What Happened Last Week
- Policy Uncertainty: Investors welcomed a delay in tariffs on Canada and Mexico.
- Sentiment Support: A weaker dollar, primarily driven by lower Treasury yields on unchanged composition of Treasury issuance and Bessent commentary, buttressed investor sentiment.
- Price Action: Lower yields supported equities, although SMID-caps failed to participate meaningfully.
What We’re Watching This Week
- Tariffs: Focus shifts to China and EU tariffs; more tariff discussion will likely drive risk asset volatility in the near term.
- Earnings: With the bulk of large-cap earnings (excluding NVDA, which is at the end of this month) out of the way, our focus shifts to SMID-caps.
- Monetary Policy: U.S. inflation, retail sales, and Fed Chair Powell’s Congressional testimony could catalyze moves in yields.
Investment Management Team’s Views
Equity markets were mixed in a week bookended by tariff threats. Investors treated the delay of tariffs on Canada and Mexico positively. Despite the implementation of bigger tariffs against China than we saw in the 2018-19 Trade War, investors largely viewed these as a bargaining chip. Friday’s session saw tariff concerns flare again as Trump suggested adding additional measures against China. We think this back and forth on trade may erode investor confidence and cap near-term market upside. However, the macro backdrop remains supportive and we expect any pullbacks to be heavily bought by investors.
Investors got some positive rumblings on long-term yields and the Fed between last week’s tariff news. Treasury Secretary Bessent expressed a desire for lower 10-year yields in the months ahead. Coupled with a better-than-feared Treasury debt sales announcement, the yield curve flattened materially last week. The bid to bonds weakened the dollar, improving equity sentiment and supporting international stocks. Notably, lower yields did not translate into a strong domestic small-cap performance. The barbell of AI-winners coupled with smaller-cap cyclicals continue to interest us. Beyond the macro developments in the weeks ahead, we are eyeing SMID-cap earnings, which are just getting started now.
Turning to this week, the tariff focus shifts to China as investors await the long-forecasted phone call between Trump and Xi. With the EU also a target, our framework suggests that the more tariffs dominate the conversation, the more volatile equity trading will become. On the fundamental front, our focus moving forward is on smaller- and mid-cap companies, along with select specialty retailers. Outside of SMID-caps, Nvidia (NVDA) will report at the end of the month. The macro calendar is also busy, with domestic inflation and retail sales releases shaping the Fed’s view of the economy. Investors will also closely watch Chair Powell’s testimony before Congress in the middle of the week.
