Weaker consumer confidence dampens a good week for stocks

We’ve already used the roller coaster analogy, and it’s time to use it again as we moved higher on this market ride last week. The S&P 500 Index is now less than 4% below its all-time high¹ following a strong week for stocks. The German DAX Index closed out the week at an all-time high and has risen nearly 19% in 2025.² Though stocks moved higher, the US dollar resumed its downtrend.³

A series of key points helped contribute to the better tone of the markets. It almost felt too good to be true.

Tariffs: De-escalation day

On Monday, May 12, the US and China agreed to a 90-day “ceasefire” to what up to that point could only be characterized as an escalating trade war. As part of the deal, US tariffs on China should fall from 145% to 30%, and Chinese tariffs on the US should be lowered from 125% to 10%. US stocks surged following the announcement, especially the more cyclical parts of the markets.⁴ One must remember, however, that tariffs remain much higher than they were in 2024 and much of the previous 100 years. But markets tend to respond to the second derivative in news — i.e., things are getting less bad.

Middle East: Deals, deals, deals

President Trump made his first international trip in his second term, heading to the Middle East. Large defense agreements were signed — Saudi Arabia agreed to purchase around $142 billion of arms,⁵ the largest defense deal ever signed. Many tech names were driven higher by deals that should allow Nvidia to export the highest end chips to the region.

US Consumer Price Index: Disinflation nation

US Consumer Price Index (CPI) inflation for April came in softer than expected for the third month in a row. Headline inflation fell to 2.3%, its lowest level since 2021, and down from a peak of 9.1% in 2022.⁶ Tariffs haven’t had a material impact on the latest inflation print, as many businesses had previously built inventories to try and avoid having to raise prices immediately once tariffs took effect. Elsewhere in the inflation data, the cost of hotel and motel rooms was down 10 basis points in April, and airfares were lower too.⁷ This was to be expected, in our view, since foreign tourism to the US has been falling markedly in recent months.

Federal Reserve: Later-but-larger cut?

The mix of lower tariff rates and encouraging inflation data suggests the Federal Reserve (Fed) will likely remain on hold for now. A wait-and-see approach could give the Fed flexibility to respond based on how conditions develop. A resurgence in inflation would argue for fewer or potentially no rate cuts, while a weakening labor market would likely result in a further reduction of the federal funds rate. With monetary policy still restrictive, we believe the Fed has room to react with a later-but-larger cut should the economy show sudden signs of weakness. Overnight index swaps now suggest the market expects two cuts in 2025.⁸ Atlanta Fed President Raphael Bostic commented that he expects only one cut this year unless uncertainty resolves itself in weaker hard data.⁹

Fiscal policy: “Big, beautiful bill”

House Republicans released the tax provisions of what President Trump has called his “big, beautiful bill.” Key proposals include an extension of the 2017 Tax Cuts and Jobs Act, temporary tax breaks on overtime pay, new deductions for tips, and spending cuts to entitlement programs. The tax package, along with the broader bill, isn’t in its final form and will be subject to further negotiations in Congress before being signed into law.

Bond market: Approaching the threshold?

Despite tariff de-escalation, fewer attacks on Fed Chair Jerome Powell, and benign inflation prints, long-term US Treasury yields have drifted higher in recent weeks. The 30-year Treasury rate recently hit 4.97%, a level not seen since 2023,¹⁰ and just below the 5% threshold that twice this year resulted in the administration adjusting its stance on tariffs.

Higher yields have reflected a complex mix of lower recession risks, higher inflation expectations, and US fiscal deficit worries as Congress proposes further tax cuts without matching offsets in spending. Deficit concerns have shown up in higher credit default swap prices on US government debt, too. While the Treasury market may remain under some pressure from bond vigilantes, we are minded not to panic. The US has many levers to pull when it comes to its debt and deficit. We expect the debt ceiling will be lifted (just as it was in 2023 and many periods before), foreign investors haven’t dumped US Treasuries, and the Fed isn’t likely to buckle to pressure.

Europe: German spending plans gather pace

Germany’s Foreign Minister Johan Wadephul said the nation would support demands from the US to increase defense spending to 5% of gross domestic product (GDP). According to NATO, Germany spent 2.4% of its GDP on defense in 2024. Germany joins Poland in supporting the Rutte plan. That 5% will be split: 3.5% for traditional defense spending, including weapons systems and personnel, and 1.5% allocated to infrastructure, intelligence, and civil protection. In applying that split, the spending is more likely to pass political hurdles. This news is another element of support for those who think Europe has turned a fiscal corner and might see better growth as a result in the coming years.

US consumer confidence: There isn’t much

After the series of good news and good rhetoric through the week, it was disappointing to see the week rounded out with US consumer confidence data from the University of Michigan hitting 50.8, the second-lowest reading on record. This suggests that consumers are anxious about the growth outlook.¹¹ Expectations for inflation in one year’s time are now 7.3%, and 4.6% in 5–10 years.¹² Another signal of weaker growth and stronger inflation expectations means the Fed’s decision process just got even harder.