Market Commentary

• One can make a reasonable argument that at least some of the recent stock market bounce higher can be attributed to anticipation that some trade deals will be announced in the near term.
• Further near-term upside in the S&P 500 Index is likely limited, and we expect to see more downside volatility before the tariff uncertainties are resolved.

Let’s get one thing out of the way right off the bat: We do have three interest-rate cuts penciled in this year if the economy slows in coming quarters and the unemployment rate rises as we expect. Our central bankers keep telling us they are “data dependent.” That means Chair Powell and the other voting Federal Open Market Committee (FOMC) members need to see the data that tells the Federal Reserve the labor environment is weak and/or inflation readings are coming down in a consistent fashion. For now, we believe it appears the economy has not slowed enough for policy makers to deliver a rate cut this week.

Now we can move to what we believe, for now, are the most important topics at hand: tariffs and trade negotiations. We know that tariffs have real economic costs. Prices/inflation tend to rise and then the economy tends to slow. We are now hearing some retailers stating that they will have fewer goods on their shelves in coming months and quarters if current tariff levels persist (i.e., think clothing and toys). But the president over the weekend hinted that there could be trade deals announced as early as this week. Last week, Treasury Secretary Scott Bessent told reporters that a trade deal with India was “very close.” One can make a reasonable argument that at least some of the recent stock bounce higher off the lows can be attributed to anticipation that some trade deals will be announced in the near term. These deals do not necessarily need to be with our largest trade partners like China or the European Union to help calm some investor nerves on the tariff front. Deals with our largest partners will take time, but unless and until the deals come — especially with Mexico, Canada, Europe, and China — the increase in consumer goods prices and the slower pace of private spending will be tangible.

Investors want to know now if we have seen the bottom in the stock market and if the day-to-day volatility is going to continue. We currently do not know if or how soon these deals may come, nor do we know if the president will add sectoral tariffs on pharmaceuticals and electronics. In our view, further near-term upside in the S&P 500 Index is likely limited and we expect to see more downside volatility before the tariff uncertainties are resolved and other positives (tax cuts, deregulation, and lower interest rates) help the economy gain traction again, potentially in the autumn.

In the meantime, we are looking into 2026 and seeing an economic and earnings recovery. For now, while volatility remains the likely headline, we prefer to focus on quality, like large- and mid-cap U.S. equities, and favor the Energy, Communication Services, Information Technology, and Financials sectors. Be selective in fixed income. We prefer investment-grade corporates and essential-service municipals in the three to seven year maturity range. Quality and selectivity should lead the way as a recovery develops and could provide some stability on days when the news is negative.

Forecasts, estimates, and projections are not guaranteed and are based on certain assumptions and views of market and economic conditions which are subject to change.

Each asset class has its own risk and return characteristics. The level of risk associated with a particular investment or asset class generally correlates with the level of return the investment or asset class might achieve. Stock markets, especially foreign markets, are volatile. Stock values may fluctuate in response to general economic and market conditions, the prospects of individual companies, and industry sectors. Small- and mid-cap stocks are generally more volatile, subject to greater risks and are less liquid than large company stocks. Bonds are subject to market, interest rate, price, credit/default, liquidity, inflation and other risks. Prices tend to be inversely affected by changes in interest rates. Municipal bonds offer interest payments exempt from federal taxes, and potentially state and local income taxes. Municipal bonds are subject to credit risk and potentially the Alternative Minimum Tax (AMT). Quality varies widely depending on the specific issuer. Municipal securities are also subject to legislative and regulatory risk which is the risk that a change in the tax code could affect the value of taxable or tax-exempt interest income.

Sector investing can be more volatile than investments that are broadly diversified over numerous sectors of the economy and will increase a portfolio’s vulnerability to any single economic, political, or regulatory development affecting the sector. This can result in greater price volatility. Communication services companies are vulnerable to their products and services becoming outdated because of technological advancement and the innovation of competitors. Companies in the communication services sector may also be affected by rapid technology changes; pricing competition, large equipment upgrades, substantial capital requirements and government regulation and approval of products and services. In addition, companies within the industry may invest heavily in research and development which is not guaranteed to lead to successful implementation of the proposed product. The Energy sector may be adversely affected by changes in worldwide energy prices, exploration, production spending, government regulation, and changes in exchange rates, depletion of natural resources, and risks that arise from extreme weather conditions. Investing in the Financial services companies will subject an investment to adverse economic or regulatory occurrences affecting the sector. Risks associated with the Technology sector include increased competition from domestic and international companies, unexpected changes in demand, regulatory actions, technical problems with key products, and the departure of key members of management. Technology and Internet-related stocks, especially smaller, less-seasoned companies, tend to be more volatile than the overall market.

Investment Grade bonds - A rating that indicates that a municipal or corporate bond has a relatively low risk of default. Bond rating firms, such as Standard & Poor's, use different designations consisting of upper- and lower-case letters 'A' and 'B' to identify a bond's credit quality rating. 'AAA' and 'AA' (high credit quality) and 'A' and 'BBB' (medium credit quality) are considered investment grade. Credit ratings for bonds below these designations ('BB', 'B', 'CCC', etc.) are considered low credit quality, and are commonly referred to as "junk bonds".

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