| | | Market Snapshot
| Dow | 42581.78 | +374.96 | (0.89%) | | Nasdaq | 19630.99 | +183.57 | (0.94%) | | SP 500 | 6025.17 | +57.33 | (0.96%) | | 10-yr Note |
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| | NYSE | Adv 1873 | Dec 905 | Vol 1.28 bln | | Nasdaq | Adv 2610 | Dec 1903 | Vol 9.12 bln |
Industry Watch
| Strong: Utilities, Materials, Information Technology, Industrials, Real Estate, Financials, Consumer Staples, Consumer Discretionary |
| | Weak: Energy |
Moving the Market
-- U.S. strikes three Iranian nuclear facilities, but market shows resilience
-- Oil prices drop, as market doesn't see major oil supply disruption in spite of attacks on Iran's nuclear facilities
-- Iran launches missiles at U.S. base in Qatar, but missiles are intercepted
-- Falling Treasury yields
-- Fed Governor Bowman (FOMC voter) says she could see a rate cut in July if certain conditions are met
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Closing Stock Market Summary
23-Jun-25 16:25 ET
Dow +374.96 at 42581.78, Nasdaq +183.57 at 19630.99, S&P +57.33 at 6025.17
[BRIEFING.COM] The stock market saw some roller-coaster action today that followed the track of developments related to the Israel-Iran conflict, which was elevated over the weekend when the U.S. destroyed three nuclear sites in Iran.
The U.S.-led strikes created some nervous energy in the capital markets, but they didn't create much fear. That was clear to see at today's open, when stocks moved higher and oil prices moved lower. They did so, driven by a sense that the conflict will be contained and that there won't be any major disruption to oil supplies coming out of the Middle East.
The early gains faded, though, with the S&P 500 running into resistance at the 6,000 level, and as news reports indicated Iran was preparing a missile strike on a U.S. base in Qatar. The latter report was accurate, but subsequent reports that Iran notified officials beforehand to limit any casualties, that the missiles were intercepted by Qatar's air defense system, and that there were no casualties or deaths triggered a relief trade that carried the indices to new session highs and the S&P 500 back above 6,000.
That relief was also evident in the oil market. WTI crude futures fell 7.0% today to $68.63/bbl. That move undercut the energy sector (-2.5%), which was the only S&P 500 sector to close in red figures. Gains for the remaining 10 sectors ranged from 0.1% (health care) to 1.8% (consumer discretionary), but eight sectors were up at least 1.0%.
The consumer discretionary sector was steered by Tesla (TSLA 348.71, +26.55, +8.24%), which surged after rolling out its robotaxi service in Austin, TX. Tesla also spearheaded a 1.3% gain in the Vanguard Mega Cap Growth Index Fund (MGK 352.79, +4.62, +1.33%).
The rate-sensitive real estate (+1.5%), utilities (+1.3%), and financials (+1.2%) sectors were relative strength leaders today, benefitting from a drop in Treasury yields that was helped by safe-haven flows and burgeoning hope the Fed could cut rates at its July FOMC meeting.
Fed Governor Bowman (FOMC voter) said she could support a rate cut at the July meeting if inflation pressures remain contained. Her view followed on the heels of Fed Governor Waller (FOMC voter) saying on Friday that he thinks the Fed could cut rates at its July meeting.
The 2-yr note yield fell eight basis points to 3.83%, and the 10-yr note yield dropped six basis points to 4.32%. Separately, the fed funds futures market increased the probability of a 25-basis point cut at the July meeting to 22.7% from 14.5% on Friday, according to the CME FedWatch Tool.
These viewpoints will add some intrigue to Fed Chair Powell's semiannual monetary policy report, which he will deliver Tuesday before the House Financial Services Committee. Undoubtedly, he will be pressed to explain why the Fed, based on comments from his recent press conference, isn't inclined to cut rates at the July meeting.
