Weekly Market Update – May 16, 2025

Quick Takes

• Stocks rallied last week, sparked by a surprise U.S. and China trade truce before the U.S. markets opened on Monday. The world’s two largest economies will see most of the dramatically high tariff rates implemented in early April suspended for 90 days.
• The S&P 500 Index closed the week up +5.3%, the technology-heavy Nasdaq Composite Index was up +7.2%, and the small cap Russell 2000 Index rose +4.5%. The MSCI EAFE Index (developed market non-U.S. stocks) was up +0.8%, which was enough to hit a record high.  
• Economic reports for the week showed a further slowdown in both consumer and wholesale prices. The Consumer Price Index (CPI) report on Tuesday showed retail inflation well below Wall Street expectations, and on Thursday, the Producer Price Index (PPI) showed wholesale inflation down the most in four years.

Source: Bloomberg. Data as of May 16, 2025.
Price Returns for Equity, Total Returns for Bonds.
* The term basis points (bps) refers to a common unit of measure for interest rates and other percentages in finance. One basis point is equal to 0.01%. Bond prices and bond yields are inversely related. As the price of a bond goes up, the yield decreases.

Stocks surge on easing trade tensions

The S&P 500 Index closed the week up +5.3%, the technology-heavy Nasdaq Composite Index was up +7.2%, and the small cap Russell 2000 Index rose +4.5%. That was the second best weekly performance of 2025 for the S&P and Nasdaq, and the best week for the Russell since November. More impressive was the sheer momentum and breadth of the market since the depths of peak tariff turbulence in mid-April. The S&P 500 was positive every day of last week, something it just accomplished for the week ending May 2. The index has never been positive for five consecutive weekdays for two weeks over just a three-week span in its history. Since April 21, the S&P has only seen three negative days, and has risen +15.5% over that brief span, recovering all the tariff-induced losses and turning the index positive for the year. And the breadth of participation of the rally has been impressive as well. For small cap stocks, the Russell 2000 has been positive for six straight weeks, its longest weekly winning stretch since December 2023. The index, which tracks roughly 2,000 small-cap stocks within the broader Russell 3000 Index stock universe, is often viewed as a barometer of the U.S. economy due to its focus on domestically oriented firms. It still trails the S&P by -6.6 percentage points in 2025, but has narrowed the performance gap considerably since the middle of 2024 when the Russell was -13.6 percentage points behind the S&P. 

The early stages of this weeks-long rally were dominated by progress with trade negotiations between the U.S. and its major trading partners, with the conspicuous exclusion of China, where little, if any, progress was seen. But Wall Street’s rally last week was single-handedly sparked by a surprise U.S. and China trade truce before the U.S. markets opened on Monday. The agreement between the world’s two largest economies will see most of the dramatically escalated high tariff rates implemented in early April suspended for 90 days while further trade negotiations continue. That effectively lowers U.S. tariffs on most Chinese goods from 145% to 30%, while tariffs levied by China on U.S. imports will drop from 125% to 10%. Stocks around the world cheered the U.S.-China breakthrough, with investors bidding up stocks throughout the week in hopes for further de-escalation with a longer-term trade agreement. On Friday, President Trump said he would set tariff rates for U.S. trading partners “over the next two to three weeks,” saying his administration lacks the capacity to negotiate deals with all its trading partners. The U.S. Treasury collected $16.3 billion in tariffs in April, a record. Fiscal year to date, the government has collected $63.3 billion in customs duties.

In addition to the constructive trade news, economic reports for the week showed a further slowdown in both consumer and wholesale prices. The Consumer Price Index (CPI) report on Tuesday showed retail inflation well below Wall Street expectations (see Chart of the Week below for further details). The 2.3% headline CPI reading was the lowest since February 2021. On Thursday, the Producer Price Index (PPI) also showed wholesale inflation lower than expected, with its largest decline in four years. 

Non-U.S. equities didn’t climb as much as the U.S. indexes but still advanced and hit new all-time highs. The MSCI EAFE Index (developed market non-U.S. stocks) was up just +0.8% last week, but that was enough to close at a record high for the index. U.K. GDP grew at its fastest pace in a year, and eurozone industry, trade, and employment strengthened. On the contrary, Japan’s GDP growth contracted more than expected – its first decline in more than a year. The MSCI Emerging Markets Index was up +3.0%, marking a five-week win streak. Chinese stocks rallied on the U.S.-China trade truce. Brazil’s inflation was higher than expected but not out of line with recent inflation reports.

