Good Morning Investors,
Friday's pre-market trading reflects a market in transition as we close out a volatile month of May. After Thursday's whipsawed trading on tariff developments and strong earnings from tech leaders, investors are parsing mixed signals heading into the final session. The legal uncertainty around President Trump's trade policies continues to create volatility, even as underlying economic data and corporate performance paint a more optimistic picture.
We're seeing a classic end-of-month dynamic playing out: strong monthly performance for major indices despite persistent headline risks. The S&P 500 and Nasdaq are on track for their strongest monthly gains since November 2023, while the Dow is also poised to post solid gains. This resilience in the face of trade uncertainty suggests markets are beginning to look through policy noise toward underlying fundamentals.
The question now is whether this momentum can carry into June—or if the combination of legal volatility and elevated valuations in megacap tech will result in the pullback I've been flagging since late April. With the Nasdaq 100 still sitting well above its 200-day moving average (currently near 494 on QQQ), any hiccup in growth expectations or inflation data could drive a retest of that level in the coming weeks.
Before the Bell
Stock futures are trading mixed this morning as investors weigh conflicting developments from the past 24 hours. S&P 500 futures are down 0.2%, while Nasdaq futures have slipped 0.3%. Dow futures are holding near flat, down just 0.1%.
The cautious tone comes despite an appeals court temporarily reinstating President Trump's tariffs after a lower court had blocked them Wednesday. This legal back-and-forth is creating uncertainty about the ultimate fate of the administration's trade policies, keeping investors on edge even as broader market trends remain positive.
Today's key data release will be the Personal Consumption Expenditures (PCE) index for April, the Federal Reserve's preferred inflation gauge. Any signs that tariffs are beginning to impact consumer prices will be closely watched, though most economists don't expect significant effects until later readings.
Tariff Uncertainty Continues: Legal Battles Create Market Volatility
The most significant development overnight was a federal appeals court's decision to temporarily reinstate President Trump's sweeping tariffs, just one day after a trade court had blocked them as exceeding presidential authority. This ongoing uncertainty explains why markets are struggling to find direction despite otherwise positive fundamentals.
The Court of International Trade's Wednesday ruling had initially blocked the tariffs, finding that Trump had overstepped his authority. But Thursday's appeals court stay means the duties remain in effect until at least next week, when further legal proceedings will determine their fate.
Adding to the complexity, reports suggest the Trump administration is now considering using the Trade Act of 1974 to implement tariffs of up to 15% for 150 days, providing an alternative legal pathway if current challenges fail. Treasury Secretary Scott Bessent's comments that U.S.-China trade talks "are a bit stalled" further dampened hopes for a quick resolution.
This ongoing uncertainty explains why markets are struggling to find direction despite otherwise positive fundamentals.
Nvidia Delivers Despite China Headwinds
The biggest individual earnings story continues to be Nvidia's quarterly results, which demonstrated remarkable resilience despite significant regulatory challenges. The company's ability to deliver strong growth while absorbing an $8 billion hit from China export restrictions shows the underlying strength of AI infrastructure demand.
What's particularly encouraging for the broader tech sector is how hyperscale customers continue ramping their AI investments. The combination of strong demand, pricing power, and technological leadership positions Nvidia well, even as geopolitical tensions create near-term challenges.
Jensen Huang's commentary about manufacturing AI chips in the U.S. while framing export controls as ultimately counterproductive suggests the company is positioning itself strategically for whatever trade environment emerges.
Corporate Earnings Paint Mixed Picture
Beyond Nvidia, this week's earnings results have shown the complex ways tariff uncertainty is affecting different sectors:
Retail Under Pressure: Gap warned that tariffs would reduce annual operating income by $250-300 million, though the company expects to mitigate more than half of that impact through supply chain adjustments. Costco also noted it had pulled forward some imports to avoid potential tariff impacts.
Tech Infrastructure Thriving: Dell raised its annual profit forecast on growing demand for AI-powered servers, generating $12.1 billion in AI orders in just one quarter. This strength in enterprise technology spending suggests business investment remains robust despite macro uncertainties.
Automotive Recovery: Microchip Technology raised guidance based on faster than expected recovery in automotive chip demand, with bookings in May tracking to be the highest in two years.
Mixed Consumer Signals: While Ulta Beauty raised its forecast on strong cosmetics demand, American Eagle Outfitters posted wider losses amid sluggish apparel demand and consumer financial constraints.
The Bigger Picture: Strong Month Despite Volatility
Despite all the headline uncertainty, May is shaping up as a remarkably strong month for equities. The S&P 500 has gained over 6%, while the Nasdaq has surged 10%. This performance suggests that while investors are concerned about policy risks, they're not willing to bet against the underlying economic momentum.
The strength is particularly notable given the concerns about tariff-driven inflation and potential Federal Reserve policy responses. Markets appear to be pricing in a scenario where either tariffs are ultimately limited in scope, or the economy proves resilient enough to absorb their impact.
What's Next: PCE Data and Month-End Dynamics
Today's Personal Consumption Expenditures data will provide crucial insight into whether inflationary pressures are building. The core PCE index is expected to show a 0.1% monthly increase, with the year-over-year rate potentially declining from 2.6% to 2.5%.
Any surprise to the upside could reinforce Federal Reserve concerns about tariff-driven inflation and limit the central bank's flexibility on interest rates. Conversely, benign inflation data might provide markets additional confidence that policy tightening won't be necessary.
There's also a technical factor at play: Goldman Sachs estimates that U.S. pension funds may need to sell $20 billion in equities as part of month-end rebalancing, following stocks' strong outperformance versus bonds in May.
Closing Thoughts
This morning's mixed futures action perfectly captures the market's current state: optimistic about underlying fundamentals but cautious about policy developments. The legal battles around tariffs will likely continue creating volatility in the near term, but the broader economic picture remains supportive.
What's particularly encouraging is corporate America's demonstrated ability to adapt and thrive despite policy uncertainty. From Nvidia's strategic positioning around China restrictions to retailers' supply chain adjustments for potential tariffs, companies are showing the operational flexibility that has historically allowed markets to navigate political volatility.
The key insight remains that while policy uncertainty creates near-term noise, the underlying drivers of market performance—corporate earnings, economic growth, and technological innovation—continue to trend positively. May's strong performance despite constant tariff headlines demonstrates this dynamic at work.
Still, my view from late April holds: a pullback in megacap tech remains possible, particularly as QQQ sits well above its long term trendline. The 200-day moving average near 494 represents a logical test if growth narratives falter or inflation surprises to the upside. That's not a prediction—it's a risk worth respecting.
Big picture, this is still a constructive market environment. But with summer trading ahead and the legal outlook on tariffs still murky, we should expect episodic drawdowns alongside longer term strength. Let the story develop, and be ready to act when price meets conviction.
Dan Sheehan
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This newsletter is for informational purposes only and should not be considered investment advice. Please consult with your financial advisor about your specific situation.