- S&P 500: +2.4% YTD
- Nasdaq: +1.7% YTD
- DJIA: +0.1% YTD
- S&P 400: -2.3% YTD
- Russell 2000: -4.4% YTD
Reviewing today's data:
- Flash June S&P Global U.S. Manufacturing PMI (Actual 52.0; prior 52.0) and flash June S&P Global U.S. Services PMI (Actual 53.1; prior 53.7)
- Existing home sales increased 0.8% month-over-month in May to a seasonally adjusted annual rate of 4.03 million (Briefing.com consensus 3.94 million) from an unrevised 4.00 million in April. Sales were down 0.7% from the same period a year ago.
- The key takeaway from the report is that the inventory of existing homes for sale is rising, yet overall demand remains subdued because of affordability constraints stemming from high prices and high mortgage rates.
A sigh of relief
23-Jun-25 15:30 ET
Dow +313.97 at 42520.79, Nasdaq +162.35 at 19609.77, S&P +47.60 at 6015.44
[BRIEFING.COM] The stock market is holding the line now with its relief trade as the indices are trading near their best levels heading into the final 30 minutes of trading.
The mega-cap stocks, led by Tesla (TSLA 349.36, +27.20, +8.44%), have offered some important sponsorship. The Vanguard Mega Cap Growth Index Fund (MGK 352.60, +4.42, +1.27%) is up 1.3%, leaving it well ahead of the market cap-weighted S&P 500 (+0.8%).
Elsewhere, the 2-yr note settled the session down eight basis points at 3.83%, while the 10-yr note yield settled the day down six basis points at 4.32%.
U.S. Treasuries had the benefit of both a safe-haven trade today and a trade grounded in some increased hope that the Fed could cut rates at the July FOMC meeting. The former was driven by the U.S. strikes on three Iranian nuclear facilities over the weekend, while the latter was precipitated by Fed Governor Bowman saying she could support a rate cut in July if inflation pressures remain contained.
Those pressures eased today with crude futures dropping 7.0% to $68.63/bbl, as the market saw a relatively weak military response from Iran this afternoon as a basis to conclude that it won't be moving to close the Strait of Hormuz and that it is possible there won't be a further military escalation involving the U.S.
Treasuries finished off their best levels of the day but retained the bulk of their gains. The front of the curve led the way on the rate-cut hope, some of which was also priced into the fed funds futures market. According to the CME FedWatch Tool, the probability of a 25-basis point rate cut at the July FOMC meeting increased to 22.7% from 14.5% on Friday. Today's thinking will place an added premium on Fed Chair Powell's Semiannual Monetary Policy Report before the House Financial Services Committee on Tuesday.
Relief rally folliwing weak Iran response
23-Jun-25 15:05 ET
Dow +279.31 at 42486.13, Nasdaq +153.25 at 19600.67, S&P +42.50 at 6010.34
[BRIEFING.COM] The stock market has enjoyed a relief trade that carried the indices to session highs and oil prices to session lows. In brief, the relief factor is that Iran's response was fairly weak in military terms.
Reports have suggested that they gave officials advance warning the attack was coming to minimize casualties, that Qatar's air defense system successfully intercepted the missiles, and that there were no deaths or injuries associated with the attempted attack on the U.S. base in Qatar.
According to CNN, President Trump does not want more military action in the region. That view could be subject to change, but it is sitting well with the market that there might not be any more escalation of the conflict.
WTI crude futures, which flirted with $77.00/bbl overnight, are down 7.4% to $68.36/bbl, a move that has undercut the energy sector (-2.5%). Meanwhile, just about everything else found a renewed bid that has propped up the indices.
S&P 500 gains ground led by NTRS deal hopes, ANET and DASH upgrades; HAL lags on oil slide
23-Jun-25 14:25 ET
Dow +308.13 at 42514.95, Nasdaq +175.53 at 19622.95, S&P +44.84 at 6012.68
[BRIEFING.COM] The S&P 500 (+0.75%) is in second place, consolidating afternoon gains with just an hour and a half left in the session.
Briefly, S&P 500 constituents Northern Trust (NTRS 119.82, +7.97, +7.13%), Arista Networks (ANET 91.96, +5.71, +6.62%), and DoorDash (DASH 228.61, +8.15, +3.70%) dot the top of the standings. NTRS is higher on deal optimism, strategic interest from multiple potential acquirers, and investor anticipation of a possible premium takeover offer, despite the company signaling its intent to remain independent. ANET caught a target raise out of Evercore ISI this morning, while DASH was upgraded to Strong Buy at Raymond James this morning.