The yields on U.S. Treasurys were modestly higher for a second straight week. The yield on the 10-year UST and 2-year UST were up +10 and +11 basis points, respectively, to finish the week at 4.48% and 4.0 %. The Bloomberg U.S. Aggregate Bond Index slipped -0.2% for the second consecutive week. Non-U.S. bonds, as measured by the Bloomberg Global Aggregate ex U.S. Bond Index, were down -0.7% for a second week. 

Just after markets closed on Friday, credit-rating firm Moody’s downgraded U.S. debt one notch to Aa1 from Aaa, reflecting “the increase over more than a decade in government debt and interest payment ratios to levels that are significantly higher than similarly rated sovereigns,” the firm said Friday. Moody’s decision means that all three major ratings firms have downgraded U.S. debt from top ratings. S&P Global Ratings was the first to do so in 2011, and Fitch Ratings shifted its rating to AA+ from AAA in 2023. U.S. debt has risen sharply under both Democratic and Republican administrations. Debt held by the public now stands at nearly $28.9 trillion, or just under 100% of annual Gross Domestic Product (GDP). The downgrade is likely to put pressure on Congress, which is trying to advance a tax bill to extend tax cuts passed in President Trump’s first term that expire in December. On Friday, the House Budget Committee failed to pass a version of the bill, with five Republican members raising concerns that it didn’t do enough to address the debt. The Friday “no” vote may be more of a speed bump than an actual roadblock, with some of the no votes indicating they still see a path to passage. The bill would then need to be sent to the Senate for a vote.

The Week Ahead

It will be another relatively quiet week for economic reports, with the Conference Board’s Leading Economic Index kicking things off on Monday. But then the next major reports don’t come until Thursday with the S&P Global Manufacturing and Services PMIs and Existing Home Sales from the National Association of Realtors. The Census Bureau reports New Home Sales on Friday.

Wall Street will be watching for additional tariff developments and any progress by the House of Representatives on the Republican tax bill as the next catalyst for further stock gains. A solid first-quarter earnings season winds down with mostly retailers on tap next week, including Home Depot on Tuesday, Lowe’s and Target reporting on Wednesday, and Deckers Outdoor and Williams-Sonoma reporting earnings on Thursday.

Chart of the Week

The inflation rate for consumer goods and services slowed more than expected again in April. The headline Consumer Price Index (CPI) was up +0.2% for the month, less than +0.3% Wall Street was forecasting. That was down from an unrevised -0.1% decline the prior month. Year-over-year (YoY), CPI decelerated to +2.3%, versus +2.4% the prior month (unrevised), which is where it was expected to remain. That is the smallest 12-month increase since February 2021. Core CPI, which excludes the more volatile food and energy prices, also slowed to +0.2% for the month, up from an unrevised +0.1% the prior month, but below expectations for a +0.3% rise. YoY Core CPI was +2.8%, unchanged from the prior month as expected. The Federal Reserve and Wall Street generally consider the Core CPI to be a better predictor of future inflation. Slumping Energy prices continued to help keep inflation down. Although it was up some on a month-over-month basis (+0.7%), it was down at -3.7% on a year-over-year basis. As a result, Gasoline prices are down -11.8% from last year ahead of the key summer driving season. The Apparel index decreased -0.2% month-over-month and was down -0.7% year-over-year. The Food index decreased -0.1% month-over-month but was up +2.8% year-over-year. Shelter, which is about one-third of the CPI weighting, increased just +0.3% for the month and +4% for the year for the second straight month at the smallest gain since November 2021. Airfares fell -2.8% after drops of -5.3% and -4% the prior two months, resulting in a year-over-year decline of -7.9%. The bottom line is that there was a distinct lack of tariff spikes in consumer prices, which were largely held in check, including food and gasoline.

Annual Inflation Rate in April is the Lowest in More than Four Years

U.S. Consumer Price Index (CPI) Year-over-Year Percent Change

Source: U.S. Bureau of Labor Statistics, CNBC. Data as of May 13, 20205. Note: Not seasonally adjusted.

Did You Know?

