In the past week there have been a number of shifts in our technical indicators as well as a series of new economic releases. Overall, these were all very bullish and positive changes, although we could divide the economic releases into two parts: hard data which was strong and soft data, i.e., sentiment surveys which were weak.

In terms of economic data, total retail sales rose 0.1% in April versus March, after soaring an impressive 1.7% in March (upwardly revised from 1.4%). Excluding autos, sales rose a similar 0.1% after growing 0.8% in March. Restaurants and building supply stores drove non-auto gains and declines were led by sporting goods/hobby stores and department stores. But most impressive was that year-over-year growth in total sales was 5.2%, compared with an upwardly revised reading of 5.2% in March. Excluding autos, sales were up a strong 4.2% YOY, and excluding autos and gas sales increased a striking 5.4% YOY. See page 3.

Tariffs and Inflation

Tariffs and inflation are the big concerns of most investors, but inflation data for the months of March and April were surprisingly good. In April, headline CPI was 2.3% YOY, down from 2.4% YOY. PPI final demand was 2.4% YOY, down significantly from 3.4% in March. The PCE index was 2.3% YOY in March, down from 2.7% in February. Core indices were also encouraging. Core CPI was 2.8% YOY, unchanged on a YOY basis; core PPI was 2.6% YOY, up a bit from 2.3%, but the core PCE index was 2.7% YOY down from 3% in February. Notice that all these rates of inflation remain well below the 75-year average of 3.5% YOY and are in line with, or below, the 25-year average of 2.4% YOY. See page 4.

Since the anxiety regarding future inflation is based on President Trump’s tariff policy, monitoring monthly import price indices will be important in order to see if this fear is justified. In the month of April, import prices rose 0.1% YOY which was down from 0.8% YOY in March. Import prices excluding petroleum prices rose 1.3% YOY but were down from 1.5% in March. Export prices rose 2.0% YOY down from 2.6%. In sum, there is nothing worrisome to date.

Watching import price indices should be a focus in coming months because with inflation running below average and around 2.5% and the effective fed funds rate at 4.33%, from a purely mathematical perspective, there is plenty of reason for the Fed to lower rates in coming months See page 5.

Tariffs and Revenue

Financial journalists are ignoring the positive side of tariffs. President Trump instituted 10% across-the-board tariffs on US imports starting on April 2 and this 10% was on top of other select duties he had leveled previously. According to the Treasury Department’s monthly statement for April, customs duties totaled $16.3 billion for the month. This $16.3 billion was 86% above the $8.75 billion customs duties collected in March and more than double the $7.1 billion collected a year earlier. The total for customs duties was $63.3 billion in the fiscal year-to-date (which ends in September), up more than 18% in the same period in 2024.

The Treasury Department also indicated that the federal surplus in the month of April was $258.4 billion, up 23% from the same period a year ago. This lowered the fiscal year-to-date deficit to $1.05 trillion, nevertheless, this is still 13% higher than a year ago. The deficits built up over the last decade are a major problem and the combination of a record deficit and high interest rates is a huge budgetary burden. It may be the biggest problem President Trump will face in his term. Net interest on the $36.2 trillion national debt totaled $89 billion in April, higher than any other category except Social Security. For the fiscal year-to-date, net interest payments have been $579 billion, also the second highest outlay.

Soft Data

The first estimate for the University of Michigan consumer sentiment survey showed a decline from 52.2 to 50.8 in May. This was the fifth consecutive monthly decline and its lowest level since the record low of 50 reported in June 2022. However, political bias plays a significant role in sentiment indicators. Democrat consumer sentiment was 33.9 in May; independent sentiment was 48.2 and Republican sentiment was 84.2. This is a Democrat-Republican divergence of over 50 points! The present conditions index fell from 59.8 to 57.6 and the expectations index fell from 47.3 to 46.5. Survey details for March suggest that inflation was the main concern. The median 1-year price gain expectation was 5% and the mean expectation was a stunning 9.4%. See page 6. In short, tariff fears are driving sentiment indices, not economic conditions.