Meanwhile, Halliburton (HAL 20.86, -1.42, -6.37%) is underperforming amid falling crude oil prices.
Nasdaq leads gains as weaker dollar lifts gold
23-Jun-25 14:00 ET
Dow +254.73 at 42461.55, Nasdaq +147.97 at 19595.39, S&P +38.88 at 6006.72
[BRIEFING.COM] The Nasdaq Composite (+0.76%) is still the top-performing major average this afternoon.
Gold futures settled $9.30 higher (+0.3%) at $3,395/oz, buoyed by a weaker dollar and continued geopolitical tensions.
Meanwhile, the U.S. Dollar Index is now -0.3% to $98.44.
FactSet posts solid gains as Q3 organic ASV growth outshines EPS miss (FDS)
FactSet (FDS) is posting solid gains despite reporting 3Q25 EPS of $4.27, missing consensus estimates. The market’s enthusiasm is driven by robust organic Annual Subscription Value (ASV) growth of $22.6 mln, with CFO Helen Shan noting in the earnings press release that “third quarter organic ASV growth is accelerating as we meet client demands and execute diligently.” Additionally, the company reaffirmed its FY25 guidance, signaling confidence in sustained demand. These positives, coupled with 166 net new client additions, are overshadowing the EPS miss, as investors focus on FDS’s recurring revenue strength and client expansion.
- Organic ASV, which increased from $19.6 mln in Q2, is a critical metric for FDS, as it reflects the annualized value of recurring subscription revenues, excluding one-time or project-based services. This 4.5% yr/yr growth to $2.297 bln underscores FDS’s successful pivot toward managed services and enterprise solutions, which offer higher predictability and stability compared to volatile project-based revenues.
- As financial institutions increasingly demand integrated data and analytics platforms, FDS’s focus on recurring revenue streams -- driven by its workstation solutions, portfolio analytics, and AI-enhanced tools -- positions it to capture long-term client commitments. The acceleration in ASV growth, particularly in wealth management and corporate segments, reflects FDS’s ability to deepen client relationships and expand its footprint in high-margin, subscription-based offerings.
- FDS’s client count grew by 166 net new clients in Q3, reaching 8,811 as of May 31, 2025, with user count surpassing 220,000, driven by strong demand from wealth managers and corporates. Key drivers include the integration of clients from the Irwin acquisition, which bolstered FDS’s corporate client base, and growing adoption of its wealth management solutions, such as portfolio analytics and ESG reporting tools. This client growth fueled organic revenue growth of 4.4% yr/yr to $577.2 mln, as new clients contributed to higher subscription volumes and cross-selling opportunities.
- Despite the positive topline metrics, FDS’s Q3 adjusted EPS of $4.27 declined 2.3% yr/yr, missing estimates, while the adjusted operating margin contracted by 270 bps to 36.8%, reflecting higher investments in technology and personnel costs. Incoming CEO Sanoke Viswanathan, announced on June 3. faces the challenge of reversing this margin pressure to drive profitability. Potential avenues include optimizing operating expenses through automation, particularly in data processing and client support, and leveraging economies of scale from the growing client base to improve margins.
FDS’s reaffirmed FY25 guidance and accelerating organic ASV growth signal a robust outlook, overshadowing the Q3 EPS miss and driving investor confidence. The company’s client expansion and focus on recurring revenue position it well to capitalize on demand for data and analytics, with incoming CEO Viswanathan poised to enhance profitability.
BNY Mellon eyes Northern Trust merger to supercharge custody and wealth management businesses (BK)
Northern Trust (NTRS) is surging following a Wall Street Journal report that BNY Mellon (BK) approached its smaller rival to discuss a possible merger. While no formal bid has been made, the exploratory talks signal BK's ambition to consolidate its position in the asset servicing and wealth management industries. This development follows closely on the heels of another transformative deal in the financial industry -- Capital One’s (COF) $35 bln acquisition of Discover Financial Services, approved earlier in 2025 -- which underscores a broader wave of M&A driven by stabilizing interest rates and a lighter regulatory touch under the current administration.
