Weekly Market Update: May 28, 2025

The pace of price growth showed further signs of easing in April. On the heels of a more-benign Consumer Price Index report, the companion Labor Department report revealed more progress at the producer (wholesale) level. Specifically, the April Producer Price Index (PPI) and the core PPI, which excludes the food and energy components, fell 0.5% and 0.1%, respectively. On a 12-month basis, the PPI and core PPI increased 2.4% and 2.9%, respectively, with both easing from the 3.4% and 3.5% paces recorded in March. 

The worries about stagflation have lessened a bit. That is because inflation moderated last month, and the labor market has held up well. April’s job-creation figures were better than expected, and initial unemployment claims are still running at a level not indicative of stress in the labor sector. The growth picture, though, is unclear, with the gross domestic product (GDP) contracting in the first quarter amid concerns about the Trump Administration’s tariff policies. Our sense is that a new tax deal on Capitol Hill and increased deregulation in the energy and financial markets will be needed to drive growth over the next 12 months. 

Then there is the recent downgrade to the United States’ debt rating. The credit rating agency Moody’s cited the increase in spending this decade, and the resultant ballooning of the debt level to $36 trillion, as the primary reasons for the downgrade. This news pushed Treasury yields higher and weakened the value of the U.S. dollar against international currencies. The subsequent increase in borrowing costs will make it more expensive to fund investments and capital spending projects. The higher lending rates also are not a good backdrop for home sales and residential and nonresidential building. 

Corporate America performed well in the first quarter. Earnings growth for the S&P 500 companies was averaging nearly 14%, easily exceeding the consensus forecast of a high-single-digit advance. This growth provided support for equities at a time when fiscal and monetary policies remain uncertain. 

Conclusion: With Treasury market yields firming—and the cost of capital rising—a portfolio led by the stocks of high-quality companies with strong cash flows appears warranted. 

Source: ValueLine.com