Sustained employment growth and an anticipated fiscal stimulus in the wake of the One Beautiful Big Bill … More Act (OBBBA)’s tax cuts have helped lower the chance of a recession, mirroring the year’s lowest levels. The next major obstacle on the horizon is President Trump’s July 9 deadline for tariffs. The surprisingly robust job market and successful enactment of US tax laws were key engines behind the S&P 500’s skyrocketing to record levels on Friday.
Receding recession fears, demonstrated by dwindling odds of such a scenario, have incited stocks to break fresh ground. At the stock market’s nadir in early April, hefty American tariffs declared on Liberation Day drove the recession betting odds up to a striking 65%. However, relieved tension over tariffs and tangible advancements in trade negotiations led stocks to make a robust recovery.
The OBBBA tax cuts, coupled with the labor market’s tenacity, played a significant role in mitigating the likelihood of a recession, pushing it closer to the year’s lows. As recession worries subsided and the stocks bottomed out, economically flexible cyclical stocks have outperformed the lesser economically affected defensive stocks. This data solidifies the belief that the macroeconomic conditions have been the major driving force behind the stock market behavior so far this year.
This past holiday-reduced week saw the S&P 500 hit an unprecedented high, currently standing 2.2% above its previous high in mid-February, after having plunged nearly 20%. The Magnificent 7 – Microsoft (MSFT), Meta Platforms (META), Amazon.com (AMZN), Apple (AAPL), NVIDIA (NVDA), Alphabet (GOOGL), and Tesla (TSLA) – have managed to claw back up to only 3.5% beneath its middle-December grade after once being a staggering 30% off-peak.
The sustained vigor in US bank stocks remains a noteworthy factor. The Federal Reserve’s recent methodological revisions will cut down on future Stress Capital Buffers (SCBs) requirements for banks. In theory, reduced capital needs translate to heightened profitability paired with amplified capacity to enrich shareholders with returns.
Banks typically benefit from a more optimistic economic climate, as their business model is economically sensitive. The job market saw an expansion of 147,000 nonfarm jobs, which outperformed predictions. Updated data shows a slight enhancement, indicating positive trends. Solid statistics have also emerged from the household survey, with 93,000 job gains, and the research series, reflecting payroll report criteria, increased by 751,000.
The remarkable ascend in the research series compensates for most of the prior month’s drop. Despite estimations, the unemployment rate declined to 4.1% from 4.2%, resulting from the addition of 93,000 jobs as per the household survey and a decrease of 130,000 in the workforce. Wage growth, however, lagged at 3.7% year-over-year, dropping from 3.8% the previous month. The typical working week clocked in at shorter hours, 34.2, barely over the lowest mark in five years – 34.1 in January – affected by adverse weather conditions and fires in LA.
The employment-to-population ratio amongst individuals of prime working age, between 25 to 54, is a critical metric that provides insights into unemployment rate concerns. The rising trend in the three-month-average of this ratio corroborates the resilience of the labor market. Though maintaining relatively steady levels so far, this metric undoubtedly warrants close monitoring.
Applications for unemployment benefits on a weekly basis remain largely uneventful. On the other hand, ongoing claims for benefits surpass the lowest levels, suggesting a deceleration in re-employment following job loss. While the jobs report might seem reasonably impressive on the surface, the specifics reveal that the employment growth exceeded expectations and overall labor market health seems robust.
Currently, markets forecast two 25 basis points (0.25%) Federal Reserve cuts by 2025, falling in line with the median prediction by the Fed. The strengthening job data has eradicated any possibility for a cut in July, yet we can still expect the first reduction in 2025 to take place in September. This week isn’t expected to witness significant economic data releases.
Just two companies listed on the S&P 500 are slated to disclose earnings this week. With the ratification of the One Beautiful Big Bill Act (OBBBA) complete, all eyes should now be on President Trump’s impending July 9 tariff deadline. Trade agreements have been negotiated with Vietnam and the United Kingdom and the détente with China has been achieved, yet tariff rates of several major trading partners hang in balance, pending trade agreements.
President Trump has announced that notifications regarding the effective tariff rate applicable to their exports to the US will be dispatched to the respective countries, to take effect from August 1, unless a trade deal is concluded before. Market stakeholders will be eagerly waiting to discern if additional trade agreements are finalized or if potential economic strains from heightened tariffs begin to impact the US’s economic forecast.
The US equity market has responded positively to the improved economic data and probable stimulus resulting from the previous week’s tax cuts. Although the hurdles at the current valuations are steeper, optimism surrounding corporate earnings forecasts has heightened as economic downturn risks begin to fade.
The anticipated deviation in effective tariff rates around President Trump’s July 9 deadline could reignite worries over the escalation of economic challenges, making heightened volatility an expected outcome.
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