- BK and NTRS are titans in asset servicing, but their operational strengths diverge, creating a compelling case for strategic synergy. BK, with a market capitalization of $65.55 bln, is the world’s largest custodian bank, overseeing more than $53 trillion in assets under custody and administration. Its primary lines of business include custody and fund services, investment management, and treasury services, generating net interest income (NII) largely through securities lending, deposit spreads, and financing activities tied to its institutional client base.
- NTRS, with a $21.76 bln market cap, specializes in wealth management and investment services, managing $1.3 trillion in assets under management (AUM) and $1.4 trillion under custody as of 2023. Its NII stems from loan portfolios and deposit margins, particularly from high-net-worth clients and institutional investors.
- A merger between the two would amplify BK’s wealth management capabilities, where NTRS’s relationship-driven, high-touch model complements BK’s institutional focus. NTRS’s expertise in private wealth could enhance BK’s Pershing platform and bolster its Alts Bridge initiative for alternative asset servicing, creating a hybrid powerhouse spanning institutional and ultra-high-net-worth clients. Additionally, NTRS’s Global Investment Stewardship division, leveraging AI for compliance and ESG reporting, would complement BK’s tech-driven initiatives like Alts Bridge, potentially driving fee-based revenue synergies.
- NTRS is coming off a solid 1Q25 performance on April 22, 2025, with EPS exceeding consensus estimates. Key factors included a 6% yr/yr increase in wealth management fees, fueled by rising AUM due to favorable equity markets, and a 4% uptick in custody and fund administration fees from higher transaction volumes. NII grew by 7%, supported by higher deposit rates, though margin pressures persisted due to competition.
- Despite the strategic fit, BK faces significant risks in pursuing this merger. Regulatory scrutiny is a primary concern, as the combined entity would dominate the custody and wealth management sectors, raising potential antitrust issues. While the Trump administration’s approval of COF’s Discover deal suggests a more permissive environment, the U.S. Department of Justice’s recent focus on banking consolidation (e.g., the blocked PNC-Bank of America merger) indicates hurdles. Also, integration risks are substantial, given the complexity of merging BK’s global footprint across 35 countries with NTRS’s regionally concentrated operations. IT system harmonization and client retention could strain resources, as seen in similar megadeals.
A BK/NTRS merger presents an attractive opportunity to create a dominant player in asset servicing and wealth management, leveraging complementary strengths and technological investments. The potential for revenue synergies and enhanced market positioning makes this a deal worth watching, though execution and regulatory navigation will be critical.
CarMax heads higher on impressive Q1 EPS beat following rough Q4 results (KMX)
CarMax (KMX +6%) is driving in high gear today after getting FY26 off to a good start. The nation's largest retailer of used autos reported big EPS upside with its Q1 (May) report this morning. KMX earnings have been volatile lately. It had big EPS upside in Q3, then a Q4 miss and today a huge beat. Part of the issue is KMX does not guide, so analysts are a bit in the dark.
- Revenue rose 6.1% yr/yr to $7.55 bln, which was slight upside. Combined retail and wholesale used vehicle unit sales were 379,727, an increase of 5.8% yr/yr. Total retail used vehicle unit sales increased 9.0% to 230,210. Comparable store used unit sales increased +8.1%.
- Total retail used vehicle revenue increased 7.5% yr/yr, driven by the increase in retail used units sold. Wholesale unit sales were up 1.2% yr/yr, although average wholesale selling price declined approximately $150 per unit to $8,000.
- KMX said was it pleased it delivered its fourth consecutive quarter of positive retail comps and double-digit yr/yr EPS growth. Importantly, KMX was pleased that all three months were positive. April ended up being the strongest month in Q1 with tariff concerns likely playing a role. In terms of the outlook for the rest of the year, KMX feels like it's in a good position. KMX expects to continue to grow sales and continue to gain market share.