The National Association of Homebuilders survey was similarly weak. In May, the headline index fell from 40 to 34. It was as high as 47 in January, and the weakest results were reported in the West. Current single-family sales fell from 45 to 37. Expected sales for the next six months edged down from 43 to 42 and traffic eased from 25 to 23.

Technical Breakouts

The major equity averages are currently trading above all three key moving averages this week, which is impressive since typically the convergence of the 100 and the 200-day moving averages will represent formidable resistance. The Russell 2000, the perpetually laggard index, is trading above its 50-day moving average but is below longer-term moving averages. Nonetheless, the recent advance has lifted the S&P 500 and the DJIA to small gains for the year and leaves the S&P 500 only 3.3% below its all-time high. See page 9.

The 25-day up/down volume oscillator is at 3.63 this week after hitting 5.10 on May 16. It is overbought for the seventh day in a row, and the 5.10 reading was the highest overbought reading seen since August 18, 2022, which materialized shortly after the market rallied from its June 16, 2022 low. This solid overbought reading is favorable since it confirms that persistent buying pressure is driving stock prices higher. Strong overbought readings may not represent the most opportune time to buy stocks, but they are reflective of a bull market cycle. See page 10.

It is highly unusual for this oscillator to reach overbought territory before the equity market makes a new cyclical high. Typically, after new highs in price, an overbought reading (for a minimum of five consecutive trading days) confirms the high. However, the NYSE cumulative advance/decline line has also made a series of record highs. These are both signs that the underlying stock market is more robust than the indices. This is also seen on pages 13 and 14. The sectors currently outperforming the S&P 500 index are industrials, utilities, consumer staples, financial, materials, REITs, and communications services. The only underperforming sectors are technology, energy, healthcare, and consumer discretionary. With the S&P 500 now close to its all-time high it could be vulnerable to negative news in the near term; however, the longer-term outlook is bullish.

Gail Dudack

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Last week our weekly entitled “The Bull Market Remains Intact” (May 7, 2025) noted that technical indicators were turning favorable, particularly the NYSE cumulative advance/decline line which rose to an all-time high — a characteristic of a bull market. Normally, a new high in the NYSE cumulative advance/decline line is the technical confirmation that follows a new high in the indices, so this sequence seems inverted; nevertheless; a new high in the advance/decline line suggests the bull market remains intact and stock prices should move higher.

The advance/decline line continued to make new highs this week, but it was not the only positive change. Our 25-day up/down volume oscillator rose to 4.18. This was its second consecutive reading in overbought territory and the highest overbought reading since December 2023. The December 2023 reading was in line with the strong equity rebound from the October 2023 low. In short, the underlying breadth of the market is as bullish as it was in late 2023. See pages 10 and 11.

It is unusual for the 25-day up/down volume oscillator to reach overbought territory prior to the equity market making a new cyclical high. Much like the advance/decline line, this oscillator usually provides confirmation (or non-confirmation) of an advance after the market has made new highs. And to confirm a new high in the market the oscillator should remain overbought for a minimum of five consecutive trading days. It is possible that the oscillator could reach the five consecutive days in overbought this week. If so, it would imply new market highs in the near term. But even if it does not, this indicator measures the intensity of volume in advancing and declining shares and an overbought reading is confirmation that persistent volume in advancing stocks is driving stocks higher. This is a bullish characteristic.

Last week we also noted that the current rally materialized from a reading of negative 1.80, a level only halfway toward oversold territory. The last oversold reading in this oscillator was made at the October 2023 low. The lack of an oversold reading since then means the current advance is a continuation of the bull market that began in 2023.

Another positive this week was the 10-day daily new high/low indicator. The 10-day average of daily new highs rose to 103 this week and new lows are averaging 48. This combination, of daily new highs above 100 and new lows below 100, is an improvement from last week and shifts this indicator from neutral to positive. As a reminder, on April 11, three trading days after the S&P 500 hit a low of 4982.77, the 10-day new low index rose to an extreme reading of 823. This was the highest number since the September-October 2022 low when the 10-day new low level reached 882.

