US Equities Scale New Heights Despite First-Half Headwinds

US stock markets closed the week on a triumphant note, with major indices reaching fresh all-time highs despite the significant challenges that defined the first half of 2025. The S&P 500 extended its remarkable run, adding 1.7% for the week. This performance underscores the market’s remarkable resilience and adaptability in the face of persistent geopolitical tensions, monetary policy uncertainties, and global economic headwinds that characterised the opening months of the year.

The sustained rally reflects investor confidence in corporate earnings growth and the underlying strength of the US economy. Technology stocks continued to lead the charge, with the sector’s momentum showing no signs of abating despite periodic concerns about valuations and regulatory pressures. One notable weakness, especially for international investors is the impact of a weak US dollar. In S$ terms, the S&P 500 is still in the red for the year.

Labor Market Resilience Confounds Pessimistic Forecasts

The US labor market continued to defy widespread predictions of deterioration, maintaining its robust performance through the first half of 2025. Employment data released during the week reinforced the narrative of a surprisingly durable jobs market, with unemployment rates remaining near historic lows and wage growth showing sustained momentum. This strength has been particularly notable given the numerous headwinds facing the economy, including trade tensions, geopolitical uncertainties, and the Federal Reserve’s non-easing stance.

OPEC Supply Increase Signals Amid Oil Price Weakness

In a surprising development that caught energy markets off guard, OPEC announced plans to increase oil supply despite the prevailing environment of weak crude prices. Despite concerns about demand, OPEC seems confident about market’s ability to absorb the extra supply as seen from Saudi’s hiked premiums for its flagship crude to customers in Asia.

Trade Tensions Loom as Tariff Deadline Approaches

Markets are bracing for potential volatility as a critical trade policy deadline approaches, with a temporary suspension of punitive import levies set to expire in the coming week. This development has created a significant watchpoint for investors, as the resolution of these trade tensions could materially impact global supply chains, corporate earnings, and market sentiment in the second half of 2025.

The trade uncertainty adds another layer of complexity to an already challenging global economic environment. Investors will be closely monitoring Washington’s policy decisions, as any escalation in trade tensions could disrupt the current market momentum and force a reassessment of risk assets across various sectors. Conversely, a resolution or extension of the suspension could provide additional tailwinds for the ongoing equity rally. As usual, the sound bytes coming out of the White House is not consistent: Trump says no extension, while Bessent hints extensions.

S&P 500 and Nasdaq Hit Record Highs as Market Breadth Shows Signs of Improvement

The S&P 500 closed Friday at 6,173.07, marking a new record high, while the Nasdaq also reached record closing levels as investors brushed aside trade concerns. The broad rally capped a strong week that saw major indices shrug off mid-week volatility to finish at all-time highs. Encouragingly, market breadth indicators suggest broader participation is returning after months of concern, offering hope for more sustainable gains.

July 9 Trade Deadline Looms Without Clear Resolution

The much-anticipated July 9 trade deadline approaches with mixed signals from Washington. While no definitive agreements have been reached, recent developments suggest potential flexibility in enforcement. “No, we can do whatever we want,” Trump said at the White House when asked if his deadline was set in stone. “We could extend it. We could make it shorter.” Markets have shown resilience to trade-related headlines this week, suggesting investors are either pricing in favorable outcomes or becoming desensitized to the ongoing uncertainty. The VIX continues to trend lower.

Nvidia Powers Higher on Middle East AI Expansion

Nvidia secured major AI deals during recent Gulf state visits, including selling hundreds of thousands of AI chips to Saudi Arabia, with an initial 18,000 “Blackwell” chips going to Humain, a new AI startup launched by the Saudi sovereign wealth fund. The U.S. also has a preliminary agreement allowing the UAE to import 500,000 of Nvidia’s most advanced AI chips per year starting in 2025. These geopolitical AI partnerships represent a significant expansion of Nvidia’s addressable market and underscore the strategic importance of semiconductor technology in international relations. The stock’s breakout reflects not just strong fundamentals but also the company’s central role in global AI infrastructure development.