Investors are reacting positively to KMX's Q1 results and with good reason. This was its largest EPS upside of any quarter in the past two years. Its earnings are known to be pretty volatile, partly because management does not guide and partly because gauging consumer demand for used vehicles can be difficult from quarter-to-quarter. Tariffs on foreign-made vehicles added another wrinkle, making this a difficult quarter to predict.
On a final note, sentiment was running quite low heading into this report as evidenced by the sharp pullback in the share price since early March. We think a lot of that was related to tariffs and the potential impact on the used car market. However, the impact did not seem to be too great.
We thought that the tariffs on foreign vehicles might spur demand for used cars in the US. However, offsetting that is that we have a cautious consumer worried about the macro economy and job security. All of this made for a difficult quarter to predict, but it was better than expected.
Darden Restaurants modestly higher as robust comps offset muted FY26 EPS/revs guidance (DRI)
Darden Restaurants (DRI +2%) is trading modestly higher after wrapping up FY25 on a decent but not great note with its Q4 (May) report this morning. This operator of several restaurant chains (Olive Garden, LongHorn Steakhouse, Ruth's Chris, Chuy's) reported fairly modest EPS upside. However, given the misses and very small beats in recent quarters, this was a step up from that.
- Unfortunately, the FY26 guidance was not great with a downside outlook for both EPS and revs. We suspect that investors know that DRI tends to be conservative with guidance, especially this early in the fiscal year, so they are not overly concerned about it. Also, its FY26 consolidated same-restaurant sales guidance at +2.0-3.5% was pretty solid and a step up from +2.0% consolidated comps for all of FY25. We actually view the comp guidance as quite bullish.
- Turning to comps, DRI posted Q4 consolidated comps of +4.6% (OG +6.9%, LS +6.7%, Fine Dining -3.3%), a notable improvement from recent quarters: Q3 (Feb) comps were +0.7% (OG +0.6%, LS +2.6%, Fine Dining -0.8%) and Q2 (Nov) came in at +2.4% (OG +2.0%, LS +7.5%, Fine Dining -5.8%).
- Olive Garden was impressive in Q4. DRI cited the return of its Buy One, Take One offer for the first time in five years, combined with continued strength in off-premise. The take home selections leveraged OG's existing $6 take home platform, minimizing operational complexity. OG's recent Uber partnership has been a success with average weekly deliveries nearly doubling late in the quarter. Also, OG's marketing was more targeted.
- LongHorn did well also and continues to increase market share with sales growth exceeding the industry same-restaurant sales benchmark. However, Fine Dining comps were negative as the industry continues to be challenged.
We see a lot of cross-currents in Darden's Q4 report. There were a number of positives. The $0.02 EPS upside was a decent step up from recent quarters, which included some misses and even smaller upside quarters. Probably the biggest positive was the robust comps in Q4, led by its two largest banners, Olive Garden and Longhorn. The was a big improvement from recent quarters. We also think the FY26 comp guidance was a big positive as well.
In addition to all that, DRI announced a 7% dividend increase and a $1 bln share buyback authorization. The main negative was the downside EPS and revenue guidance for FY26. Overall, we think the positives outweigh the negatives. However, the stock has been steadily rising in recent months, which tells us sentiment was running pretty high heading into this report and that may account for the somewhat muted stock reaction.
GMS heads sharply higher as Q4 was better-than-feared and a bottom may be near (GMS)
GMS Inc. (GMS +12%) is heading sharply higher following a healthy EPS beat with its Q4 (Apr) report this morning. This building products distributor (wallboard, ceilings, steel framing etc.) reported a 5.6% yr/yr drop in revenue to $1.33 bln, however, that was in-line with the single analyst estimate.
- The company is pleased with its Q4 and FY25 results, despite deterioration in its end market conditions as it moved through the fiscal year. GMS said that commercial activity continues to be negatively impacted by high interest rates, the lack of available financing and general economic uncertainty contributing to soft starts and mixed results among commercial applications. GMS expects this dynamic to continue but moderate, with some recovery in its business towards the first half of calendar 2026.
