The old adage “Sell in May and go away” didn’t hold up this year. After a sharp sell-off and rally in April, equities continued their upward momentum through May and into early June. Year-to-date, the major stock indices—excluding small caps—are up between 0.5% and 3.5%. Much of this resilience has been supported by a labor market that—despite showing signs of cooling—remains intact and continues to anchor consumer strength.
Labor Market: Slowing but Still Solid
Recent employment data showed the U.S. economy added 139,000 jobs in May—slower than April but still ahead of expectations. The unemployment rate held steady at 4.2%, and while the pace of hiring is moderating, there are no clear signs of broad-based deterioration.
The JOLTS report added to that sentiment, revealing a surprising jump of 191,000 in job openings, the largest monthly gain in nine months. However, the number of workers voluntarily quitting jobs declined by 150,000, reflecting more cautious behavior among employees. That, along with rising continuing claims, may indicate early signs of softening but not yet weakness.
Importantly, consumer spending—while slowing in April following a surge in March likely driven by pre-tariff buying—still looks healthy. Personal income growth remains strong, and the savings rate rose to 4.9% from 4.3%, suggesting there’s still dry powder to support spending and economic growth in the second quarter.
Mixed Signals: Hard Data vs. Sentiment
Despite resilient consumer behavior and employment figures, soft economic surveys are flashing warning signs. Both ISM manufacturing and services data in May pointed to a deteriorating outlook, with forward-looking indicators signaling potential business slowdown. Tariff pressures appear to be weighing on sentiment, even if they haven’t yet materialized in the hard data.
Trump–Musk Rift and the Tax Bill Overhang
Adding to the market narrative has been a public spat between President Trump and Elon Musk. After Musk criticized the administration’s budget package, Trump launched a wave of attacks via social media. Beyond the headlines, the real significance lies in the fate of the tax bill making its way through Congress. The proposal passed the House by a single vote and aims to extend the 2017 tax cuts set to expire next year. If Congress fails to act, the resulting tax increases could pose a serious headwind to both markets and the economy. Senate momentum has slowed, raising doubts about whether the bill can be signed into law by the Fourth of July.
Inflation, the Fed, and Global Central Banks
The Fed’s preferred inflation gauge—the April PCE report—showed headline inflation easing to 2.1% year-over-year, with core inflation dropping to 2.5% from 2.7%. While inflation appears to be moderating, the Fed remains cautious, with no policy shift expected until at least September as officials weigh the economic impact of ongoing tariffs.
Overseas, the European Central Bank cut rates by another 25 basis points—its eighth cut in a year—citing persistent inflation weakness and trade-related headwinds. The growing policy divergence between the ECB and the Fed could have currency and capital flow implications in the coming months.
Earnings Season Recap
First-quarter earnings wrapped up with largely solid results. Nvidia, in particular, delivered strong numbers and forward guidance that helped power a rebound in technology stocks. Still, a multi-billion-dollar charge tied to new chip export restrictions to China tempered some of the excitement. Broader corporate guidance has become more cautious, with many firms either lowering forecasts or pulling them entirely due to tariff uncertainty. Analysts have responded by revising earnings expectations lower for the rest of the year.
Positioning and Outlook
We remain cautiously defensive and have made tactical adjustments. We’ve trimmed U.S. equity exposure and increased allocations to fixed income and international equities—particularly European names, including defense stocks. Our base case assumes a lag in the impact of tariffs on economic data, which we expect to begin surfacing in June. If soft survey data remains weak and hard data confirms a slowdown, we anticipate renewed volatility in the months ahead.
We’ll be watching inflation data and the June 18th Fed meeting closely to gauge how policy might evolve amid a fragile but still-functioning economic environment.