Bull Market Intact as Tariff Impacts Loom

Weekly Investment Update | By Brian Schreiner

Last week stocks moved higher, bonds and bitcoin were flat, gold and commodities were down.

The S&P 500 and the Nasdaq pushed their record levels higher for the fourth week out of the past five as those two indexes and the Dow closed more than 1% higher last week. For the year, the S&P 500 (SPY) is up 8.7% and the Nasdaq 100 is up 10.8%. 

Small-cap stocks have not performed as well. The Russell 2000 (RUT) small-cap index is up just 1.4% year-to-date, through last Friday. The underperformance of small-cap stocks is likely due to higher interest rates, which have burdened smaller companies reliant on floating-rate debt and external financing. Slowing economic growth, compressed profit margins and tighter credit conditions have also impacted small firms.

Stock valuations have been on the rise, with the S&P 500 forward price-to-earnings ratio rising to over 22 times, the highest since 2021. Will earnings reports drive further gains? This week will be the busiest of this earnings season, with almost 40% of the S&P 500 companies reporting results, including several of the Magnificent 7: Microsoft, Meta, Apple, Amazon.

There are almost no bears left on Wall Street, which should be concerning if you’re heavily invested in stocks. I thought this was thoughtful from John Hussman: “With our most reliable stock market valuation measures at the highest extremes in US history, it’s useful for investors to remember that a market crash is nothing but risk-aversion meeting a market that is not priced to tolerate risk.”

The Q2 GDP estimate this Wednesday will show whether the U.S. economy rebounded after contracting in Q1, the first quarterly contraction since 2022. Wednesday will also conclude the Federal Reserve policy meeting and another jobs report will be released on Friday. The Fed is widely expected to keep interest rates unchanged.

Tobin Marcus of Wolfe Research believes that President Trump wants to impose the highest tariff levels that markets and the economy can sustain. That seems right, unfortunately. The famous quote from economist Friedrich Hayek comes to mind: “The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.” Impacts from higher tariffs have yet to hit the economy but may weigh on earnings season and the economy more broadly in the second half of the year.

Mohamed El-Erian said out loud what some other Fed watchers won’t. In an interview with CNBC last week he said that Federal Reserve Chair Jerome Powell has made several mistakes and should resign to preserve the independence of America’s central bank.

The National Association of Realtors reported that existing home sales declined 2.7% month over month in June, while the median sales price of existing homes hit a record high of $435,300. The report noted that “high mortgage rates are causing home sales to remain stuck at cyclical lows,” while “multiple years of undersupply are driving the record high home price.”

According to politicians and the mainstream media, the inflation level has “moderated,” and returned to “normal levels.” Over the past 25 years (since 2000) the dollar lost over 47% of its value, which works out to an annual inflation rate of 2.62%. Fortunately, rising wages and asset prices have blunted the negative impacts. I agree with Ray Dalio who wrote last week in a Time article, Defending the Value of Money, that things may have to get worse on the inflation front before policymakers finally address it: “Judging from the lessons of history and current readings, I think that it is clear that the value of money won’t be defended until the classic weak money / inflation problems become intense.”

Deputy FBI Director Dan Bongino has claimed that investigations into Deep State weaponization of law enforcement and intelligence operations are underway behind the scenes and that what he has already discovered has, “has shocked me down to my core. We cannot run a Republic like this. I’ll never be the same after learning what I’ve learned. We are going to conduct these righteous and proper investigations by the book and in accordance with the law. We are going to get the answers WE ALL DESERVE.”  Responses to Bongino’s Tweet were a mix of skepticism and hope.

As I was writing this week’s update, I enjoyed listening to the Top 20 Greatest Vocal Intros of All Time from Rick Beato on YouTube.

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The S&P 500 Index or the Standard & Poor's 500 Index is a market-capitalization-weighted index of the 500 largest U.S. publicly traded companies. The S&P 500 is a float-weighted index, meaning company market capitalizations are adjusted by the number of shares available for public trading. Note: Investors cannot invest directly in an index. These unmanaged indices do not reflect management fees and transaction costs that are associated with most investments.

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