- Despite pressures, there were areas of strength. Within commercial, current category strength continues to come from larger projects and those that are not as dependent on private financing, particularly those in public education, health care, and technology. Notably, a data center backlog extends well into 2026, and there is no indication of these projects slowing down in the near term.
- Also, GMS posted Q4 volume growth for Ceilings and Complementary Products. Ceilings performed particularly well given the continued benefits of the addition of its Kamco Supply acquisition. In addition, GMS has focused more on architectural specialties projects, which have higher average unit pricing. In Steel Framing, as suppliers navigate the latest tariff actions, GMS has received notices of upcoming manufacturer price increases.
A key statement that stood out to us was GMS saying it's cautiously optimistic that it is nearing the bottom of the cycle, although the intensity and duration of the downturn will vary by each end market. High interest rates and policy uncertainty are the primary impediments to growth. These factors are causing homebuyers to retreat to the sidelines, multifamily and commercial developers to pause or delay starts, and regional banks to increase commercial lending requirements for new projects and lend less overall.
Given all the macro headwinds, we think investors are pleased with GMS's Q4 report and its comments about FY26. GMS's market appears it will remain difficult in the near term, but management did provide some measure of optimism, saying it's nearing a bottom in the cycle.
The Big Picture
Last Updated: 23-Jun-25 07:36 ET | Archive
Stock Market Outlook Q3 2025: Volatility, Valuations, and Smart Investment Strategies
Briefing.com Summary:
*The market is priced for positive outcomes. That will restrain upside potential and invite material downside risk if those positive outcomes don't materialize.
*Another market thrill ride awaits in the third quarter with unfolding developments on the geopolitical, legislative, tariff, and earnings fronts.
*Total return potential for passive index investing will be restrained in the third quarter given the starting point of a high valuation for the market cap-weighted S&P 500.
In The Big Picture column published on February 21 we contended that the stock market was primed to go everywhere and nowhere, likening its future performance to that of a roller-coaster ride. That view was tied to a recognition that there were many "big issues" looming over the market that lacked closure.
As it turned out, we were right on the money with that thinking.
The S&P 500 hit an all-time high of 6,147.43 on February 19, yet the market would subsequently get broadsided by tariff announcements and economic concerns that hit a fevered pitch when President Trump announced reciprocal tariff rates on April 2. The S&P 500 hit a low of 4,835.04 on April 7. By June 11, though, the S&P 500 had climbed back to 6,059.40, having rallied off that April low after President Trump announced a 90-day pause on the reciprocal tariff rates.
It was a 21.4% decline from peak to trough and a 25.3% gain from that trough to the June 11 peak. The S&P 500 currently sits at 5,967.84, up 1.5% for the year and down 0.8% since February 21. Yes, indeed, the market has gone everywhere and nowhere.
So, what might the third quarter bring? Keep your seatbelts fastened. Another thrill ride, perhaps not as extreme as the one we just experienced but thrilling nonetheless, awaits.
Factors for a V-Shaped Recovery
First, let's briefly review why the market was able to recover like it did.
- On the heels of President Trump announcing the 90-day pause for reciprocal tariffs for most countries until July 9, the U.S. and China reached an agreement to scale back their draconian tariff rates for each other.
- First quarter earnings turned out much better than expected, and while there were instances of pulling guidance because of the tariff uncertainty, the reports and guidance in aggregate were good enough to keep the market's worst tariff fears in check.
- Hard economic data, namely spending and employment data, continued to paint a picture of a resilient economy that defied the dour-looking soft survey data for consumer sentiment.
- The Trump administration, which had a heightened focus on cost cuts and the deportation of illegal immigrants, started talking more about its efforts to cut taxes and regulations. On a related note, Congress got more active and vocal in its negotiations pertaining to the "One Big, Beautiful Bill."
- Inflation data continued on an encouraging path, showing little to no impact from the tariff announcements.
- Notwithstanding concerns about inflation and the deficit, market rates were held in check.
- The "Magnificent 7" stocks, as a cohort, rebounded sharply, as did the market's excitement for the AI trade.