Last week the charts of the popular indices showed that each index was confronting important resistance at its 50-day moving average. This week the S&P 500 and the Nasdaq Composite jumped not only above the 50-day and 100-day moving averages, but also through their 200-day moving averages. The DJIA, hampered by weakness in UnitedHealth Group Inc. (UNH – $311.38), is still trading below the junction of its 200-day and 100-day moving averages and the Russell 2000, the perpetual laggard, is above its 50-day moving average but well below its longer-term moving averages. Nonetheless, the recent advance has lifted the S&P 500 to a small increase for the year and leaves it only 4.2% below its all-time high. See page 9. All in all, the equity market is acting better a bit sooner than we anticipated, but technical indicators have improved dramatically, and first quarter earnings season has been better than expected. These are the two catalysts we were looking for in the second half of the year to drive the market higher.

De-escalation

The catalyst for this nice improvement in market breadth this week was the fact that the US and China agreed to de-escalate the trade war and unwind most of the tariffs put into place in April. We find the media coverage of this US/China trade deal almost comical, describing it as “surprising”, a “no deal” deal, who blinked first, a huge win for China, and only a temporary reprieve. “Journalists” do not seem to understand that President Trump has two goals. First, various reports have identified China as a major source of fentanyl precursor chemicals, which are the ingredients needed to manufacture fentanyl. President Trump wants this stopped. Second, China’s consumer market has never been open to foreign trade and President Trump wants China “to open up.” President Trump imposed tariffs on China, which basically shut down trade between the two countries, as an opening salvo to get China to open to free (freer?) trade and to stop the flow of fentanyl. So, when the media says China wins because Trump blinked on tariffs, keep in mind that it is more complicated than tariffs. At the current time, it appears that China is agreeing to many of these requests. However, China has failed to meet its commitments more than once, so time will tell!

Meanwhile, revenue from Trump’s tariffs began to flow into the Treasury Department in April, and Treasury reported a record $16.3 billion in customs duties were received. That’s 86% more than the $8.75 billion collected in March and more than double the $7.1 billion received in April 2024. The reason President Trump plans to maintain a broad 10% tariff on nearly all imports is that tariffs are a good source of revenue. Do not forget that this administration inherited a massive budget deficit and is in desperate need of revenue.

Tariffs brought in revenue in April and although tariffs were supposed to be inflationary, headline CPI was 2.3% YOY in April, down from 2.4% YOY in March. Core CPI was unchanged at 2.8% YOY. See pages 4 and 5. In short, as the trade war is de-escalating, inflation is also de-escalating! Some economists are predicting that the impact of tariffs will take more time to show up in the data, but we disagree. These same economists overlooked the fact that stimulating an expanding economy in 2020 through 2023 would be inflationary. They were wrong. Economists are now predicting tariffs are inflationary when in fact they are often absorbed by the exporter or intermediaries. Economists are also overlooking the fact that oil prices are down which will eventually bring down gasoline, heating oil, and utility prices. This should more than offset any impact from tariffs.

The National Federation of Independent Business’ Small Business Optimism Index fell 1.6 points to 95.8 in April, but since this survey was taken before the US-China Geneva talks it could make the data moot. Nonetheless, the sharp jump in optimism that appeared immediately after the presidential election was mostly, but not entirely, erased by the end of April. See page 3. Consumer credit increased $10.2 billion in March, which was a seasonally adjusted annualized rate of 1.5% for the month. Both revolving and nonrevolving grew, although nonrevolving credit accounted for 80% of the increase. This increase in consumer credit was a welcome change from February, when all forms of credit fell month-over-month and were down year-over-year. The 6-month rates of change for credit remain negative, but the trend improved in March, which could prove to be a turning point. Although credit growth is expected to remain sluggish in the near term, financing rates fell in the first quarter of the year, and this could provide stimulus for credit growth in upcoming quarters. See page 6.

