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

By:
James Hyerczyk
Published: May 10, 2025, 21:24 GMT+00:00

Key Points:

  • S&P 500 ends week down 0.4%, stuck in range as strong earnings battle trade and inflation fears.
  • Fed signals rising inflation risk as Powell says outlook is unclear; yield curve steepens to 50 bps.
  • Traders rotate into industrials and financials, while tech stocks remain under pressure from rate fears.
Nasdaq 100 Index, S&P 500 Index, Dow Jones

Markets Stall as Trade Uncertainty and Fed Signals Limit Direction

Weekly S&P 500 Index

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

Weekly S&P 500 Index

 

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.

About the Author

James Hyerczyk is a U.S. based seasoned technical analyst and educator with over 40 years of experience in market analysis and trading, specializing in chart patterns and price movement. He is the author of two books on technical analysis and has a background in both futures and stock markets.

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