Good Morning Investors,
The bull market continues to demonstrate remarkable resilience, with stocks finishing last week near record highs despite another escalation in trade tensions. The S&P 500 ($SPY ( ▲ 1.54% )) closed Friday at 6,259, down just 0.33 percent from Thursday's record high. This reflects the underlying strength of corporate fundamentals and the market's growing ability to look through policy noise.
Opening Bell: Tariff Escalation Meets Market Maturity
U.S. equity futures slid early Monday after President Trump's tariff escalation, but pared losses as investors bet on future negotiations and solid earnings. Dow futures fell 140 points, or 0.3 percent. S&P 500 and Nasdaq ($QQQ ( ▲ 1.54% )) futures also dropped 0.3 percent each. Dow ($DIA ( ▲ 1.94% )) futures were down more than 200 points overnight before rebounding.
Over the weekend, President Trump announced 30 percent tariffs on goods from the European Union and Mexico, effective August 1. The President warned that any retaliation would trigger additional increases, with retaliatory rates being added to the baseline 30 percent U.S. levy. This follows similar announcements to 23 other trading partners, with rates ranging from 20 percent to 50 percent.
What's striking is the market's muted response. Unlike the "Liberation Day" announcement in April that triggered days of frenzied selling, this latest round barely disrupted market rhythm. Investors have learned to distinguish between tariff bark and bite, recognizing that actual implementation often differs materially from initial threats.
Strategic Framework: The Anatomy of a Durable Rally
Economic Foundation: Late-Cycle Strength Without Recession Signals
The U.S. economy remains in a late-cycle phase characterized by 1.5 to 2 percent growth, which is modest but sustainable. There are no broad deterioration signals suggesting imminent recession, despite elevated probabilities now around 40 percent.
The economy shows a pronounced "K-shaped" dynamic. Affluent households, buoyed by surging asset values in equities and real estate, continue robust spending and investment, driving corporate profit margins to record levels. Meanwhile, lower-income segments are retrenching, cutting discretionary spending.
Deficit-financed fiscal stimulus continues to cushion against slowdowns, while household balance sheets remain fundamentally sound.
Corporate Exceptionalism: The S&P 500's Structural Evolution
Today's S&P 500 is dominated by businesses with superior earnings profiles and reduced economic cycle sensitivity. The concentration in technology-adjacent giants provides natural tariff protection. Communication Services and Technology sectors are expected to grow earnings by 29.5 percent and 16.6 percent respectively in Q2. Only Utilities, benefiting from AI-driven power demand, is expected to match or exceed overall index growth.
The AI Imperative: More Than a Theme, It's Economic Infrastructure
AI continues to drive the current market phase, transforming not just technology but also industrials, financials, and utilities. This is unfolding even in a restrictive interest rate environment. Should the Fed cut rates, which I maintain is likely in September, the hurdle rate for AI investments decreases, accelerating adoption.
Policy Analysis: Navigating the Tariff Maze
Despite aggressive announcements, average tariff rates have stabilized around 18 percent. Legal challenges and market pushback mean actual implementation consistently falls short. Bank of America estimates the latest announcements could push effective rates to around 14 percent, but bilateral negotiations could soften this impact.
EU and South Korea are already working on deals with the U.S. to soften the blow from these tariffs, reflecting the potential for negotiated outcomes.
Federal Reserve Positioning: Patience as Strategy
Tuesday's CPI release will be pivotal. Expectations call for core CPI to rise 0.28 percent month-over-month in June, up from 0.13 percent in May. The Fed is likely to stay patient while assessing tariff impacts, with a path toward cuts still intact for September. Using European inflation methodology, U.S. core inflation would sit closer to 1.9 percent, suggesting underlying price stability.
Earnings Season: The Moment of Truth
All major U.S. banks report this week. Investors will focus on M&A momentum, Wells Fargo’s regulatory relief, and credit quality trends. On the tech side, Netflix, ASML, and Taiwan Semiconductor will test the strength of AI demand. Expected Q2 earnings growth for the S&P 500 stands at 5 percent, potentially reaching 10 percent if recent beat trends hold.
The top contributors to earnings growth remain AI-driven:
MAG7: 16 percent
Communications Services excluding MAG7: 15 percent
Technology excluding MAG7: 14 percent
Crypto Momentum: Mainstream Integration Accelerates
A series of crypto-friendly bills are set to advance through Congress this week, potentially pushing digital assets further into mainstream finance. Bitcoin’s ($BTC.X ( ▲ 2.38% )) breakout above $118,000 last week, fueled by $2.4 billion in short liquidations, signals strong risk appetite, and then this morning we hit my near term target of $120,000. I still see potential to reach $150,000 by year-end.
Ethereum’s ($ETH.X ( ▲ 9.44% )) recent breakout sets the stage for a move toward $4,000, with stronger immediate momentum than Bitcoin. The move toward stablecoin development on Ethereum’s network strengthens its medium-term outlook. Solana remains a laggard but a break above $185 could reignite momentum.
Technical and Sentiment Analysis: The Contrarian Setup
This remains a fundamentally unloved rally. Indicators include $7 trillion in sidelined cash, increased hedge fund short positions, and widespread investor skepticism. The setup for a squeeze and further upside is strong.
Investment Positioning: Strategic Allocation Framework
Core Holdings
MAG7 and AI Infrastructure: Supported by strong earnings and continued AI monetization.
Bitcoin: Technical breakout confirms structural upside.
Sector Rotation Opportunities
Industrials: Supported by AI infrastructure spending and manufacturing incentives.
Financials: Positioned for rate cuts and stronger lending spreads.
Small-caps: Poised to benefit from domestic policy focus and lower rates.
Key Risk Considerations
Inflation persistence forcing a more hawkish Fed
Escalating tariffs beyond expectations
AI-related earnings disappointments
Geopolitical developments
The Path to 6,500: Fundamental Drivers
I maintain a year-end S&P 500 target of 6,500. This is supported by accelerating earnings, policy clarity, liquidity dynamics, and AI-driven sector leadership. The bull market remains historically young at 31 months, with strong structural support.
In Other News
Trump's spending bill may raise costs for insurers and shrink Medicaid coverage.
Mark Zuckerberg will testify in an $8 billion privacy trial starting this week.
Elon Musk stated he does not support a merger between Tesla and xAI, despite speculation.
Meta and Apple could face new broad EU taxes, though a targeted digital services tax has been dropped.
Waters Corp will merge with Becton Dickinson’s diagnostics business in a $17.5 billion deal.
Firefly Aerospace, McGraw Hill, and NIQ Global prepare IPOs amid improving market sentiment.
Analyst Recommendations
Ally Financial: RBC raises target to $45 from $40.
American Express: RBC raises target to $360 from $310.
Bread Financial: RBC raises target to $65 from $52.
Capital One: RBC raises target to $240 from $190.
Delta Air Lines: Jefferies raises target to $62 from $56.
Final Thoughts: Discipline in Opportunity
This market continues to climb a wall of worry, but beneath the surface lies robust earnings growth and technological transformation. Focus on fundamentals over headlines. This bull market is structurally strong, supported by transformative technology and corporate adaptability. As we enter earnings season and face pivotal economic data, separating signal from noise will define success.
Stay disciplined and data-driven. The best opportunities often appear when uncertainty is highest.
Dan Sheehan
This newsletter is for informational purposes only and should not be considered investment advice. Please consult your financial advisor about your specific situation.