Gail Dudack

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As an example of how fragile geopolitics can be, India conducted military strikes on nine sites in Pakistan on Wednesday in response to a deadly militant attack on Hindu tourists in Indian Kashmir. India’s strike killed at least one child and wounded two other people in what Pakistan has called a “blatant act of war.” Pakistan’s ambassador to the US stated his country has not seen a “shred of evidence” to suggest they were behind the Kashmir tourist attacks and called on President Donald Trump to step in and help alleviate rising tensions with India. In coming days, the financial markets are apt to react negatively to this escalation of fighting between two longstanding enemies, both with nuclear powers.

On a positive note, President Trump and newly elected Canadian Prime Minister Mark Carney held a friendly press conference after their White House meeting this week and Treasury Secretary Scott Bessent and chief trade negotiator Jamieson Greer will meet China’s top economic official in Switzerland later in the week in what could be a first step toward resolving a trade war between the world’s two largest economies. Still, stocks fell just ahead of the Federal Reserve’s June meeting under the assumption that no policy change will materialize. We agree.

The White House continues to suggest trade deals will be announced soon, but to date, none has emerged, and in the absence of news, stocks have weakened a bit. Nevertheless, the last week has been a time of good news on the economic front and of improvement in the market’s technical indicators.

The ISM manufacturing index was relatively unchanged in April, edging down 0.3 points, to 48.7, but with six of its 10 components lower in the month. The ISM nonmanufacturing index rose 0.8, to 51.6, with only one weak component – imports – which fell from 52.6 to 44.3. While imports declined in both surveys, exports strengthened in services and fell in manufacturing. Prices paid were higher in both surveys, but particularly in the nonmanufacturing survey. On a positive note, new orders rose in both surveys. See page 3.

The April employment index rose in both ISM surveys, from 44.7 to 46.5 in manufacturing and from 46.2 to 49.0 in nonmanufacturing. This follows significant weakness in both surveys in March. However, business activity, or production, declined in both surveys, from 48.3 to 44.0 in manufacturing and from 55.9 to 53.7 in the nonmanufacturing survey. See page 4.

The initial estimate for first quarter GDP showed a decline in economic activity of 0.3% (SAAR), with the weakness due almost entirely to net trade as imports surged in anticipation of higher tariffs. Net exports declined a huge 4.8% (SAAR) in the quarter and government consumption fell a modest 0.25%. But aside from trade, economic activity was strong. Gross private domestic investment increased 3.6% and personal consumption expenditures increased 1.2% on a quarter-over-quarter basis. On a nominal dollar basis, gross private domestic investment rose 5.4% YOY led by investment in technology and software. See page 5.

The first quarter’s net trade balance in goods and services showed a deficit of $1.26 trillion, the result of imports of $4.54 trillion and exports of $3.28 trillion. This means imports represented 12.2% of GDP and exports represented 10.9% of GDP, leading to a 4.2% reduction in GDP driven by falling net exports. This was the largest negative contribution to GDP since the negative 4.3% in the first quarter of 2022. See page 6. However, note that April’s ISM surveys suggest imports fell significantly in April which implies trade may not continue to be a major negative factor for second quarter GDP.

In the month of April employment grew by 177,000 jobs although prior months were lowered by a total of 58,000. However, while federal government employment fell 8,700 in April, gains in local government employment resulted in total government employment increasing by 10,000. Employment gains were broadly based in the month but were particularly strong in healthcare, food services, transportation and warehousing. Our favorite employment indicator is the year-over-year growth in jobs, and this was clearly positive in April. The establishment survey showed job growth of 1.2% YOY (slightly below the 1.7% long-term average) while the household survey indicated jobs grew 1.52% YOY (above the 1.51% long-term average). See page 7.

Economists have been discussing the recent disparity between hard and soft data, and the dichotomy between the two is clearly displayed on page 8. The University of Michigan consumer confidence survey plunged to recessionary levels in recent months, but employment statistics are showing job growth that is at or above average levels. Moreover, in April average hourly earnings were $31.06 and grew 4.1% YOY, just fractionally below the historic 4.2% pace. Average weekly earnings were $1,049.83, in April, growing at 4.4% YOY, which was well above the long-term average of 4.0% YOY. In sum, employment and wage trends are healthy, which suggests that like many political polls, consumer sentiment data appears overly negative and biased.

