Executive Summary
The 30-year Treasury bond yield rose above 5.00% on an intra-day basis 5/19.25 – which is close to 2023’s cyclical high, triggered, in part, by a weak Treasury bond auction, which signaled the supply of Treasuries due to increasing budget deficits was weighing on the market. The bond market may be starting to anticipate a similar concern ahead (thanks to Moody’s recent downgrade), along with somewhat hotter inflation numbers as communicated last week by Walmart on their earnings call.
Overall, the bond market is not subscribing to the disinflation trends with only 2 cuts now priced in for 2025 starting in September. There is an argument that tariff inflation may be less than markets think, as trade deals may get announced with a 10% baseline plus certain sector tariffs, which are in part absorbed by companies through margin compression (e.g., corporate tax). Services/energy inflation are nearly 2/3rds of the overall CPI index making it a larger driver of disinflation than goods (where tariffs are charged). Crude oil is down ~15% year to date. We believe the pressure on company margins will likely limit hiring and wage increases while increasing employee job security concerns, which may dampen aggregate demand and inflation expectations.
Equities
The S&P 500 returned +5.3% and erased its losses for the year, driven by an unexpected, albeit temporary, truce in the trade war with China over the previous weekend. Inflation data showed limited impacts of tariffs to date, while cooling economic data boosted bets that the Fed would cut rates later this year to prevent a recession. All sectors in the S&P500 had positive returns, led by technology (+8.2%), consumer discretionary (+7.8%), and communication services (+6.6%). EAFE markets returned +1.3%, with gains in the U.K. (+1.7%%) and Europe (+1.3%) dragged down by Japan (-0.5%). EM markets returned +3.1%, with India (+4.8%) rebounding after a military truce with neighbor Pakistan.
From a valuation perspective, only U.S. large caps trade above +1 standard deviation based on historical forward P/E ratios with the S&P 500 at +1.9. The NASDAQ is at +0.9. For the next 12 months, EPS growth for S&P 500 is expected to be 7.3% (vs. 6.9% annualized over the last 20 years). For the next 12 months, EPS growth for NASDAQ is expected to be 15.0% (vs. 10.7% annualized over the last 20 years). Equities across market caps in the U.S., and in non-U.S. developed and emerging markets, trade at or above their 20-year averages based on forward P/E ratios.
Fixed Income
Investment grade fixed income sectors had mixed returns as yields rose across the curve. Municipals returned +0.2%, U.S. AGG returned -0.2% and U.S. IG returned -0.2%. HY bond returned +0.9% as spreads compressed 38bps while bank loans returned +0.6%. EM debt returned +1.1% as the U.S. dollar rose 0.8%.
Rates
Rates rose across the curve as investors priced in lower odds of recession even as they expected the Fed to remain in standby mode. The recession-watch 3M-10Y spread widened 8bps to remain positive at +13. The 2Y-10Y spread compressed 1bp to +47. Rates rose in other developed markets as well. The BTP-Bund spread is at 1.01%. 5-year breakeven inflation expectations rose 3bps to 2.44% (vs. a low of 1.88% on Sept 10); 10-year breakeven inflation expectations rose 4bps to 2.35% (vs. a recent low of 2.03% on Sept 10); the 10Y real yield rose 5bps to 2.11%. The market now expects two cuts in 2025 vs the Fed’s guidance of two cuts. At year-end 2025, the market expects the Fed Funds rate to be 3.83% vs. the Fed’s guidance of 3.75%-4.00%.
Currencies/Commodities
The dollar index rose 0.8%. The commodities complex rose 0.4%, while energy prices rose 1.2% for the week. Brent prices rose 2.3% to $65/bbl. U.S. natural gas prices fell 12.1%, while European gas rose 0.5%.
Market monitors
Volatility fell for equities and for bonds (VIX = 17, MOVE = 97); the 10-year average for each is VIX=18, MOVE = 78. Market sentiment (at midweek) improved slightly from -22 to -9.
Weekly Commentary
Investment Commentary – May 19, 2025
Stuart Katz
Executive Summary
The 30-year Treasury bond yield rose above 5.00% on an intra-day basis 5/19.25 – which is close to 2023’s cyclical high, triggered, in part, by a weak Treasury bond auction, which signaled the supply of Treasuries due to increasing budget deficits was weighing on the market. The bond market may be starting to anticipate a similar concern ahead (thanks to Moody’s recent downgrade), along with somewhat hotter inflation numbers as communicated last week by Walmart on their earnings call.
Overall, the bond market is not subscribing to the disinflation trends with only 2 cuts now priced in for 2025 starting in September. There is an argument that tariff inflation may be less than markets think, as trade deals may get announced with a 10% baseline plus certain sector tariffs, which are in part absorbed by companies through margin compression (e.g., corporate tax). Services/energy inflation are nearly 2/3rds of the overall CPI index making it a larger driver of disinflation than goods (where tariffs are charged). Crude oil is down ~15% year to date. We believe the pressure on company margins will likely limit hiring and wage increases while increasing employee job security concerns, which may dampen aggregate demand and inflation expectations.
