S&P500: Defensive Rotation Builds as Inflation, Tariffs Shape Forecast

Markets Stall as Trade Uncertainty and Fed Signals Limit Direction

The S&P 500 ended the week down 0.4%, still roughly 8% off its February peak. Price action reflected indecision, as resilient earnings clashed with geopolitical uncertainty. While growth sectors lagged, a modest bid in cyclicals and defensives suggested investors are balancing risk and caution rather than pulling out altogether.

Trade Negotiations: Progress or Posturing?

• U.S.-China talks resumed in Geneva for the first time in weeks.
• Eight hours of dialogue brought market stability—but no formal progress.
• Trump floated “80% tariffs” on Chinese imports, clouding any optimism.
• A new U.S.-U.K. trade framework hinted at a broader diplomatic shift.

This fragile détente has lowered immediate risk but offers little confidence in a sustained resolution. Traders remain alert to headlines, especially those hinting at tariff escalation or supply chain disruptions.

Fed Holds Rates—But Turns More Cautious

• Third consecutive pause, but language grew more concerned.
• Powell: “Not at all clear” what the Fed’s next move should be.
• The 2s/10s yield curve steepened to 50 bps from 34 bps at year-end.

This curve move suggests markets are pricing in longer-term inflation concerns, not growth optimism. Fixed income desks are watching for potential curve trades if this steepening continues.

Earnings Season Outpaces Expectations

• 90% of S&P 500 companies have reported Q1 results.
• Earnings growth now stands at +13.4%, up from last week’s +12.8%.
• Strength driven by:
  • Supply chain adaptation
  • Consumer cost pass-through
  • Operational efficiency

Earnings strength has supported valuation levels and tempered fears of a sharp equity correction, even as growth sectors deal with multiple compression.

Sector and Asset Moves Worth Tracking

• Defensives steady: Investors continue to seek stability in recession-resistant names like utilities and consumer staples, which offer predictable cash flows and yield.
  • Utilities: +0.6% weekly, +6.8% YTD
  • Staples: -1.0% weekly, +5.3% YTD
• Growth sectors under pressure: Technology and consumer discretionary remain under pressure as rate concerns and trade risks reduce appetite for high-valuation plays.
  • Tech: -0.3% weekly, -8.0% YTD
  • Discretionary: +0.8% weekly, -11.5% YTD
• Rotation watch: Investors are beginning to favor cyclicals like industrials and financials—signaling some belief in economic resilience despite broader uncertainty.
  • Industrials: +1.1% weekly, +3.6% YTD
  • Financials: +0.1% weekly, +3.6% YTD
  • Healthcare: -4.2% weekly, -3.1% YTD (policy-related weakness)

Trading Outlook: Base Case Holds, But Market Remains Data-Dependent

 

The benchmark S&P 500 Index is likely to remain in a choppy range near current levels, with earnings and select cyclicals providing support while macro risks limit upside. The base case remains a slow, earnings-supported grind higher toward 6,000, assuming no sharp deterioration in trade or inflation data. However, near-term upside is capped unless there’s a policy shift from the Fed or concrete progress in trade negotiations.

Key data to watch next week:

• Tuesday: CPI report – any upside surprise could accelerate defensives and boost Treasury yields.
• Thursday: Retail sales – clarity on consumer demand could support cyclicals or expose cracks.

Positioning Considerations:

• Maintain a balance between defensives (utilities, staples) and select cyclicals (industrials, financials).
• Focus on companies with earnings durability and pricing power.
• Continue monitoring gold and Bitcoin as sentiment gauges for inflation and risk appetite.

More Information in our Economic Calendar.