Personal income reported for March was strong with headline income increasing 4.3% YOY and disposable personal income rising 4.0%. The key statistic – real personal disposable income – rose 1.7% YOY, up from 1.5% in February. The savings rate fell from 4.1% in February to 3.9% in March, which was not surprising since personal consumption expenditures rose 4.3% YOY. Spending on durable goods rose 7.2% YOY and vehicle sales increased 8% YOY. The personal consumption deflator rose 2.3% YOY in March, a nice improvement from the 2.7% seen in February. More impressive was the core PCE deflator which increased 2.6% YOY but was down from the 3.0% seen in February. Most economists are expecting inflation to pick up in April as tariffs become a factor, but we would point out that WTI crude oil prices are falling and will continue to lower headline CPI. In short, inflation releases may be a source of positive surprises in coming months.

Technical Outlook

After excellent rallies off the April lows, the popular indices were challenging their 50-day moving averages last week, and to date, only the S&P 500 and the Nasdaq Composite have bettered these levels. This is positive; however, we expect the 200-day moving average lines to be resistance for all the indices in the near term and do not anticipate these levels to be exceeded in coming months. To move significantly higher from current levels investors may require a combination of catalysts such as a good second quarter earnings season, the passage of the reconciliation bill later this year, and possibly a Fed rate cut. Nonetheless, the recent improvement in breadth statistics is impressive and though the Nasdaq Composite and Russell 2000 are 12% and 19%, respectively, below their record highs, the S&P and DJIA are now less than 10% below their record highs. The NYSE cumulative advance/decline line made a new record high on May 5, 2025 and this suggests that the long-term bull market remains intact.

Gail Dudack

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Reuters News posted a recent headline that caught our attention as well as that of many other readers: “Stocks set for worst 100 day start since Nixon as Trump injects semi-permanent uncertainty.” The writer may not know this, but this headline is comparing the current global economic environment to that seen in early 1973. The first quarter of 1973 was the initiation of an infamous oil embargo when the Arab world, organized as OPEC, imposed a ban on oil shipments to the US and other Western nations. This ban led to soaring oil prices, mile-long gasoline lines, and a long-lasting inflationary cycle that resulted in the CPI hitting 12.2% YOY in November 1974. It was also the beginning of the Watergate scandal which led to President Nixon resigning in 1974. Of course, this reporter is only looking at the decline in the S&P 500 and trying to make a point. But like any comparison, it is hollow unless it is put into an economic and historical perspective.

In 1973, the oil embargo and the Watergate scandal were not problems President Nixon could truly control and the uncertainty of both issues, one economic and the other political, lasted more than 12 months, or as the reporter noted, led to a “semi-permanent uncertainty.”

We do not believe the current environment qualifies as semi-permanent uncertainty. The current tariff negotiations are under the management of the President and his Cabinet, and it is likely that a number of important trade agreements will be announced over the course of the next 100 days. When this occurs, tariffs are apt to come down or be eliminated. Although China is the main target of the tariffs, China has already waived the 125% tariff on ethane imports from the United States imposed earlier this month. It was one of a group of products that have been granted exemptions but has not been front page news. And in terms of 1973 and oil prices, oil prices are currently going down, not up. And as we saw from 2020 to 2022, rising oil prices are inflationary and become a tax on consumers and corporations in a variety of ways. The exact opposite should be true in coming quarters. In sum, after reading this Reuters report we see little comparison to this quarter and 1973 and became more optimistic about the overall economy and stock market.

Our growing optimism may seem unwarranted given the current status of sentiment indicators. See page 3. Nevertheless, in the past few months there has been a significant discrepancy between soft data (sentiment), which shows extremely weak consumer confidence, and hard data (economic activity) which shows solid employment and consumption. The media has been highlighting the “recessionary” levels in sentiment, and we have been worried that a recession could be manufactured by a media that appears laser-focused on the negatives. However, we expect this disparity between hard and soft data will be resolved in coming months. With that in mind, it makes this week’s employment report for March an important data point. In time, sentiment and economic trends are likely to converge. But in our view, sentiment could rebound quickly if (or once) the administration announces a series of trade deals and Congress passes “the big beautiful bill” promised by President Trump.

