Weekly Economic Update: May 20, 2025

Presented by Nicholas Wealth Management

Market wipes out 2025 losses

And just like that, the market is right back to where it was at the start of the year. All it took was the news of a tariff suspension for China for 90 days and that a broader deal will be hammered out in the weeks and months to come.¹

As we ended the prior week, a deal with the United Kingdom was also being worked out, but all eyes were on Treasury Secretary Scott Bessent’s trip to Geneva, Switzerland, for high-stakes trade meetings with China.² We said previously that the talks might be the best chance to strike a significant deal, and right now, it looks like Bessent delivered.

From the market’s perspective, the 90-day pause was enough to wipe out all the losses in 2025.³ Investors who panicked and sold at the April 8 low (as measured by the S&P 500) are down nearly 9% year-to-date, but those who stayed the course are even on the year.

Going forward, it’s impossible to predict what new circumstances we’ll have to deal with and how the market will react. After these two 90-day pauses, we don’t believe we’ll see tariff rates go up unless there’s a total meltdown in talks. The official line will be that deals are being hammered out and we need more time and don’t want to stir things up.

At the end of the day, no one really knows how all this will shake out or whether each twist in the road will be viewed as an opportunity or a crisis. But the lesson here is very clear: It’s important to stay the course. The current sell-off fixed itself in less than six weeks; some people were saying we were going to have a down year and that it would take months or even years to recover. Many of the major Wall Street firms even revised their end-of-year 2025 targets just a few months after making them. Sure, the year hasn’t played out like we originally thought, and it’s anyone’s guess at how the next seven months turn out. But we’re still positive about 2025 and think we’ll see 6,600 on the S&P 500 by the end of the year.

Inflation drops for third straight month

After fears that higher tariffs would drive inflation higher, the consumer price index (CPI) came in below expectations at 2.3%, lower for the third month in a row and down from 3.0% in January.⁴ We are almost to the magic 2% reading the Federal Reserve wants to see.

The 12-month reading dropped to the lowest level since the inflation surge began in early 2021.⁵ Surprisingly, it wasn’t energy that pulled prices down; in fact, energy prices rose 0.7% in April, with higher prices for natural gas and electricity offsetting a decline in gasoline prices. Instead, food and shelter prices came down. Food prices declined 0.1%, as prices at grocery stores dropped the most since 2020, including the biggest drop for egg prices in over 40 years.

Now that we’re truly in the 2%-ish range, the Fed needs to think about lowering rates to take some heat off consumers as they deal with high credit card debts and elevated mortgage rates. Prices are 23.6% higher since the pandemic began in February 2020.⁶ Consumers are continuing to spend, but they’re getting less for their money so they’re putting more on credit. With interest rates as high as they are, we run the risk of the consumer getting overwhelmed and running out of steam.

The producer price index (PPI) came in negative (-0.5%) on Thursday, while expectations were for a 0.3% increase.⁷ PPI currently stands at 2.4%, the lowest it has been since September 2024 and the largest monthly drop since April 2020 when the global economy started a series of shutdowns.

It seems inflation is headed in the right direction and interest rate cuts should be on the horizon. But it doesn’t seem like Fed Chair Jerome Powell is a believer quite yet. In a speech in Washington, D.C., Powell stated, “We may be entering a period of more frequent and potentially more persistent supply shocks, a difficult challenge for the economy and for central banks.”⁸

Powell again seems to be drifting into opinion land, and his comments are a far cry from saying, “We are in a period of declining inflation.” These “supply shocks” have yet to materialize, and the higher prices they are supposed to cause have not materialized either. If prices (inflation) are measurably declining and the economy (negative GDP) is slowing, that should equal lower rates on the horizon. Keeping rates higher will increase the risk of an economic downturn.

Markets are still on board with two to three rate cuts this year, now expected to start in September.⁹ But rhetoric like we heard from Powell last week isn’t helpful and will most certainly rekindle President Donald Trump’s ire. Not only could this further upset markets, but failure to lower rates could cause us to stumble into a recession.

Coming this week

• This week will be all about inflation. The latest readings obviously come too late for the Fed’s rate decision, but if the Consumer Price Index (CPI) declines for the third month in a row, Trump will likely ramp up his rhetoric on rate cuts and criticism of Powell not moving fast enough for his liking.
• This month’s CPI reading (both regular and core) will be the first inflation data to feature tariff pricing embedded in the reading. It will be interesting to see just how much of a decline (if any) we’ll see in inflation and how it could impact our future path for interest rates. Look for those readings to come out on Tuesday.
• Wednesday will feature MBA mortgage applications, while Thursday will include unemployment claims and the Philly Fed. We’ll also get the all-important Producer Price Index (PPI) data.
• Earnings will continue all week. So far, they haven’t been bad.¹² As of May 9, 78% of reporting companies said they had positive earnings per share (EPS) while 62% reported positive revenues. Earnings growth in the S&P 500 for the first quarter is 13.4%.

Sources:

¹ Jamey Keaten, et al. AP. May 12, 2025. “US and China reach a deal to slash sky-high tariffs for now, with a 90-day pause.” https://apnews.com/article/china-us-switzerland-tariffs-negotiations-b3f5174d086e39b2522ab848ddad9372. Accessed May 18, 2025.

² Jesse Pound. CNBC. May 12, 2025. “Treasury Secretary Bessent says he’s likely to meet with China again in ‘next few weeks’ to work on bigger agreement.” https://www.cnbc.com/2025/05/12/treasury-secretary-bessent-says-hes-likely-to-meet-with-china-again-in-next-few-weeks.html. Accessed May 18, 2025.

³ John Towfighi. CNN. May 13, 2025. “Stocks just erased all of this year’s losses as investors welcome trade progress.” https://www.cnn.com/2025/05/13/business/stock-market-dow. Accessed May 18, 2025.

⁴ U.S. Bureau of Labor Statistics. May 13, 2025. “Consumer Price Index Summary.” https://www.bls.gov/news.release/cpi.nr0.htm. Accessed May 18, 2025.

⁵ Trading Economics. “United States Inflation Rate.” https://tradingeconomics.com/united-states/inflation-cpi. Accessed May 18, 2025.

⁶ Victoria Davidenko and Megan Sweitzer. USDA. Feb. 14, 2025. “U.S. food prices rose by 23.6 percent from 2020 to 2024.” https://www.ers.usda.gov/data-products/chart-gallery/chart-detail?chartId=58350. Accessed May 18, 2025.

⁷ U.S. Bureau of Labor Statistics. May 15, 2025. “Producer Price Index News Release summary.” https://www.bls.gov/news.release/ppi.nr0.htm. Accessed May 18, 2025.

⁸ Brian Evans and Sawdah Bhaimiya. CNBC. May 16, 2025. “10-year Treasury yield falls slightly as consumer inflation fears worsen.” https://www.cnbc.com/2025/05/16/us-treasury-yields-investors-weigh-the-state-of-the-us-economy.html. Accessed May 18, 2025.

⁹ CME Group. “FedWatch.” https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html. Accessed May 18, 2025.

¹⁰ John Butters. FactSet. May 16, 2025. “Earnings Insight.” https://advantage.factset.com/hubfs/Website/Resources%20Section/Research%20Desk/Earnings%20Insight/EarningsInsight_051625.pdf. Accessed May 18, 2025.

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