Last week brought a welcome rebound in the markets, driven by a more appeasing tone from the White House toward China and reassurance from President Trump that he won’t remove Federal Reserve (Fed) Chair Jerome Powell. While this shift in rhetoric helped fuel optimism and a 7% rally in the S&P 500, LPL Research believed some caution remains warranted.

Following the latest rebound, the S&P 500 index is stuck between its 50-day moving average (around 5,640) and the April intra-day low of around 4,835. No trade deals or even frameworks have been announced, and tariffs remain elevated. Treasury Secretary Scott Bessent suggested tariffs could come down, which would be a positive step, but until formal progress is made, markets are likely to remain sensitive to headlines.

Corporate earnings continue to exceed expectations for the first quarter, with 74% of S&P 500 companies beating estimates so far. However, many businesses are struggling to provide reliable forward guidance due to the uncertain trade environment. As a result, estimates for 2025 earnings have already been revised lower. Encouragingly, companies heavily investing in artificial intelligence—like Alphabet—have maintained their capital spending plans, potentially supporting confidence across the tech sector. We’ll be watching upcoming reports from Amazon, Meta, and Microsoft closely.

Valuations remain a point of focus. Stocks are currently priced at a level that assumes inflation will stay moderate. Should tariffs drive inflation toward 4%, price-to-earnings ratios would likely compress, adding downward pressure to stock prices. That said, the market may look through a temporary inflation spike, particularly if it’s driven by one-time tariff adjustments rather than structural inflation.

A softer tone on China from the White House is encouraging, as is the assurance that President Trump won’t fire Fed Chair Powell. We still have confidence that these trade issues will be resolved, but the ultimate landing spot for tariffs remains uncertain. Bottom line, we are staying neutral on equities tactically for now as the risk-reward trade-off in the short-term is not very attractive and we cannot dismiss the chances of a reversal lower in the coming weeks. LPL Research’s updated year-end S&P 500 target of 5,650–5,800 suggests there’s still room for positive returns by year end.

As always, please reach out with your questions and feel free to schedule a meeting.

-Mark & Elise

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