Note on page 3 that Conference Board confidence indices are currently lower than they were at the October 2022 low. The trigger for the 2022 low was high inflation and the Fed’s late, but aggressive, interest rate hikes. But as we just indicated, oil prices are now falling and current Federal Reserve policy is tilted dovish, therefore, sentiment seems too pessimistic.

In terms of the economy, recent releases point to a still sluggish housing sector and March data was in line. Existing home sales fell 2.4% YOY in March to 4.02 million units and the median price of an existing home rose 2.7% YOY to $403,700. New home sales increased a healthy 6% YOY, but prices fell 8% YOY to $403,600. This pricing is unusual since new home construction is typically priced higher than existing homes, so this price drop in new homes is interesting and suggests home prices are coming down further. Both existing and new home inventories rose in March, but healthy new home sales led to months of supply falling from 8.9 months to 8.3 months. Existing home inventories, on the other hand, rose from 3.5 to 4.0 months. At the end of the quarter homeownership fell from 65.7% to 65.1% with the largest homeownership decline seen in the Midwest. See page 4.

Nearly a third of the S&P components will be reporting first quarter earnings results this week and next week’s consensus estimate changes could be important in terms of defining an earnings trend for the year. But last week, the S&P Dow Jones consensus earnings estimate for calendar 2025 fell $2.83 to $261.40 and the 2026 estimate fell $2.67 to $299.61. The LSEG IBES estimate for 2025 fell $1.87 to $264.15 and the 2026 estimate declined by $1.92 to $302.19. The LSEG IBES estimate for 2027 is $341.00, down $1.43. In short, earnings forecasts continue to fall dramatically. See page 6.

From a valuation perspective this means the S&P 500 trailing 4-quarter operating earnings multiple, after reaching a recent intra-month low of 20.7 times earnings in early April, is now 23.1 times and above both the 5-year and 50-year averages of 21.5 and 16.8 times, respectively. When using recently lowered 2026 S&P Dow Jones estimates, the 12-month forward PE multiple is now 18.45 times and back above its long-term average of 17.9 times; but when added to inflation of 2.4%, the sum comes to 20.85, which remains within the normal range of 15.0 to 24.1. This is a positive. See page 5.

Although most economic releases indicate a stable and resilient US consumer and economy, there are a few worrisome issues. The dollar continues to trade below $100 for the first time in three years and this will make imports expensive and exports difficult. In short, dollar weakness could be a bigger negative for US trade than Trump’s proposed tariffs. And since there have been liquidity issues in the Treasury markets, we are watching the SPDR Bloomberg High Yield Bond ETF (JNK – $95.27) for signs of stress in the fixed income arena. JNK fell to an intraday low of $90.41 in early April, which was a concern; however, it has rebounded smartly and is now testing the 200-day moving average at $96.03. This is good news. See page 7. From a technical perspective, after impressive rallies off the April lows, the indices are now challenging their 50-day moving averages. These averages are directly above recent closing prices at levels of 5,613 in the S&P 500, 41,501 in the DJIA, 17,631 in the Nasdaq Composite, and 2,021 in the Russell 2000. See page 8. It will be a test of strength to see if these first lines of resistance can be bettered in coming days. We expect the 200-day moving average lines to be important resistance in coming months, or until second quarter earnings season and the reconciliation bill is passed by Congress, later this year. Nonetheless, the recent improvement in breadth statistics is impressive and the S&P and DJIA are now less than 10% below their record highs. The Nasdaq Composite and Russell 2000 are 13.5% and 19.1%, respectively, below their record highs. The 10-day average of daily new highs is 59 this week and new lows are averaging 61. This combination of daily new highs and lows below 100 is neutral, but a big improvement from last week when daily new lows averaged 342. On April 11, the 10-day new low index (823) was the highest since the September-October 2022 low (882). While we expect a trading range market to continue for several more weeks or months, the comparisons between current technical indicators and those at the 2022 low suggest a much higher market by year end.

Gail Dudack

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