By Pete Biebel, Senior Vice President, Senior Investment Strategist
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After taking on water in the second half of 2025’s first quarter, the stock market sank in early April when the tariff bombshell hit like a torpedo athwartships. The major averages were water-logged and oversold at their low a month ago when the administration announced a delay in the imposition of retaliatory tariffs. That announcement instantly buoyed the washed-out market, initiating a rebound rally that ultimately sailed higher through the end of the month.
The popular indices all breached new recovery highs several times last week. The S&P 500 Index (SPX) gained nearly 3% last week, effectively cutting its year-to-date (YTD) loss in half. The Dow Jones Industrial Average (DJIA) also gained 3% and also cut its YTD loss in half. Both SPX and DJIA extended their streaks of consecutive daily gains to nine. That’s SPX’s longest such streak since 2004. The NASDAQ Composite Index (COMP) rose 3.4% for the week but is still down nearly 7% for the year.
The information technology sector, which was one of the biggest drags on the market in the February/April decline, has provided the most buoyancy in refloating the overall market. In the past three-and-a-half weeks, that sector has rebounded about 20%, though it is still down about 7% YTD. Last week, technology was second-best of the U.S. equity sectors, gaining 3.9%, just behind the 4.3% advance in the industrials sector.
Economic news and first-quarter earnings announcements generally helped float the market’s boat last week. The only interruption as the averages tacked higher came Wednesday morning. Both the ADP payrolls report and the update on first-quarter (Q1) gross domestic product (GDP) initially spooked the market. The payrolls report showed 62,000 new private-sector hirings, about half of what had been expected. Then, Q1 GDP came in at -0.3%, its first negative print in more than three years. In the wake of that news, the averages all gapped significantly lower on the opening, temporarily dropping the indices to new lows for the week. That initial shock quickly faded as traders realized that the GDP number had been skewed significantly lower by a surge in imports fueled by the anticipation of tariffs later in the year. Stocks recovered their opening losses through the trading day, and everything was shipshape by the end of the session.
The armada of earnings announcements last was were generally favorable, with Apple Inc. (AAPL) and McDonald’s Corp. (MCD) being the most notable exceptions. This earnings season to date, about 70% of companies beat earnings estimates, and about 64% beat revenue estimates. Overall revenues and profits increased about as expected, though the real focus for analysts this earnings season has been on what forward guidance, if any, the reporting companies would provide. Not surprisingly, with the fog of threatened tariffs shrouding their outlook, many of those companies were at a loss to provide any details on their forward course. Over the past couple months, estimates of 2025 earnings growth for the S&P 500 stocks have been reduced by three to five percentage points. In a relatively expensive market, any combination of further earnings growth reductions and/or valuation multiples reductions would be a negative for stock prices.
The issue now is the market’s forward course. Will the tide continue to rise, lifting all boats? Or will stocks reverse course and relinquish some of the recent rebound gains? With the averages having recovered all of their post-Liberation Day losses, many investors expect that it will be smooth sailing from here on. The economy seems to be on an even keel, and the general expectation seems to be that the next news on tariffs will be good news. Just about everyone expects that the first sign of reduced tariffs, whether by negotiation or by proclamation, will be a strong tailwind for stocks. But such a widely anticipated response is likely to be a case of “buy the rumor, sell the news.”
I see several reasons to expect that the averages are likely to tack back in a southerly direction soon. First, the retracement to date has recovered a standard 50% to 65% of the previous markdown phase. So, so far, it still qualifies as a typical bounce in a continuing downtrend. Second, the broad averages and several leading sectors have rallied up to levels that represent pockets of heavy resistance. They’re approaching the levels of their March lows and their longer-term moving averages. Third, there hasn’t yet been any sign of capitulation. There hasn’t been any wide-scale panic or rush for the exits. Markets don’t bottom on good news. Indications from investor surveys imply that retail investors still hold a historically high allocation to equities; as a contrary indicator, that’s a negative.
One potential catalyst for a resumption of, or an acceleration in, a sell-off in stocks might be significantly higher yields for 10-year Treasury notes. For months my mantra has been, “Keep an eye on the 10-year yield.” Over the past few months, the higher yield has been just a mildly negative factor. Sure, that yield is much higher now than it was before the U.S. Federal Reserve Board (Fed) started to cut its target lending rate in September, but it hasn’t yet been higher enough to catch the attention of the stock market. The 10-year yield shot up to 4.80% in January on the post-election, pre-inauguration hoopla. It briefly rose above 4.60% in February and again during the early-April market meltdown. But in each circumstance, the yield dropped back by about 40 basis points (or 0.40%) in the next several weeks. In fact, it fell to around 4.15% early last week as the rebound rally in stocks continued.
I was beginning to doubt my theory. Then, as if rising from the ashes, the 10-year yield shot up into the 4.30+% range late last week. And that was while stocks were continuing their rebound rally. The next couple weeks could be telling: If that yield climbs much above the 4.35% to 4.40% range, then it will have broken its short-term downtrend and a continued increase into the 4.80% to 4.90% range would be likely. And that would be something that stocks could no longer ignore.
On a recent call with our advisors, I suggested that one condition we could watch for, as a sign that a new uptrend was beginning for the overall stock market, was improving relative strength in small-cap stocks. That sector of the market has been a significant and a continuous underperformer for much of the past few years. Historically, small-caps have performed well in the early stages of a new bull market. In fact, the group is likely to see improving relative performance even before the bottom for the major averages. So far, there’s no sign of lasting improvement. Last week, the Russell 2000 Index was up a bit more than 3%, but it’s still down more than 9% YTD.
The torrent of earnings reports will be reduced this week, both in terms of quantity and quality; most of the mega-cap tech companies have already reported. The Fed policy announcement Wednesday afternoon isn’t expected to rock the boat, but analysts will dissect Fed chair Powell’s press conference later that afternoon for any additional insight on the Fed’s next move.
Feliz Cinco de Mayo!
| Economic Calendar (5/5/25 – 5/9/25) | Previous | Consensus | |
| Monday 5/5/2025 | S&P Final Services PMI, April | 51.4 | 51.0 |
| ISM Services, April | 50.8% | 50.4% | |
| Tuesday 5/6/2025 | U.S Trade Deficit, March | $122.7B | $136.0B |
| Wednesday 5/7/2025 | FOMC Policy Announcement & Press Conference | ||
| Consumer Credit, March | -$800mm | $11.0B | |
| Thursday 5/8/2025 | Initial Jobless Claims | 241K | 230K |
| Continuing Claims | 1,916K | 1,892K | |
| U.S. Productivity, Q1 | +1.5% | -0.5% | |
| Wholesale Inventories, March, M/M | +0.3% | +0.5% | |
| Friday 5/9/2025 | No Reports Schedules | ||
Links to previously published commentaries can be found at benjaminfedwards.com/Latest Investment Insights/Market Commentary/Market