Equities
The S&P 500 returned +5.3% and erased its losses for the year, driven by an unexpected, albeit temporary, truce in the trade war with China over the previous weekend. Inflation data showed limited impacts of tariffs to date, while cooling economic data boosted bets that the Fed would cut rates later this year to prevent a recession. All sectors in the S&P500 had positive returns, led by technology (+8.2%), consumer discretionary (+7.8%), and communication services (+6.6%). EAFE markets returned +1.3%, with gains in the U.K. (+1.7%%) and Europe (+1.3%) dragged down by Japan (-0.5%). EM markets returned +3.1%, with India (+4.8%) rebounding after a military truce with neighbor Pakistan.
From a valuation perspective, only U.S. large caps trade above +1 standard deviation based on historical forward P/E ratios with the S&P 500 at +1.9. The NASDAQ is at +0.9. For the next 12 months, EPS growth for S&P 500 is expected to be 7.3% (vs. 6.9% annualized over the last 20 years). For the next 12 months, EPS growth for NASDAQ is expected to be 15.0% (vs. 10.7% annualized over the last 20 years). Equities across market caps in the U.S., and in non-U.S. developed and emerging markets, trade at or above their 20-year averages based on forward P/E ratios.
Fixed Income
Investment grade fixed income sectors had mixed returns as yields rose across the curve. Municipals returned +0.2%, U.S. AGG returned -0.2% and U.S. IG returned -0.2%. HY bond returned +0.9% as spreads compressed 38bps while bank loans returned +0.6%. EM debt returned +1.1% as the U.S. dollar rose 0.8%.
Rates
Rates rose across the curve as investors priced in lower odds of recession even as they expected the Fed to remain in standby mode. The recession-watch 3M-10Y spread widened 8bps to remain positive at +13. The 2Y-10Y spread compressed 1bp to +47. Rates rose in other developed markets as well. The BTP-Bund spread is at 1.01%. 5-year breakeven inflation expectations rose 3bps to 2.44% (vs. a low of 1.88% on Sept 10); 10-year breakeven inflation expectations rose 4bps to 2.35% (vs. a recent low of 2.03% on Sept 10); the 10Y real yield rose 5bps to 2.11%. The market now expects two cuts in 2025 vs the Fed’s guidance of two cuts. At year-end 2025, the market expects the Fed Funds rate to be 3.83% vs. the Fed’s guidance of 3.75%-4.00%.
Currencies/Commodities
The dollar index rose 0.8%. The commodities complex rose 0.4%, while energy prices rose 1.2% for the week. Brent prices rose 2.3% to $65/bbl. U.S. natural gas prices fell 12.1%, while European gas rose 0.5%.
Market monitors
Volatility fell for equities and for bonds (VIX = 17, MOVE = 97); the 10-year average for each is VIX=18, MOVE = 78. Market sentiment (at midweek) improved slightly from -22 to -9.
Disclosure and Source
Investment Commentary Sources: Bloomberg. Investment advisory services offered through Robertson Stephens Wealth Management, LLC (“Robertson Stephens”), an SEC-registered investment advisor. Registration does not imply any specific level of skill or training and does not constitute an endorsement of the firm by the Commission. This material is for general informational purposes only and should not be construed as investment, tax or legal advice. It does not constitute a recommendation or offer to buy or sell any security, has not been tailored to the needs of any specific investor, and should not provide the basis for any investment decision. Please consult with your Advisor prior to making any Investment decisions. The information contained herein was carefully compiled from sources believed to be reliable, but Robertson Stephens cannot guarantee its accuracy or completeness. Information, views and opinions are current as of the date of this presentation, are based on the information available at the time, and are subject to change based on market and other conditions. Robertson Stephens assumes no duty to update this information. Unless otherwise noted, any individual opinions presented are those of the author and not necessarily those of Robertson Stephens. Indices are unmanaged and reflect the reinvestment of all income or dividends but do not reflect the deduction of any fees or expenses which would reduce returns. Past performance does not guarantee future results. Forward-looking performance targets or estimates are not guaranteed and may not be achieved. Investing entails risks, including possible loss of principal. Alternative investments are only available to qualified investors and are not suitable for all investors. Alternative investments include risks such as illiquidity, long time horizons, reduced transparency, and significant loss of principal. This material is an investment advisory publication intended for investment advisory clients and prospective clients only. Robertson Stephens only transacts business in states in which it is properly registered or is excluded or exempted from registration. A copy of Robertson Stephens’ current written disclosure brochure filed with the SEC which discusses, among other things, Robertson Stephens’ business practices, services and fees, is available through the SEC’s website at: www.adviserinfo.sec.gov. © 2025 Robertson Stephens Wealth Management, LLC. All rights reserved. Robertson Stephens is a registered trademark of Robertson Stephens Wealth Management, LLC in the United States and elsewhere.
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