SUBDUED EXPECTATIONS – Consumer expectations for income growth over the next year fell to 2.6%, the lowest since April 2021 and a percentage point below the 3.6% expected inflation rate. Respondents also noted a less than 50% chance (49.2%) that they could find a job within three months if they became unemployed, the lowest percentage since March 2021. (NY Federal Reserve) 

WELCOME TO THE REAL WORLD – For college graduates in 2025, average annual pre-tax income of those with jobs was $68.4K, which was -32% less than the average of $101.5K they anticipated. 31% said they were able to negotiate a higher salary, and only 18% of graduates say their salaries exceeded expectations. (Source: ZipRecruiter)

HOME SWEET HOME – While the stock market has outperformed real estate handily in the U.S. over the last half-century, a recent Gallup survey found that 37% of Americans think real estate is the best long-term investment compared to just 16% for stocks. Real estate has ranked as the top investment for Americans every year since 2014. (Source: Gallup)

This Week in History

HOME SHOPPING – On May 13, 1986, with Wall Street going ga-ga over media and retail stocks, Home Shopping Network went public, selling 2 million shares at $18. The stock closed at $47.75, up +165%, the highest first-day return yet on record at the time. A decade later, the Internet would change all that. (Source: The Wall Street Journal)

Economic Review

• Like consumer inflation, wholesale inflation was also weaker than expected in April. The headline Producer Price Index (PPI) was down -0.5% for the month, well below expectations for +0.02%, and follows the prior month’s flat reading (revised higher from -0.4%). That was the biggest decline since 2020. Year-over-year (YoY) PPI increased at a +2.4% rate, below expectations for a +2.5% increase and down from the prior month’s +3.4% annual rate (revised higher from +2.7%). That’s the lowest level since last fall. Core PPI, which strips out volatile food and energy costs, fell -0.4% for the month, far below expectations for a +0.3% rise and down from +0.4% the prior month (revised higher from -0.1%). YoY Core PPI was up +3.1%, matching expectations and down from the prior month’s +4.0% annual rate (revised up from +3.3%). The decline was largely tied to falling egg and gasoline prices and a quirky category, the index for Final Demand, that measures certain business profit margins. The collapse in company margins was likely a result of the firms absorbing tariff increases.
• Imports Prices rose +0.1% in April, after falling -0.4% the prior month, after being revised down from -0.1%. Wall Street was expecting a -0.3% decline. Import Prices ex Petroleum were up +0.4%, up from -0.2% the prior month (revised down from 0.0%) and above expectations for a +0.1% rise. Year-over-year, the cost of imports was up +0.1%, above expectations of -0.2% and down from +0.8% the prior month (revised down from +0.9%). Meanwhile, Export Prices were up +0.1%, above expectations for a -0.4% decline and in line with the prior month after being revised up from 0.0%. Export prices accelerated to +2.0% over the past year, down from last month’s +2.6% annual rate (revised up from +2.4%).
• The Commerce Department reported that the advance read on U.S. Retail Sales showed a slight +0.1% increase. That was just above Wall Street expectations for a flat reading but down from a +1.7% jump the prior month (revised higher from +1.4%). Retail sales represent about one-third of all consumer spending and offer clues on the strength of the economy. After rushing to buy new cars and other imported goods in March before tariffs raised prices, Americans reduced their spending at retail stores in April, suggesting that consumer spending may be erratic until the tariff negotiations play out. Motor vehicles and parts dealer sales surged +5.3% month-over-month following a -1.6% decline in February. Auto sales account for one-fifth of all retail sales. Retail Sales Ex-Autos were up +0.1%, below expectations of +0.3%. Sales Ex-Autos and Gas were stronger, up +0.2%, but still short of expectations for a +0.3% rise. Both were revised higher from the prior month, to +0.8% and +1.1% respectively. The Control Group, a figure used to calculate Gross Domestic Product (GDP), fell -0.2%, far below expectations for a +0.3% increase and down from +0.5% the prior month (which was revised higher from +0.4%). Restaurant Sales, a key economic barometer, rose sharply in April and are up almost +8% in the past year. Americans tend to eat out or buy more takeout when the economy is healthy and they feel secure in their jobs.
• The preliminary reading of the University of Michigan Consumer Sentiment Index for May fell to the lowest level in history at 50.8 from a 52.2 final reading the prior month and was well below expectations for 53.4. In the same period a year ago, the index stood at 69.1. The Current Economic Conditions component fell to 57.6 from the prior month’s 59.8 and was below expectations for a 59.9 reading. It was 69.6 a year ago. The Consumer Expectations component sank to 46.5, down from 47.3, and was short of expectations for 48.6. It was 69.6 a year ago. One-year inflation expectations increased to +7.3% from +6.5%, matching expectations. 5–10-year inflation expectations increase to +4.6% from +4.4% the prior month, where they were expected to stay. The report continues to reflect deteriorating views among consumers about their personal finances and inflation expectations, but the survey was conducted between April 22 and May 13, closing two days after the U.S.-China tariff de-escalation news, so it may not capture the full consideration of that promising development.
• The National Federation of Independent Business (NFIB) reported that their Small Business Optimism Index fell to 95.8 from an unrevised 97.4 the prior month, but that was ahead of expectations of 95.0. Six of the 10 component indexes declined, three improved, and one was unchanged. The improvements came from the Earnings Trend component, which was up +7 points to a net -21%, and Plans to Increase Employment and Current Inventory, which each rose by +1 point to +13% and -6% respectively. Now a Good Time to Expand was unchanged at +9%. The biggest decline came from Expect Economy to Improve, and Current Job Openings, which both fell -6 points to +15% and +34% respectively. The separately produced Uncertainty Index that is released with the Small Business Index fell -4 points to 92 after the prior month’s -6 drop. “While owners are still trying to fill a high number of current job openings, their outlook on business conditions is less supportive of future business investments,” said NFIB Chief Economist Bill Dunkelberg.
