seasonally adjusted annualized rate. As a result, business expenditures contributed 3.98 percent, up 0.38 percent from the initial estimate. Included in the business spending was a 24.4 percent increase in equipment, a seasonally adjusted annualized rate, which contributed a record 1 percent to first-quarter GDP. The spike in business spending was likely the result of companies buying ahead of expected tariffs. Similarly, imports surged 42.6 percent, which is the steepest increase on record, and served as a 5 percent drag on GDP.

Finally, corporate profits declined 2.9 percent in the first quarter from the previous quarter’s 5.4 percent advance. While still suggesting healthy profits, the decline was the steepest recorded since the first quarter of 2020. Margins contracted somewhat and likely reflect businesses absorbing rising costs or an inability for businesses to raise prices on consumers.

Capital spending shrinks: Preliminary results for April showed that durable goods orders tumbled for the month, falling 6.3 percent compared to a 7.6 percent rise the previous month. The previous month’s rise was likely driven by a surge in spending ahead of expected tariffs. While economists generally shrug off this volatile number, the report also contains nondefense capital goods orders and shipments, excluding aircraft, that are viewed as proxies for overall business spending. That measure fell 1.3 percent after rising 0.3 percent in March. Nondefense capital goods shipments excluding aircraft declined 0.1 percent after rising 0.5 percent in March.

Goods imports drop: After a surge of imports in anticipation of new tariffs during the first quarter, April saw a steep drop. The latest data from the Census Bureau shows that the U.S. trade deficit was slashed to $87.6 billion from March’s $162.3 billion—a decline of 46 percent. The significant drop was driven by a 19.8 percent decline in goods imports. The size of the decline marked the steepest on record. In a further sign of the impact of tariffs, automotive shipments from overseas fell 21.6 percent after rising 7 percent in March and 14.1 percent in February.

Consumer spending slows: The pace of consumer spending slowed in April, rising just 0.1 percent on an inflation-adjusted basis in April compared to a 0.7 percent gain in March, according to figures from the Bureau of Economic Analysis. On a nominal basis (meaning not adjusted for inflation) goods spending declined 0.13 percent for the month, while services spending rose 0.39 percent. On a year-over-year basis, spending was up 5.4 percent through the end of April; however, the trend suggests a slowdown.

The slowdown in spending comes despite a rise in income. The latest data shows personal income rose by 0.8 percent in April. However, consumers chose to save most of the uptick in earnings as reflected by the personal savings rate rising to 4.9 percent. For context, the savings rate hit a recent low of 3.5 percent in December 2024. The higher savings rate may be a sign that consumers are becoming more conservative due to concerns about the potential for an economic slowdown.

Inflation eases: The latest reading of the Personal Consumption Expenditures (PCE) index from the Bureau of Economic Analysis showed that headline inflation rose 0.1 percent in April—after no change in March—and is up 2.1 percent on a year-over-year basis, down from March’s year-over-year pace of 2.3 percent. Core inflation, which strips out volatile food and energy prices and is the measure that the Fed has the greatest influence over, was also up just 0.1 percent—after being flat in March. On a year-over-year basis, core inflation was up 2.5 percent, the lowest reading since March 2021.

The cost of goods rose 0.1 percent in April after falling 0.5 percent in March. Services prices rose by 0.1 percent, down from March’s pace of 0.2 percent. On a year-over-year basis, inflation for services came in at 2.5 percent, up 0.2 percent from March’s final reading. Meanwhile, goods prices are down 0.3 percent from the same period a year ago. Finally, so-called super core services prices, a measure that strips out shelter, was essentially unchanged for the month (down 0.02 percent) but remained elevated at more than 3 percent on an annualized three- and six-month basis.

After three months of rising prices to start the year, the last two PCE reports have shown mild price increases. It is too early to tell whether the easing inflation of the last two months is a result of slowing demand after the surge in activity to get ahead of tariffs. Still, the three-, six- and nine-month annualized inflation readings are likely too high for the Federal Reserve’s comfort and make a rate cut in the near future unlikely, particularly as the impacts of tariffs are still unclear.

Whether the recent trend of mild inflation continues will be determined by whether the soft survey data that shows companies planning to raise prices carries through into the hard data. Given the uncertainty surrounding trade policy, which was heightened with last week’s trade court ruling, the answer may not be known for several months.

Consumer confidence rebounds: The Conference Board’s Consumer Confidence Index released last week came in at 98 for May, up 12.3 points from April, snapping a streak of five consecutive months of declines. Views of current economic conditions rose 4.8 points from the prior month’s final reading to 135.9.

Expectations for the future rebounded sharply to 72.8, up 17.4 points from April. Still, expectations remain below the 80-point level that has typically served as a threshold indicating a recession is approaching. It’s important to note that roughly half of the survey results were collected after the May 12 announcement of a pause on reciprocal tariffs on many goods from China. “The rebound (in confidence) was already visible before the May 12 U.S.-China trade deal but gained momentum afterward,” Stephanie Guichard, Senior Economist, Global Indicators at The Conference Board, said in comments released with the results.

Despite improved sentiment overall, the labor differential, which measures the gap between those who find it easy or hard to get a job, fell to 13.2 from April’s final reading of 13.7 percent. It’s worth noting that the labor differential was at 31.7 in January 2024 and eventually fell all the way to 12.7 in September. Typically, a decline in the differential signals a more challenging job market and can coincide with a rise in unemployment (as we saw in the summer of 2024). While the differential improved modestly in the latest reading, it’s worth noting that the percentage of those who thought jobs were hard to get rose to 18.6 percent, which is the same level recorded in September of last year, when the job market was showing signs of weakening.

Jobless claims jump: Initial jobless claims were 240,000, an increase of 14,000 from the prior week’s final figure. The four-week rolling average of new jobless claims came in at 233,750, down 250 from the previous week’s average.

Continuing claims (those people remaining on unemployment benefits) stand at 1.919 million, up 26,000 from the previous week’s revised total and the highest number since November 2021. The four-week rolling average of continuing claims came in at 1.89 million, an increase of 2,750 from last week and the most since late November 2021. As we’ve noted in prior commentaries, we believe continuing claims are a more reliable indicator of the labor market, as they measure workers who are facing long-term challenges in finding a job and, as such, filter out some of the temporary noise that can be found in initial claims data.

The week ahead

Monday: The Institute for Supply Management (ISM) releases its latest Purchasing Managers Manufacturing Index. Last month’s report showed that manufacturing contracted for a second consecutive month, while input costs rose. We will be watching to see if the latest data points to continued rising costs or changes in the pace of growth.

Wednesday: The latest Purchasing Managers Services Index from the ISM comes out mid-morning. Recent data has shown increased inflationary pressures and modest growth in the services sector. Given that the services side of the economy has driven much of the economy’s growth over the past two years, we will be looking for signs of any changes in underlying strength in this report.

Friday: The Bureau of Labor Statistics will release the Jobs report for May. We’ll be watching to see if last month’s solid pace of hiring continued. Importantly, we will be monitoring the pace of wage growth. Last month’s data showed the pace of wage growth was still above the pace the Fed believes is consistent with its long-term inflation goal, and we will be looking to see if that trend continues, as it could weigh into the Fed’s actions on rates in the future.

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