FINANCIAL MARKET INSIGHT

HIGHLIGHTS

• Market Impact of the Assassination Attempt on Former President Trump
• Acknowledging There is a Downside to Current Market Events, Too
• Weekly Market Preview: Do Growth and Earnings Hold Up?
• Weekly Economic Cheat Sheet: An Important Check on the Consumer This Week
• Special Reports and Editorial:
  • Is the Rotation from Tech to the "Rest of the Market" Sustainable?
  • Powell Testimony Takeaways
  • Market Multiple Table: An Important Change

STOCKS

✓ What is Outperforming: Defensive sector, minimum volatility, and sectors linked to higher rates have relatively outperformed recently as markets have become more volatile.

✓ What is Underperforming: Tech/growth and high valuation stocks have lagged as yields have risen.

Market Impact of the Assassination Attempt on Former President Trump

Geopolitical risks are a constant for markets, but domestic political risks are much less common. Unfortunately, the assassination attempt on Former President Trump is a stark reminder that domestic political risks are real, and they can impact markets. The initial market reaction to the horrible events of Saturday was a classic "risk-off" move. From a practical standpoint, this event likely ensures a Trump victory in November. While markets generally prefer Republican presidents, the key takeaway is that this event introduces a significant amount of uncertainty into the political outlook, and markets historically do not like uncertainty.

Bottom line: The assassination attempt is a horrific event that reminds us that domestic political risks are real. While the market impact has been minimal so far, this event does increase the chances of a volatile summer and fall, and we need to be prepared for that possibility.

Acknowledging There is a Downside to Current Market Events, Too

The S&P 500 hit another new all-time high last week thanks to a soft CPI report that increased the chances of a September rate cut. But despite the new highs, there are some underlying currents that are not so positive. Specifically, there’s a legitimate downside to the soft economic data that’s fueling rate cut hopes. The data is pointing to a loss of economic momentum that could become a problem for markets later this year.

So far, markets have ignored this because as long as the data implies rate cuts are coming, that’s all that matters. But at some point, the reason for the rate cuts will matter, and if it’s because of a rapidly slowing economy, that will not be a positive for stocks.

Bottom line: We are not trying to be overly bearish, but we do want to acknowledge that the current market environment is not without risks. While the path of least resistance remains higher for now, we are watching for any signs that the economic slowdown is accelerating, as that would be a legitimate threat to this rally.

Economic Data (What You Need to Know in Plain English)

Last week was all about inflation, and the data was unequivocally positive for markets. Both CPI and PPI came in softer than expected, and that sent a clear message to investors: The decline in inflation has resumed. That’s a critical development because it increases the chances of a September rate cut and further easing from the Fed later this year.

Looking ahead, the focus now shifts to economic growth. This week, we get updates on retail sales, industrial production, and housing starts. Markets will want to see these numbers hold up to support the "soft landing" narrative. If the data is too weak, it could spark growth concerns and weigh on stocks, even if it means more rate cuts are coming.

Bottom line: Last week’s inflation data was a clear positive, but now the market needs to see that the economy is not slowing too quickly. As long as growth remains resilient, the outlook for stocks remains positive.

COMMODITIES, CURRENCIES & BONDS

SPECIAL REPORTS AND EDITORIAL

Is the Rotation from Tech to the "Rest of the Market" Sustainable?

One of the key themes in markets over the past month has been the rotation out of mega-cap tech stocks and into other sectors of the market. This is a healthy development, as it suggests the rally is broadening out. However, the key question is whether this rotation is sustainable. The answer to that question will depend on economic growth. If the economy remains resilient, then the rotation can continue. But if growth starts to falter, investors will likely flock back to the perceived safety of mega-cap tech, and the rotation will end.

Powell Testimony Takeaways

Fed Chair Powell’s testimony to Congress last week was largely a non-event, as he stuck to the script and did not provide any new information on the outlook for monetary policy. The key takeaway is that the Fed remains data-dependent and will not be rushed into cutting rates. That’s a net neutral for markets, as it keeps the possibility of a September rate cut on the table but does not guarantee it.

Market Multiple Table: An Important Change

This month, we made an important change to our Market Multiple Table. We are now using 2025 earnings estimates instead of 2024 estimates. The reason for this change is that as we move through the second half of the year, markets will increasingly focus on the outlook for next year’s earnings. This change results in a lower market multiple, which is a more accurate reflection of the current valuation of the S&P 500.