The V-shaped recovery was exacerbated by short-covering activity, a race to get more equity exposure, and a fear of missing out on further gains. The price action itself, which was imbued with a persistent buy-the-dip inclination, became its own positive catalyst.
Three Is a Crowd
The start of the third quarter is just around the corner, and it is primed to start with a bang. That expectation has nothing to do with Fourth of July fireworks either. Rather, it has everything to do with the fireworks that will be ignited by the following:
- The Israel-Iran conflict
- President Trump said on June 20 that he will decide on a final course of action with respect to Iran over the next two weeks, but on June 21 a squadron of B-2 bombers dropped several bunker-busting bombs that destroyed nuclear enrichment facilities at Fordo, Natanz, and Isfahan.
- Iran has vowed that it will respond to the U.S. attack, leaving the oil market and capital markets on edge.
- The progression of the "One Big, Beautiful Bill"
- President Trump set an optimistic deadline of July 4 to have the "One Big, Beautiful Bill" on his desk for signing into law.
- The Senate is still working through its changes, and it is unclear if they will be acceptable to House members to keep the legislation on track to be signed by July 4. Senate leaders aim to have a vote on the Senate floor by the middle of the coming week.
- The CBO estimates that the House version of the bill will add $2.8 trillion to the deficit over the next decade.
- The pause on reciprocal tariff rates expires July 9
- Reportedly, the pause on reciprocal tariff rates for countries negotiating new trade deals in good faith with the U.S. could be extended, yet there is no assurance that will be the case. It is shaping up to be a "game-time decision," and which countries get the benefit of an extended pause will matter greatly to the market.
Accordingly, with the second quarter coming to an end, the U.S. got involved directly in destroying Iran's nuclear enrichment capabilities; and in the first two weeks of the third quarter, the "One Big Beautiful Bill" may or may not be signed into law, creating misgivings about the trajectory of the budget deficit and national debt and/or hope that it will pave the way for stronger economic growth that pays for the bill; and the lid could come off tariff rates and spark another growth scare.
The latter half of July, meanwhile, will feature second-quarter earnings reports and guidance. That is always the case, but the guidance stakes are higher this year with the market sporting a premium valuation that rests on the continuation of good earnings news.
A Valuation Snapshot
At 21.4x forward twelve-month earnings, the S&P 500 trades at a 16% premium to its 10-year average of 18.4x, according to FactSet. On a trailing twelve-month basis, the S&P 500 trades at 23.8x earnings, which is a 15% premium to its 10-year average of 20.6x.
The point we have made in the past and will continue to make is that the market's valuation is less demanding on an equal-weighted basis. To that end, the equal-weighted S&P 500 trades at just 16.8x forward twelve-month earnings and 18.3x trailing twelve-month earnings, roughly in line with the 10-year average. The discount relative to the market cap-weighted S&P 500 speaks to the influence of the mega-cap stocks on the market cap-weighted index.
The mega-cap companies, by and large, have earned their premium valuation. Objectively, then, the market may not be as overvalued as it looks and will likely persist in an "overvalued" state so long as its mega-cap leaders continue to deliver robust earnings growth. The risk, of course, is that they don't deliver or the outlook changes to create an impression that they won't deliver, as was clearly demonstrated in the peak-to-trough selloff between February 19 and April 7.
Many of these stocks, fortunately, continue to trade with a head of AI steam. There is a mass transformation just getting started with the advancement of AI and its various applications throughout the economy. There is no slowdown in the AI economy, only questions about how long it will take the hyperscalers to see a return on their massive investment in data centers, how long it will take other companies to integrate AI solutions in their service and production work processes, and what changes this might bring to the labor market.
Fed Speak
The labor market is in reasonably good shape. Initial jobless claims have perked up a bit but remain well below levels associated with a recession, and the unemployment rate at 4.2% is consistent with full employment. The four-week average for continuing jobless claims, though, is at its highest level since November 20, 2021, and above levels that were seen before COVID.
The summation, aptly described by Fed Chair Powell, is that businesses have been slow to lay off employees but that it has grown harder to find a job after losing a job. The Federal Reserve is keeping a close eye on the labor market, and although it says it is attentive to the risks to both sides of its mandate, it continues to be steered more by its inflation concerns.
