Market Insights Recap — Week of May 19, 2025

Hello, I'm Steve Orr, Chief Investment Officer for Texas Capital's Private Bank.

Halfway through May, we have to ask, what's next for stocks? Where are rates going? And finally, let's examine Trump tariff trauma, middle innings and what we should be doing about each of these issues. 

Taking a quick scan of markets, we've had a nice rebound from the April 8 lows in the stock market. S&P is up nearly 19%. Nasdaq up 25%. Most stock markets have largely recovered from their April waterfall declines. The S&P 500, Nasdaq and Dow industrials are back above their Liberation Day levels. Volatility measures are below worry levels. Looking ahead, we should, emphasis on should, take a pause and grind sideways, with markets taking a bit of a breather from this recent rally. These v-shaped rebounds usually create pretty good stock returns over the next six months. Several of our rally indicators are in positive territory. We need a few more just to confirm. After a better-than-expected first quarter earnings season, where a greater number of companies raised their full-year guidance, we see plenty of opportunities to put cash to work in stocks. 

Another place to consider putting cash to work is in the bond markets. Over the last two years, long-term rates have sloshed back and forth in about a 1% range. Today, 10-year treasuries are trading near 4.5%. With inflation running around 2.5%, the difference between the 4.5% yield and inflation implies a real return of nearly 2%. Very reasonable real return for folks needing income. 

Down in the short-term world, when the fed met earlier this month, they left rates on hold. They really do not want to cut the overnight Fed funds rate, which right now runs between four and a quarter and 4.5%. So don't expect the Fed to move, if at all, until the fall. No change in short-term rates anytime soon means if you need cash for an upcoming payment of some sort, earning 4%-plus on your cash is going to put you well ahead of inflation. 

Finally, we reiterate, trauma does create opportunities. Tariff levels look to be settling in that 10% range for everybody, but China. And we're keeping a close eye on any of the inflation gauges that may be impacted, especially with the recent news that Walmart plans to raise some prices this summer. Now, some of those price increases should be offset by the big budget bill making its way through the House. As of this taping, Memorial Day looks to be in doubt for getting that bill out of the House, but they should get it to the Senate by mid-June. While the tariffs will continue to be a driving factor throughout the year, there's often a forgotten benefit in terms of some new revenue. We're expecting around $150 billion in new revenue from tariffs. However, that's nowhere near that $600 billion that was announced on Liberation Day. Looking abroad, increases in spending by foreign governments and a tariff adjusted a weaker dollar suggest outperformance from overseas stocks. Some of our indicators are suggesting a move to a more international exposure may be a good idea. 

To wrap up, we preached patience through the tariff trauma. And now that we're into the middle innings of negotiations, markets sense less uncertainty ahead, unlike the Fed. There's going to be plenty of opportunities to put cash to work in stocks. Bond yields are reasonable, and the international picture continues to improve. So, let us know how we can help; 'til next time.