Oil Retreats to $60s as Middle East Tensions Ease

Oil prices fell 6% on Tuesday to settle at a two-week low, as the ceasefire between Israel and Iran reduced expectations of Middle East supply disruptions. The dramatic retreat from recent highs provides welcome relief for inflation-sensitive sectors and consumers. The geopolitical risk premium that had pushed oil higher earlier in the month has largely evaporated, with markets now focusing on fundamental supply-demand dynamics. The return to $60s pricing removes a key headwind for economic growth and gives central banks more flexibility in their policy decisions.

Looking Ahead

The coming week brings critical inflection points across multiple market drivers. The July 9 trade deadline will test market resilience, while earnings season approaches with heightened focus on AI beneficiaries and their ability to justify lofty valuations. The improvement in market breadth indicators suggests the rally may be gaining broader support, which could provide a more sustainable foundation for continued gains. With geopolitical tensions subsiding and oil stabilizing, attention returns to fundamental earnings growth and Federal Reserve policy as primary market catalysts.

Iran-Israel Tensions

The Israel-Iran conflict’s immediate impact is heightened oil prices and market volatility, with risks of broader economic disruption if escalation continues. Diplomacy or limited retaliation could stabilize markets, but a wider conflict involving oil infrastructure or the Strait of Hormuz could lead to severe global economic consequences, including inflation, supply chain disruptions, and recession risks. Iran’s weakened proxies, degraded military infrastructure, leadership losses, and economic constraints makes a restrained response more likely than a large-scale counterattack. Should Israel stick to targeting nuclear facilities, it is likely that the conflict remains contained.

US Inflation Easing

The latest US Consumer Price Index (CPI) report for May 2025 shows inflation rose 0.1% month-over-month, slightly below the expected 0.2%. Over the past 12 months, the CPI increased by 2.4%, matching estimates. Core CPI, excluding food and energy, also rose 0.1% monthly, below the expected 0.3%, with a yearly increase of 2.8%. Shelter and food prices each went up 0.3%, while energy prices dropped 1.0%, driven by lower gasoline costs. This suggests inflation is cooling slightly and tariff concerns have yet to push prices higher. The FED has slightly more room to ease rates.

US-China Trade Truce

The U.S.-China trade truce, agreed upon in London on June 10-11, 2025, is a temporary measure to ease escalating trade tensions. Following a preliminary deal in Geneva in May, this framework seeks to reduce economic friction by scaling back punitive tariffs and restrictions. The U.S. will keep tariffs on Chinese goods at 55%, down from a high of 145%, while China will lower its tariffs on U.S. goods to 10% from 125%. This includes a contested 10% baseline tariff currently under legal review in the U.S. The agreement, however, is limited in scope and awaits final approval from President Donald Trump and Chinese President Xi Jinping, with no guarantee of resolving deeper trade disputes.

As part of the truce, China has committed to loosening export controls on rare earth minerals and magnets, which are vital for U.S. industries like automotive and defense. In exchange, the U.S. will ease restrictions on technology exports and visa limitations for Chinese students. Despite these concessions, the deal is seen as a stopgap, with logistics firms and retailers warning that the 55% U.S. tariff still threatens supply chains, jobs, and businesses. The truce is set to hold until at least July 9, 2025, when a 90-day tariff pause expires, potentially leading to renewed tariff hikes if negotiations falter.

US Stock Market Response To Trade Fading

Since Liberation Day, US stock market volatility has fallen as trade negotiations, legal challenges and Trump’s electorate constraints have limit the impact on investors’ risk appetite. The VIX index has fallen steadily since that fateful day, with lower highs. It would seem that investors are moving on to geo-politics and the inflation/interest rate narratives for the next few quarters.

European Central Bank Rate Decision

The European Central Bank delivered its third rate cut of 2025, reducing rates by 25 basis points to 2%. The ECB hinted at a pause in its year-long easing cycle after inflation finally returned to its 2% target. ECB President Lagarde signalled a cautious stance going forward, with the bank maintaining its 0.9% growth forecast for 2025 despite ongoing trade policy uncertainties. European stocks and the euro are loving it.