Specifically, many Fed officials are worried that cutting rates again, before they know what effect the tariffs are having on prices, could reignite inflation. Fed Chair Powell said after the June FOMC meeting that he expects a meaningful amount of inflation to arrive in coming months because of the tariffs. What he and others want to ascertain is if any tariff-driven inflation will be a one-time price adjustment or something that is longer lasting.
The consensus among Fed officials isn't shared by all. Fed Governor Waller recently said that he thinks the Fed could cut rates at its July FOMC meeting since he isn't expecting the tariffs to drive up inflation significantly and that, if the Fed is worried about the labor market weakening, it should be ahead of that and not wait for it.
Mr. Waller is in the minority, certainly at the Fed and in the market for that matter. While others have argued that the Fed should have cut rates again already or should in July, the fed funds futures market is following the voice of the Fed Chair. The CME FedWatch Tool currently shows just a 16.5% probability of a 25-basis point rate cut at the July 29-30 FOMC meeting.
There will be another employment report and another round of CPI, PPI, and PCE Price Index data before then, so the probability of a rate cut at the July meeting is certain to change in the interim, but for now, it is looking like the Fed will be keeping the target range for the fed funds rate steady at 4.25-4.50% past the July meeting.
What To Do
The Israel-Iran conflict has entered a new realm of uncertainty; the impact of the "One Big, Beautiful Bill" is wide open for the market's interpretation; the Fed is paying a lot of lip service to inflation concerns as a basis for holding the target range for the fed funds rate steady; and earnings growth prospects have been tarnished by the tariff uncertainty, geopolitical tension, and a growing body of anecdotal evidence that consumers are growing more conscientious about their discretionary spending activity.
So, what is one to do with so many loose ends left untied?
An investor should remain invested but be cognizant that total return potential for passive index investing will be restrained in the third quarter given the starting point of a high valuation for the market cap-weighted S&P 500.
For passive investing, we would favor an equal-weighted approach when it comes to the S&P 500. The Invesco S&P 500 Equal Weight ETF (RSP) is a good option in this respect. For active investors, we would look to allocate money in the equity portion of a diversified investment portfolio into several buckets, if you will, that can benefit in good times, help mitigate losses in bad times, and provide attractive long-term return potential.
Those buckets would be tilted toward the following strategies:
- Companies with attractive price-to-earnings growth ratios
- Briefing.com analysts like: automotive supplier Dana Inc. (DAN), jewelry retailer Signet Jewelers (SIG), rideshare and food delivery company Uber (UBER)
- Companies that are less exposed to tariff issues
- Briefing.com analysts like: appliance maker Whirlpool (WHR), warehouse retailer Costco (COST), payment processing network Visa (V)
- Companies that are steady growers regardless of economic conditions
- Briefing.com analysts like: electric utility company Entergy (ETR), retailer Walmart (WMT), robotic-assisted surgery company Intuitive Surgical (ISRG)
- Companies with quality attributes that include a competitive advantage, a strong balance sheet, healthy free cash flow, consistent earnings growth, and solid management
- Briefing.com analysts like: the JPMorgan U.S. Quality Factor ETF (JQUA)
- Companies that are in good position to capitalize on secular growth trends
- Briefing.com analysts like: the iShares Cybersecurity and Tech ETF (IHAK), the Global X Artificial Intelligence & Technology ETF (AIQ)
Briefing.com Analyst Insight
While the run by the market off the April 7 lows has made things look easy, this is not an easy investing environment. Market risk has risen with valuations. Multiple expansion will be harder to achieve, and if the guidance coming out of the second quarter earnings reporting period doesn't surpass a relatively high bar, the third quarter could be punctuated with multiple compression.
It isn't an easy period to forecast because the range of outcomes for many key issues is fairly wide, but the market is priced for positive outcomes.
There is nothing wrong with that, but it implies a lot of good news is priced in already, which makes further upside harder to come by and invites material downside risk if those positive outcomes don't materialize.
-- Patrick J. O'Hare, Briefing.com
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