• The U.S. Treasury Department recorded a Federal Budget Surplus of $258.4 billion in April, compared to a +$209.5 billion surplus the same month last year, but slightly under expectations for a -$145.0 billion shortfall. Receipts were $850.2 billion, up +9.5% from the year earlier, while Outlays were $591.8 billion, a +4.4% annual increase. The increase in receipts was largely due to the Individual Income Taxes ($537 billion) and Social Insurance & Retirement receipts ($184 billion), while outlays were driven by Social Security ($132 billion), Net Interest ($89 billion), Medicare ($82 billion), Health ($76 billion), and National Defense ($70 billion). The cumulative budget deficit for the first five months of fiscal 2025 has widened to -$1.049 trillion, 23.3% higher than in the same period in fiscal 2024. The Treasury Budget data are not seasonally adjusted, so the current month cannot be compared to the prior month but rather needs to be compared to the year earlier data. The key takeaway is that there was some relief on the deficit side of things with tax receipts swelling in April.
• U.S. Industrial Production was flat for the month of April, below expectations for a +0.1% rise but up from the prior month’s -0.3% decline (unrevised). However, Manufacturing Production was down -0.4% versus the -0.3% expected by Wall Street, but down from +0.4% the prior month (revised higher from +0.3%). Manufacturing represents about three-quarters of total Industrial Production and was up for a fifth straight month, and remains non-recessionary. Year-over-Year, Industrial Production was up +1.5%, following the prior month’s +1.3% increase. Capacity Utilization slipped to 77.7% from an unrevised 77.8%, where it was expected to remain. Capacity Utilization reflects how much a manufacturing plant is being used to produce things. Year-over-year, Capacity Utilization was up +1.9% from a +1.8% annual rate the prior month.
• Homebuilder confidence sank in May, as the National Association of Home Builders (NAHB) Housing Market Index (HMI) fell to 34 from 40 in the prior month, where it was expected to stay. A year ago, the index stood at 51. The index is based on a 0-to-100 scale, where any number over 50 indicates a good reading, and below 50 is considered negative sentiment. The Current Sales component fell to 37 from 45, while Sales Expectations in the Next Six Months slipped to 42 from 43, and Traffic of Prospective Buyers dipped to 23 from 25. For the month, 34% of builders reported cutting home prices, compared to 29% the prior month. That’s the highest level since December 2023, when 36% reported cutting prices. The average price reduction was unchanged at 5%. The use of sales incentives beyond price cuts was 61%, also unchanged.
• The New York Fed’s Empire State Manufacturing Index, a gauge of manufacturing activity in the state, slipped to -9.2 in May from -8.1, worse than the -8.0 reading expected. New Orders were up to +7.0 from -8.8, and Shipments also turned positive, to +3.5 from -2.9. The Inventories index remained positive at +4.8, signaling that business inventories continued to move higher. Forward looking indicators remain pessimistic, with the index for Business Conditions Expected in Six Months at -2.0. Of concern, the inflation components rose for a fifth consecutive month, with the Prices Paid indicator up +8 points to +59.0, although the Prices Received indicator retreated -6 points to +22.9.
• The Philly Fed Manufacturing Business Outlook Survey improved to -4.0 in May from -26.4 the prior month. That was far better than estimates for a rise to -11.0. Readings above zero indicate economic expansion. The indexes for New Orders rose sharply, breaking three straight months of declines. New Orders rose +42.0 points to +7.5, nearly offsetting April’s decline of -42.9 points. Shipments fell for the fourth straight month, to -13.0 from -9.1. The Employment index rose to +16.5 from +0.5. The Average Workweek index was up to +2.0 from -12.7. Both employment indexes rose to their highest readings since June 2022. Firms indicated that current price indexes remained elevated, with Prices Paid and Prices Received rising further to 59.8 and 43.6, respectively.
• April Housing Starts were up an underwhelming +1.6% month-over-month to a seasonally adjusted annual rate of 1.361 million units, missing expectations for a +3.0% rise to 1.363 million units. That compares to a -10.1% drop, or 1.339 million units from the prior month (revised up from a -11.4% fall and 1.324 million units originally reported). Single-unit starts were down -2.1% to 927,000 units, compared to 947 million units the prior month. Multi-family units were +10.7% after being flat the prior month. Housing starts peaked at 1.8 million in April 2022. New construction starts were down -10.8% in the Midwest and -16.1% in the West, but were up +12.9% in the Northeast and +10.9% in the South. On the other hand, Building Permits, one of the leading indicators tracked by the Conference Board and an indicator of future construction activity, were down -4.7% to an annualized rate of 1.412 million units. That was worse than the expected -1.2% decline to 1.450 million units and down from the prior month’s +1.9% rise to 1.481 million units. Single-unit permits dropped -5.1%, and multi-family units were down -3.7%. Regionally, permits were down -8.1% in the Midwest and -9.6% in the South, but up +3.4% in the West and +14.3% in the Northeast. 
• Weekly MBA Mortgage Applications rose +1.1% for the week ending May 9, following a +11.0% jump the prior week. The Purchase Index was up +2.3% after rising +11.1% the prior week. The Refinance Index slipped -0.4% after an increase of +11.1% the prior week. The average 30-Year Mortgage Rate inched up to 6.86% from 6.84% the prior week.
• Weekly Initial Jobless Claims were unchanged at 229,000 for the week ending May 10, a bit above expectations for 228,000. The prior week was revised higher by +1,000. The number of people already collecting unemployment claims (i.e., Continuing Claims) rose by +9,000 to 1,881,000 in the week ending May 3, better than expectations for 1,890,000 claims. Last week’s reading was revised lower from 1,879,000 to 1,872,000.

