Stocks Settle Mixed on Concerns Over Trade Policy and the Fiscal Outlook

The S&P 500 Index ($SPX) (SPY) Thursday closed down -0.04%, the Dow Jones Industrials Index ($DOWI) (DIA) closed unchanged, and the Nasdaq 100 Index ($IUXX) (QQQ) closed up +0.15%.  June E-mini S&P futures (ESM25) are down -0.05%, and June E-mini Nasdaq futures (NQM25) are up +0.12%. 

Stock indexes on Thursday recovered from early losses and settled mixed, with the S&P 500 and Dow Jones Industrials posting 1-1/2 week lows. Stocks were under pressure Thursday when bond yields rose after President Trump's tax and spending bill passed the House Thursday morning, which would avert a year-end tax increase at the expense of adding to the US deficit.  The bill now heads to the Senate, where some groups of Republicans are pressing for extensive changes.  Lawmakers are expected to vote on the bill's approval by August.  Concerns remain that the tax bill could add trillions of dollars to an already bulging deficit at a time when investors' appetite for US assets is waning.  Stocks and the dollar have been under pressure this week due to the reduced attractiveness of US assets to foreign investors with the ongoing trade war, last Friday's Moody downgrade of the US credit rating, and the negative US budget deficit outlook in the Republicans' reconciliation bill. 

However, stocks recovered from their worst levels Thursday to trade mixed as bond yields fell from early highs and moved lower on dovish comments from Fed Governor Waller, who said if the Trump administration's tariffs on US trading partners settle around 10% this summer, "then we're in a good position at the Fed to kind of move with rate cuts through the second half of the year."  Stocks also found support from Thursday's US economic news, which showed that weekly jobless claims fell to a 1-month low and that the May S&P manufacturing PMI unexpectedly increased.

US weekly initial unemployment claims unexpectedly fell -2,000 to a 1-month low of 227,000, showing a stronger labor market than expectations of an increase to 230,000.

The US May S&P manufacturing PMI unexpectedly rose +1.9 to 52.3 versus expectations of a decline to 49.9.

US Apr existing home sales unexpectedly fell -0.5% m/m to a 7-month low of 4.00 million, weaker than expectations of an increase to 4.10 million.

The price of Bitcoin (^BTCUSD) rose more than +2% to a new record high Thursday as stablecoin legislation advanced in the US Senate after a group of Democrats dropped their opposition to it on Monday. The stablecoin-friendly regulatory bill is being debated in the Senate with a bipartisan group hoping to pass it as soon as this week.

This week, the markets will focus on any tariff news or announcements of new trade deals.  G-7 finance ministers and central bank governors are meeting this week on Tuesday through Thursday in Braniff, Canada.  On Friday, Apr new home sales are expected to fall -4.7% m/m to 690,000.

The markets are discounting the chances at 5% for a -25 bp rate cut at the next FOMC meeting on June 17-18.

Q1 earnings reporting season is winding down.  So far, almost 90% of companies in the S&P 500 have reported quarterly results, and 77% have beaten estimates, the highest since Q2 of 2024.  Earnings growth in Q1 is running at +13.1%, compared with just +6.6% expected before the start of the season.  Full-year 2025 corporate profits for the S&P 500 are seen rising +9.4%, down from the forecast of +12.5% in early January.  

Overseas stock markets on Thursday settled lower.  The Euro Stoxx 50 closed down -0.55%.  China's Shanghai Composite closed down -0.22%.  Japan's Nikkei Stock 225 fell to a 2-week low and closed down -0.84%.

Interest Rates

June 10-year T-notes (ZNM25) Thursday closed up by +10.5 ticks.  The 10-year T-note yield fell -5.6 bp to 4.543%.  June T-notes on Thursday recovered from a 1-1/4 month low, and the 10-year T-note yield fell back from a 3-1/4 month high of 4.625%.  Short-covering emerged in T-notes Thursday after Fed Governor Waller said the Fed could cut rates in the second half of this year if tariffs settle around 10%.  T-note prices on Thursday initially fell after the House passed President Trump's tax and spending package that will add to the US budget deficit.  The unfunded tax cuts in President Trump's budget would force the Treasury to increase the sales of Treasury debt securities to finance the burgeoning deficit.  Thursday's unexpected decline in weekly US jobless claims to a 1-month low signals labor market strength that was hawkish for Fed policy and bearish for T-notes. 

European government bond yields on Thursday moved lower.  The 10-year German bund yield fell -0.3 bp at 2.643%. The 10-year UK gilt yield fell from a 6-week high of 4.799% and finished down -0.6 bp to 4.751%.