US-China Trade Talks

Financial markets showed muted reactions to President Trump’s “very good” 90-minute trade discussion with China’s Xi Jinping, with both leaders agreeing to mutual visits, as traders have grown accustomed to Trump’s volatile trade negotiations and remain unfazed even by rising concerns over Chinese rare earth mineral shortages.

President Trump sent countries a draft letter on 3 June requesting their best trade proposals across tariffs, quotas for US products, and non-tariff barrier remedies. Reuters reported that the document reflects urgency within the administration to complete deals ahead of their tight July 9 deadline, supporting analysts’ view that Trump’s tariff team seeks to resolve trade tensions quickly and move the issue out of public focus. Stock investors have increasingly aligned with this assessment since April 9 when Trump delayed reciprocal tariffs for 90 days, while also showing greater confidence in the underlying economic outlook.

US Debt Dynamics

The 10-year US Treasury yield dropped to 4.36% today as bond investors focused on weaker-than-expected economic data from ADP private payrolls and ISM nonmanufacturing reports, while largely ignoring political tensions over federal spending. Despite Elon Musk’s harsh criticism of President Trump’s spending bill as a “disgusting abomination” and the Congressional Budget Office projecting the legislation could add $2.4 trillion to the deficit over a decade (with some estimates reaching $3-5 trillion), bond markets showed no signs of the debt crisis fears that had emerged just days earlier. Instead, investors appeared to prioritise the immediate economic data suggesting potential weakness, driving demand for Treasuries, though analysts maintain confidence in the underlying economic resilience despite these mixed signals.

US Jobs Market

This week’s standout economic data was the May jobs report, which showed employers added 139,000 jobs—beating expectations and pushing the three-month average to 135,000. However, the positive headline was dampened by significant downward revisions totaling 95,000 jobs for March and April combined.

The job growth showed concerning concentration, with just two sectors accounting for most of the gains: leisure and hospitality added 48,000 jobs while healthcare and social assistance contributed 78,000. This narrow hiring pattern across sectors will be important to monitor in coming months.

US Stock Market Recovery

Despite the uncertainties on Trump’s trade and budget policies, the economy continues to muddle along and risk of recession continues to fall. Prediction markets now puts the odds of a recession at 26%, down from a high of 66% back in April 7. The S&P 500 is close to its all time high made in mid-February.

Weekly Investor Missive:

S&P 500 Performance: Q1 Highlights

Despite Trump’s Tariff Turmoil (TTT), S&P 500 companies showed strength in Q1 2025. FactSet reported revenue growth of 4.7% y/y, slightly below the 10-year average of 5.1%, with 10 of 11 sectors growing, led by Tech, Utilities, and Health Care. Only 62% of firms beat revenue estimates, below the 5-year average of 69%. Yardeni Research noted a 4.6% y/y rise, under its 4.8% long-term average. Earnings per share (EPS) grew 12.9% y/y per FactSet, above the 10-year average of 8.9%, with 78% of companies beating estimates. Yardeni reported 11.1% EPS growth, exceeding its 9.0% average. Profit margins hit 13.0% (FactSet) to 13.3% (Yardeni), above the 10-year average of 10.8%.

Analysts project 2025 revenue growth of 5.8% and EPS growth of 9.3%-14.8%, but TTT may slow growth if it sparks a global recession. Tariffs, mentioned by 411 firms in Q1 earnings calls, could act as a corporate tax unless offset by productivity gains or cost pass-through.

Trump’s Tariffs: A System of Checks and Balances

The U.S. operates as a federal republic with a constitutional system designed to prevent any single authority from holding unchecked power. This framework includes three branches of government—legislative, executive, and judicial—intended to balance each other and protect against overreach. This system is currently limiting President Trump’s tariff plans. On Wednesday, a lower court ruled against most of Trump’s tariffs, stating that the U.S. Constitution grants Congress exclusive authority over international commerce. A federal appeals court paused this ruling, and the matter may now proceed to the Supreme Court.

