Weekly Market Update: May 5, 2025
The U.S. economy contracted in the first quarter. The Commerce Department reported that gross domestic product (GDP) decreased slightly, at an estimated annualized rate of 0.3% during the three-month period. This was the first negative reading in three years. Consumption, which accounts for two-thirds of the nation’s economic output, slowed considerably, as consumers started to show fatigue amid the burgeoning concerns about the Trump Administration’s tariff policy. The stockpiling of goods ahead of potential tariffs and the resultant increase in imports, along with a decline in government spending, also hurt GDP.
The inflation outlook has improved. The Personal Consumption Expenditures (PCE) Price Index, the assessment of inflation most closely watched by the Federal Reserve, and the core PCE, which excludes the food and energy components, were unchanged in March. These were big improvements from the respective 0.3% and 0.5% increases recorded in February. On a 12-month basis, the PCE and core PCE increased 2.3% and 2.6%, respectively, with the headline number running just modestly above the central bank’s target growth rate, and the core PCE figure at its lowest level since March of 2021. The PCE data were encouraging, but investors should note that the readings came prior to the implementation of the Trump tariffs in early April. The more-benign inflation figures could give the Fed more leeway with regard to cutting interest rates if the economy continues to weaken.
Meantime, first-quarter earnings season has been encouraging. True, the pace of profit growth for the S&P 500 companies has moderated from the impressive fourth-quarter rate of 18%. However, with close to 50% of those companies having reported as of press time, average earnings growth for the S&P 500 Index was a still-healthy 10%. That said, many companies have withdrawn near-term guidance until there is more clarity on the Administration’s global trade policies.
Conclusion: Volatility in the stock market remains elevated, as concerns about the global trade tensions offset better-than-expected first-quarter financial results and more-benign inflation data. Given the ongoing macroeconomic uncertainty, including more talk of stagflation, and unclear fiscal and monetary policy courses, we recommend a diversified, conservative-leaning portfolio of high-quality stocks, bonds, and cash-equivalent securities.
Source: ValueLine.com
