the S&P 500 closes within a whisker
As we reach the end of the 2nd quarter, despite rising geopolitical risks, the potential impact of Donald Trump’s restrictive tariff policy, generally weaker economic data, and inflation rates that remain above central bank targets, last night the S&P 500, with minutes to go, rose above its highest closes on record before pulling back a tad. However, it still managed to record its second-highest close in history. As we approach the start of the second-quarter earnings season, according to Bloomberg, expectations for the S&P 500 this year have fallen from $273 per share at the beginning of the year to $265 per share currently, placing the S&P 500 on a current price-to-earnings ratio of 23x.
There is clearly little love lost between Mr Trump and Mr Powell, the Fed Chair, as the President described him to the world’s press yesterday as “terrible” and “stupid”, adding that there were up to four candidates to succeed him. Mr Trump has little interest in remaining impartial when it comes to influencing the Federal Reserve. Once again, the dollar is sent lower. These comments were made as Mr Powell told a U.S. Senate panel on Wednesday that the Trump administration’s tariff plans might cause a one-time jump in prices, but the risk of more persistent inflation is significant enough for the central bank to exercise caution when considering further rate cuts. Despite this repeated wait-and-see message, US 2-year Treasury yields have fallen from over 4% to 3.75% in the past weeks, indicating that traders are becoming more convinced the Fed is nearing another rate cut, possibly in July. That would have helped equity prices. US ten-year yields, which hit 4.75% in the 1st quarter, are back to 4.25%, however, this still leaves the equity risk premium close to zero.
What drives this recovery in stock prices, one must assume, is that the markets remain confident that the AI revolution will provide the world with its next leg of economic growth. July could well be an interesting month, as ide from earnings season, we have the end of Trump’s 90-day tariff pause. Could he possibly extend the deadline? One would not rule it out. Will the Fed actually cut rates? First, of course, we will get the monthly PMIs next week. The flash PMIs indicated that U.S. business activity continued to grow in June, albeit at a slightly slower pace; however, the composite index remained above 50.