This built-in “gridlock” is a deliberate feature of the U.S. system, ensuring stability by preventing rapid, unilateral policy changes. Investors globally often view this as positive, as businesses tend to perform best when government intervention is limited. Stock futures surged after the court’s ruling, further supported by Nvidia’s strong earnings report.

Federal Reserve: Steady as She Goes

President Trump met with Fed Chair Jerome Powell on June 2, pushing for immediate interest rate cuts. However, Powell and the Federal Open Market Committee (FOMC) remain cautious, as noted in the May 6-7 FOMC minutes. The Fed sees no rush to lower rates, given the economy’s resilience. The federal funds rate futures market anticipates three 25-basis-point cuts over the next 12 months, but we remain in the “none-and-done” camp through year-end.

Q1 real GDP was revised to show a 0.2% annualized contraction, driven largely by a 42.6% spike in imports as companies rushed to beat tariffs. Despite this, the economy remains robust, supporting the Fed’s steady stance.

Nvidia and the AI Boom

Nvidia’s stock soared after a blockbuster Q1 report (ended April 2025), with datacenter revenues surging 73% y/y to $39.1 billion. Unlike Cisco’s crash during the Tech Wreck of 2000-2001, Nvidia’s growth is fueled by robust demand for AI infrastructure. Tech giants like Microsoft, Amazon, Google, and Meta plan to increase AI-related capital spending by 41% this year, totaling over $345 billion. This demand, driven by the broader Digital Revolution, suggests the datacenter boom is not a bubble but part of a long-term trend toward faster, cheaper data processing.

However, concerns about a potential Nvidia valuation bubble persist. Bloomberg Opinion columnist John Authers has compared Nvidia’s meteoric rise to Cisco’s during the dot-com bubble, noting that while Nvidia’s profits are rising faster than its stock price, its valuation remains stretched. In a March 2024 article, Authers argued that Nvidia’s rally, while supported by strong fundamentals, hinges on the sustainability of its earnings growth. He highlighted that Nvidia’s market cap surged by over $275 billion in early 2024, drawing parallels to the 1999 dot-com melt-up, though he noted the AI boom is less extreme than the dot-com era. The introduction of DeepSeek in January 2025 raised fears that Nvidia’s “economic moat” could be disrupted by cheaper AI alternatives, potentially threatening its dominance. Despite these concerns, Authers emphasized in May 2025 that Nvidia’s ability to keep increasing profits, even amidst tariff challenges, continues to drive market optimism. Still, investors should remain cautious, as valuations assume aggressive revenue growth—potentially over 80% annually for the next five years, according to some analyses—raising “buyer beware” risks.

Global Markets: Japan’s Bond Woes

Japan’s government bond (JGB) market sparked global concern after a weak 20-year bond auction, the worst since 1987, signaled dwindling demand. Yields on 30-year JGBs hit a record 3.14%, and 40-year yields reached 3.6%, reflecting investor worries about Japan’s fiscal stability, with a debt-to-GDP ratio of 260%. Factors driving this included the Bank of Japan’s (BOJ) paused tightening due to “tariff haze,” Prime Minister Shigeru Ishiba’s comparison of Japan’s fiscal situation to Greece, and persistent economic challenges like inflation above the BOJ’s 2% target (3.6% in March 2025). Yields later fell to 2.85% for 30-year JGBs after reports that Japan’s finance ministry might reduce super-long bond issuance.

This matters to global investors for several reasons. Japan holds $1.13 trillion in U.S. Treasuries, making it the largest foreign holder, and its investors own $2.3 trillion in foreign bonds, including significant U.S. and European debt. Rising JGB yields could prompt Japanese investors to repatriate capital, reducing demand for U.S. Treasuries and pushing up global borrowing costs. This could exacerbate U.S. yield pressures, with 30-year Treasury yields already breaching 5% amid weak auctions and a Moody’s downgrade. Additionally, the yen carry trade—borrowing in low-yield yen to invest in higher-yield assets like U.S. bonds—is unwinding as JGB yields rise, potentially strengthening the yen and disrupting global markets. A July 2024 BOJ rate hike triggered a 6% S&P 500 drop, showing the global ripple effect. If Japan’s bond market loses confidence, it could signal broader sovereign debt concerns, raising borrowing costs and liquidity risks worldwide, especially for debt-heavy economies like the U.S.

