Week of May 11 2025

Despite this technical strength, fundamental concerns create an asymmetric risk profile. The IMF forecasts the US facing a -0.9 percentage point growth revision due to tariffs, while productivity decreased 0.8% in Q1 as unit labor costs surged 5.7%, creating stagflationary pressures. Consumer inflation expectations remain stubbornly high at 3.6% for the one-year horizon, constraining Fed policy flexibility. A troubling divergence exists between the Atlanta Fed's GDPNow model showing 2.3% growth and Blue Chip forecaster consensus near zero—highlighting the tension between current data strength and anticipated weakness.

Federal Reserve policy remains a critical uncertainty, with Powell emphasizing "uncertainty" and acknowledging tariffs are "a lot higher than the Fed anticipated." Markets still expect three rate cuts in 2025, with the first now most likely in July (57% probability) and September increasingly likely for a second reduction. However, elevated inflation expectations may constrain Fed flexibility as unit labor costs accelerate.

The positioning landscape reveals extraordinary dynamics explaining the disconnect between price action and fundamentals. CTAs remain net short despite the rally, while fund investors sold into strength. This professional skepticism contrasts dramatically with retail enthusiasm, as Bank of America data revealed an unprecedented 21-week retail buying streak with private clients purchasing a record $2 billion of equities over just four weeks, while institutions dumped ~$2.7 billion—creating a Main Street versus Wall Street divide larger than during the 2022 bear market.

The left tail risk centers on a "stagflationary trap" where tariff-induced inflation constrains the Fed's ability to address growth concerns, with corporate exposure to China ($1.167 trillion in revenue) representing a critical vulnerability. The right tail opportunity emerges from potential diplomatic progress at the weekend's US-China meeting, with Trump suggesting tariffs could be reduced from 145% to 80% depending on negotiation results.

Looking ahead to Week 20, the weekend's US-China meeting represents the central event, with Monday's market reaction providing the first verdict on diplomatic outcomes. Tuesday's CPI report takes on heightened significance given tariff-induced inflation risks, while Wednesday's retail sales will reveal consumer resilience. Corporate earnings from Alibaba, Walmart, and other major firms will provide further insights. Seasonal analysis suggests focusing on healthcare (favorable through July 31) while showing caution toward copper miners, homebuilders, Japanese stocks, and transportation sectors, which are entering historically unfavorable periods.