The Eurozone May S&P manufacturing PMI rose +0.4 to a 2-3/4 year high of 49.4, stronger than expectations of 49.2.  However, the May S&P composite PMI unexpectedly fell -0.9 to a 6-month low of 49.5, weaker than expectations of an increase to 50.6.

The April 16-17 ECB meeting summary was dovish as policymakers expressed concern about the negative economic impact of US tariffs and signaled a bias toward additional monetary easing.  Policymakers also said, "Even with the additional spending on defense and infrastructure, it was likely that, on balance, Eurozone economic growth would be worse in 2025 than previously expected."

The German May IFO business climate index rose +0.6 to an 11-month high of 87.5, stronger than expectations of 87.3.

In its monthly report, the Bundesbank said that after modest growth in Q1, output would probably stagnate in Q2, citing a "wide range of negative factors" that are compounded by US trade tariffs hitting German exporters.  Also, "due to the economic downturn, uncertainty about the future economic development, and lower inflation rates, wage settlements are likely to remain significantly lower than in the past two years." 

The UK May S&P manufacturing PMI unexpectedly fell -0.3 to 45.1, weaker than expectations of an increase to 46.1.

Swaps are discounting the chances at 95% for a -25 bp rate cut by the ECB at the June 5 policy meeting.

US Stock Movers

Managed healthcare stocks were under pressure Thursday after the Centers for Medicare & Medicaid Services said it will embark on a "significant expansion" of its auditing efforts for Medicare Advantage plans.  As a result, Humana (HUM) closed down more than -7%, and Centene (CNC) closed down more than -4%.  Also, Elevance Health (ELV), Molina Healthcare (MOH), and CVS Health Corp (CVS) closed down more than -3%.  In addition, UnitedHealth Group (UNH) closed down more than -2% to lead losers in the Dow Jones Industrials. 

Chip stocks moved lower on Thursday and weighed on the overall market. Analog Devices (ADI) closed down more than -4% to lead losers in the Nasdaq 100.  Also, NXP Semiconductors NV (NXPI) closed down more than -4%, and ON Semiconductor (ON) closed down more than -3%.  In addition, Texas Instruments (TXN), Qualcomm (QCOM), and Microchip Technology (MCHP) closed down more than -2%.  Finally, Advanced Micro Devices (AMD), KLA Corp (KLAC), Applied Materials (AMAT), and Micron Technology (MU) closed down more than -1%.

Williams-Sonoma (WSM) closed down more than -4% after reporting Q1 gross margin of 44.3%, below the consensus of 45.2%. 

W. R. Berkley (WRB) closed down more than -1% after Goldman Sachs downgraded the stock to neutral from buy, saying its reserve position is "relatively worse" than peers.  

Advanced Auto Parts (AAP) closed up more than +58% after reporting Q1 net sales of $2.58 billion, better than the consensus of $2.50 billion, and forecast full-year net sales of 8.40 billion-$8.60 billion, the midpoint above the consensus of $8.47 billion. 

Urban Outfitters (URBN) closed up more than +22% after reporting Q1 net sales of $1.33 billion, stronger than the consensus of $1.29 billion. 

Snowflake (SNOW) closed up more than +13% after reporting Q1 revenue of $1.04 billion, above the consensus of $1.01 billion, and raised its full-year product revenue forecast to $4.33 billion from a previous forecast of $4.28 billion, stronger than the consensus of $4.29 billion.

Coinbase Global (COIN) closed up +5% to lead crypto-linked stocks higher and led gainers in the S&P 500 after the price of Bitcoin rose to a new all-time high.

Seagate Technology Holdings Plc (STX) closed up more than +4% after its board approved the repurchase of up to $5 billion worth of shares in its repurchase program. 

Nike (NKE) closed up more than +2% to lead gainers in the Dow Jones Industrials after announcing it will return to Amazon.com's online store after leaving it in 2019. 

Ralph Lauren (RL) closed up more than +1% after reporting Q4 net revenue of $1.70 billion, above the consensus of $1.65 billion.

Earnings Reports (5/23/2025)

American Vanguard Corp (AVD), Booz Allen Hamilton Holding Co (BAH), Buckle Inc/The (BKE), Gencor Industries Inc (GENC), NexPoint Diversified Real Estate Trust (NXDT), Starz Entertainment Corp (STRZ), TechTarget Inc (TTGT), Triumph Group Inc (TGI).