Trade Talks: A Glimmer of Hope

President Trump’s weekend call with EU Commission President Ursula von der Leyen brought positive developments. Trump postponed his threat of 50% tariffs on the EU from June 1 to July 9, citing progress in trade talks. European officials expressed readiness to advance negotiations swiftly. These developments, along with Nvidia’s earnings, buoyed stock markets.

US-China trade war truce

The US and China agreed to a 90-day pause on high tariffs, reducing the US tariff on Chinese goods from 145% to 30% and China’s tariff on US goods from 125% to 10%. This deal, reached after talks in Geneva, aims to ease trade tensions but leaves uncertainty for businesses planning long-term. Markets rallied, sending the S&P500 to positive for the year.

Moody’s downgraded US debt

US debt was downgraded by Moody’s Ratings on May 16, 2025. The credit rating was lowered from Aaa (triple-A) to Aa1, citing the nation’s growing $36 trillion debt, rising interest payments, and persistent budget deficits. This aligns Moody’s with Fitch Ratings (downgraded in 2023) and S&P Global Ratings (downgraded in 2011), meaning all three major agencies no longer give the US their top rating. The downgrade reflects concerns about fiscal sustainability, especially with proposed tax cuts that could add trillions to the deficit. Not much impact to markets as it was already priced in.

Walmart to raise prices due to tariffs

Walmart on Thursday warned that even softer tariffs on China could soon force the company to raise prices on certain items. Still, the Walmart executive emphasized that the retailer will do what it can to avoid passing the import taxes onto customers. Trump has told Walmart to eat the tariffs. It remains to be seen how much of tariffs will be passed through to consumers, since we have a 30% tariff on China that remains intact.

The AI Hiring Pause Is Here. Will Productivity Rise?

Bloomberg reported that Microsoft is reducing 6,000 jobs this past week, even as it heads into a boom in the software market. Outside tech, AI has made significant inroads on productivity. Norway’s sovereign wealth fund, the world’s largest, is to stop hiring more humans for now in an early indication of the disruption the emerging technology may bring to the workforce. A possible scenario where labour market weakens (not dramatically) but company profits continue to rise, may occur in the quarters ahead, sustaining the bull market is equities.

Market Repair Almost Complete

As the S&P 500 erases the year’s losses, it was confirmed by some positive market breadth indicators. The advance-decline index is almost back to the peak last seen in late November 2024. The strength of the increase suggests that the pullback in stocks is just a correction, and the bull market remains intact.

U.S.-China Trade Talks Spark Market Optimism

Global markets rebounded as U.S.-China trade negotiations in Geneva showed signs of progress. U.S. Treasury Secretary Scott Bessent reported “substantial progress,” and both sides agreed to establish a consultative mechanism for continued economic negotiations. While no formal deal was reached, the talks signalled a potential de-escalation amid concerns about global supply chains. The Chinese side confirmed the positive meeting progress. Note: this is just the first step forward towards resolving the ridiculous tariffs.

FED: Wait and See.

At its May 6–7, 2025 meeting, the Federal Reserve’s Federal Open Market Committee (FOMC) decided to maintain the federal funds rate at 4.25% to 4.5%. This marks the third consecutive meeting where rates have remained unchanged, reflecting the Fed’s cautious approach amid economic uncertainties. Market reactions to the Fed’s decision were mixed. While some investors were reassured by the Fed’s commitment to data-driven policy, others expressed concerns about the potential for stagflation—a scenario characterised by high inflation and stagnant economic growth. Interestingly, Truflation is suggesting that inflation has fallen substantially. 