Asset Class Performance

Source: Bloomberg.
Asset‐class performance is presented by using market returns from an exchange‐traded fund (ETF) proxy that best represents its respective broad asset class. Returns shown are net of fund fees for and do not necessarily represent performance of specific mutual funds and/or exchange-traded funds recommended by The Retirement Planning Group. The performance of those funds may be substantially different from the performance of the broad asset classes and to proxy ETFs represented here. US Bonds (iShares Core US Aggregate Bond ETF); High‐Yield Bond (iShares iBoxx $ High Yield Corporate Bond ETF); Intl Bonds (Vanguard Total International Bond ETF); Large Growth (iShares Russell 1000 Growth ETF); Large Value (iShares Russell 1000 Value ETF); Mid Growth (iShares Russell Mid-Cap Growth ETF); Mid Value (iShares Russell Mid-Cap Value ETF); Small Growth (iShares Russell 2000 Growth ETF); Small Value (iShares Russell 2000 Value ETF); Intl Equity (iShares MSCI EAFE ETF); Emg Markets (iShares MSCI Emerging Markets ETF); and Real Estate (iShares US Real Estate ETF). The return displayed as “Allocation” is a weighted average of the ETF proxies shown as represented by 24% US Bonds, 10% International Bonds, 6% High Yield Bonds, 13.8% Large Growth, 13.8% Large Value, 3.6% Mid Growth, 3.6% Mid Value, 1.2% Small Growth, 1.2% Small Value, 16.8% International Stock, 4.2% Emerging Markets, 1.8% Real Estate.
* The term basis points (bps) refers to a common unit of measure for interest rates and other percentages in finance. One basis point is equal to 0.01%. Bond prices and bond yields are inversely related. As the price of a bond goes up, the yield decreases.