Week of May 25 2025

The data reveals systemic weakness beneath surface strength indicators, fundamentally reframing our analysis from strength-based disruption to weakness-management acceleration. Apollo's employment data showed Magnificent 7 employment growth collapsed from 45% in 2020 to -1% in 2023 with only 2% recovery in 2024, indicating the administration is controlling timing and direction of contraction already emerging in key sectors rather than engineering crisis from economic strength. LSEG reports Q1 2025 earnings growth falling from 14.0% to estimated 5.8% in Q2 2025, with Energy declining 16.6% (Q2 estimated -25.2%) and Technology moderating from 19.6% to 17.4%. With P/E ratios at 21.7x and earnings yields at 4.61% competing poorly against 5%+ Treasuries, markets appear vulnerable to multiple compression risk.

Michael Hartnett's BofA Flow Show report provided institutional confirmation through the "BBB + BBB ≠ AAA" analysis, highlighting how Treasury yields now trade higher than Microsoft corporate bonds in an unprecedented credit hierarchy inversion. The revelation that US federal deficit has averaged 9% of GDP over the past five years, with Moody's forecasting continued 9% deficits through 2034, validates the mathematical impossibility of current fiscal trajectory. Hartnett's recommendation that "30-year Treasuries above 5% represent great entry-point" creates fascinating tension with our recession-reset framework, suggesting either contrarian opportunity or fundamental misunderstanding of the strategic policy context. The most fascinating divergence emerged through fund manager survey data showing 58% consider "Long Gold" the most crowded trade while "basically no one in the West holds it." This perception versus reality disconnect suggests Western institutional capital remains positioned for the old economic regime while calling the new regime crowded, creating extraordinary contrarian conditions. Combined with record 45% net overvaluation sentiment representing 17-year highs, this positioning mismatch creates forced rotation potential as recession-reset conditions make traditional portfolio construction inadequate.

Market technical analysis reveals multiple critical thresholds being tested simultaneously, with the S&P 500 breaking below its 200-day moving average at 5,979, creating vulnerability to our identified 5,750-5,850 support zone where technical breakdown could accelerate recession-reset timeline. This technical deterioration, combined with the Dollar Index's concerning breakdown to 99.5 and Gold's 3% surge to $3,350, paints a clear picture of market stress. Elevated volatility metrics (VIX at 22.29, +9.91%; VVIX at 109.76, +5.44%) and Friday's failure to hold key technical levels indicate the recession-reset strategy has moved from theory to implementation. This transition has occurred earlier than our July forecast, setting up Week 22 as a crucial test of whether this represents successful economic statecraft or policy overreach beyond the administration's control capabilities.

The left tail risks have crystallized around uncontrolled systemic breakdown scenarios where international coordination fails and currency debasement accelerates beyond policy management capabilities. The possibility that foreign capital withdrawal from Treasury markets intensifies during recession conditions could create simultaneous economic contraction and financing constraints, severely limiting policy flexibility. Additionally, the compression of crisis timeline from July to June may overwhelm diplomatic backstop mechanisms, triggering chaotic rather than controlled international response to US economic adjustment.

Right tail risks center on successful policy moderation achieving strategic objectives through controlled adjustment. Legislative pressures could force scaling back of the House tax bill's deficit impact while extending tariff pause arrangements, creating the fiscal discipline and trade certainty markets desire. The massive institutional underweighting of US equities could drive significant performance-chasing momentum if fundamental pressures ease, while the technical resilience demonstrated suggests that controlled policy implementation could achieve economic rebalancing without triggering systemic consequences.

Week 22 emerges as the critical data validation period, featuring NVIDIA earnings as a key technology sector indicator, Federal Reserve communications through speakers and FOMC Minutes, and crucial economic data including Q1 GDP's expected first contraction in three years and PCE consumer spending metrics. International readings spanning European inflation, German unemployment, and Chinese industrial profits will complete the global picture. This convergence of domestic and international data will determine if the recession-reset strategy achieves controlled adjustment or triggers unmanageable systemic consequences.