Market Internals Repair Job: Work-in-Progress

Buyers are still winning for now as the good news continue to roll in, with the US-UK trade deal, resilient US labour market, and less negative outcome for US-China trade talks. Advance-Decline index continues to improve,

• Economic Pessimism: 82% of fund managers expect a weaker global economy over the next 12 months, with 42% anticipating a recession, the fourth-highest recession expectation in 20 years.
• Inflation Concerns: 57% predict rising global inflation, a significant shift from previous expectations of lower inflation.
• U.S. Exceptionalism Wanes: A net 62% believe the theme of “U.S. exceptionalism” has peaked, with reduced confidence in U.S. economic outperformance.

• Bearish Sentiment: The survey’s broadest sentiment measure, based on cash levels, economic growth expectations, and equity allocations, reflects extreme pessimism, driven by a worsening U.S. economic outlook, though China’s growth outlook slightly improved.
• Bull Crash: Investor sentiment experienced a “bull crash,” with the second-largest monthly rise in macro pessimism since 1994.

• Equity Sell-Off: Global investors significantly reduced equity holdings, with a record 40-percentage-point drop in U.S. equity allocation, the largest monthly decline on record. A record number of investors plan to cut U.S. stock exposure further.
• Cash and Bonds Increase: Cash levels rose sharply to 4.1% from 3.5% in February, the highest since 2010, and bond allocations increased, reflecting a flight to safety.
• Regional Shifts: Eurozone stocks saw increased allocations (net 39% overweight, up from 12% in February), as did global emerging markets (net 20% overweight). Japanese equities remained slightly underweight, while UK allocations rose to a net 4% overweight.

• Trade War: 55% of managers cited a trade war-induced recession as the top tail risk, particularly due to potential tariffs under the new U.S. administration.
• Inflation and Rates: 31% highlighted inflation forcing the Federal Reserve to raise rates, down from 41% in January.
• Other Risks: 13% pointed to an AI bubble, and 10% noted new geopolitical conflicts.

• The survey notes a sharp shift in investor outlook, with the U.S. economy expected to weaken (net 71% anticipate a downturn) while China’s outlook brightened (net 28% expect strengthening).
• Expectations for Federal Reserve rate cuts increased, with 68% anticipating cuts in 2025, up from 51% in February, though the magnitude of cuts remains debated.

• The bearish sentiment contrasts with earlier 2025 surveys, such as February’s, which showed bullishness at a three-year high and low recession fears.

Global markets have spoken on Trump’s universal tariffs on everyone. 54% on China, 46% on Vietnam, 20% on EU, and 10% minimum on all others.

By Friday, S&P 500 plunged 10.5% over two days, while Monday futures indicate another 2.5% decline as of writing. Asian markets are also falling, HSI is down 11.3%, TOPIX is down 12.4%. Investors are piling into government bonds, with the US 10Y yield falling to 3.5% from 3.9%. Safe haven currencies like the JPY is up. Clearly, this is a risk off event as investors worry about global recession, rather than stagflation.

How should investors respond?

How markets react will be based on whether the tariffs can be negotiated and retracted. Besides China (that has already retaliated) and the EU that threatened to retaliate but could not come to agreement among its member states, most other countries are choosing to negotiate. Trump himself has already said that he had a call with Vietnam and the direction is going towards negotiation.

However, the key will still be US-China relations. If there are no signs of negotiations, it may be difficult to see how markets can stabilise, especially if the tariffs escalates (worst case scenario).

Before market stabilises, investors probably need to see signs to indicate a willingness to talk. We could be in for more pain, i.e. more pain in financial markets before both sides are willing to negotiate.

Based on the price action in markets, the US is expected to experience a mild recession. The S&P 500 is down 20%, Small caps -28%, and Nasdaq even more, all from their last peak.

Further declines would probably mean a bigger crisis, i.e. deeper economic contraction or credit event (GFC in 2008) or the COVID shock in 2020. Due to the gaps in the sell off, i.e. there were large price differences between the opening and previous closing prices, there seems to be some form of capitulation going on. So for a further sell off in markets, i.e. another 15-20% decline in US stocks, we would need to see another round of escalation in the trade war, which would slow global economic growth dramatically.

Given the high level of uncertainty, it is probably unwise to make any investment decisions (more than 6 months). Investors should gather more evidence before re-positioning their portfolios.