Good Morning Investors,
Tuesday delivered exactly what markets needed—a strong rally that broke a four-day losing streak. The S&P 500 surged 2.1%, the Dow climbed 1.8%, and the Nasdaq jumped 2.5% in what felt like a collective exhale after days of tariff uncertainty. The catalyst was clear: President Trump's decision to delay the 50% EU tariff until July 9, giving markets breathing room they desperately craved.
This week remains pivotal. With Nvidia reporting after tonight's close and key Fed minutes due this afternoon, we're entering a period where the market could either build momentum or stumble if guidance disappoints. The tone has shifted from panic to cautious optimism, but volatility remains the dominant theme.
Before the Bell
Futures are showing modest strength this morning. S&P 500 futures are up 0.1%, Nasdaq 100 futures have gained 0.2%, while Dow futures trade flat. It's a measured response after Tuesday's explosive rally, suggesting investors are taking a wait-and-see approach ahead of tonight's Nvidia earnings.
The EU tariff reprieve has clearly helped sentiment. What started as Trump saying he was "not looking for a deal" on Friday quickly evolved into extended negotiations through July 9. Markets are learning to navigate this pattern of escalation followed by tactical retreat.
Bond Market Pressure
Treasury yields remain a persistent headwind that's not getting enough attention. The 30-year yield hit 5.15% last week—its highest level since 2007—while the 10-year pushed above 4.6%. These aren't temporary spikes; they reflect genuine concerns about fiscal sustainability as Trump's tax legislation could add $4 trillion to the national debt over the next decade.
The bond market is demanding higher compensation for mounting deficits, and this is creating real economic friction. Mortgage rates and corporate borrowing costs are tied to these longer-term yields, not the Fed's benchmark rate. Even if the Fed cuts later this year, the impact could be muted if long-term yields stay elevated.
Tariff Dynamics
We're fully back in familiar territory—the classic Trump negotiation playbook of maximum pressure followed by strategic retreat. The 50% EU tariff threat spooked markets Friday, but the July 9 extension bought time for both sides to find middle ground.
The pattern is becoming predictable: threaten massive tariffs, watch markets react, then use that volatility as leverage in negotiations. Consumer confidence data released Tuesday showed this strategy is working—the index jumped from 85.7 to 98 in May, well above the 87.1 economists expected. Americans are responding quickly to any signs of trade de-escalation.
However, structural issues remain. As one economist noted, there's still no meaningful rebound in US-China trade volumes despite the earlier truce, suggesting companies are either waiting for better terms or that existing tariffs remain too restrictive.
Nvidia: The Market's Moment of Truth
Tonight's Nvidia earnings represent the quarter's most important data point. Wall Street expects earnings of 93 cents per share with revenue climbing to around $43.3 billion—a massive jump that would represent roughly 66% year-over-year growth. But this isn't just about beating numbers anymore.
The real focus is on China restrictions and their impact. CEO Jensen Huang recently called the chip ban "deeply painful," estimating potential losses of up to $15 billion in sales. The company faces a $5.5 billion inventory write-down on H20 chips that were designed for export but rendered obsolete by new restrictions. This could pressure gross margins down to around 58%.
Options markets are pricing in a 7% move in either direction for Nvidia shares, and given the stock's 5.5% weighting in the S&P 500, that implies broader market volatility. Despite beating estimates in recent quarters, Nvidia shares haven't rallied on earnings over the past year—including a 9% drop in February despite strong results.
The key will be guidance and commentary around Blackwell demand. Management needs to convince investors that AI infrastructure spending remains robust despite geopolitical headwinds and that alternative markets can offset China restrictions.
Fed Minutes in Focus
This afternoon's release of the May FOMC meeting minutes will provide insight into how policymakers are thinking about tariffs and inflation. There's a "healthy debate" within the Fed about whether tariff-driven price increases should be viewed as temporary or persistent.
Minneapolis Fed President Neel Kashkari has made it clear he wants to keep rates steady "until there is more clarity on the path for tariffs and their impact on prices." Others, like Fed Governor Chris Waller, believe tariff inflation could be temporary and shouldn't derail the easing cycle.
With core PCE data due Friday, this week will help clarify whether the Fed can proceed with expected rate cuts or if trade policy uncertainty forces them to remain on hold longer.
Market Positioning
The technical picture remains challenging. Major indices are still working to break free from recent trading ranges, and the bond market headwinds create a difficult backdrop for multiple expansion. However, Tuesday's rally showed there's significant buying interest when trade tensions ease.
Key levels to watch include the S&P 500's approach toward 6,000—it's currently just 1.3% away after Tuesday's gains. The speed of the consumer confidence rebound suggests sentiment can shift quickly when policy uncertainty diminishes.
Closing Thoughts
Tuesday’s rally was a reminder of how quickly sentiment can turn when policy risk backs off. But this remains a market navigating complexity—not collapsing under it. The pullback earlier this month wasn’t about deteriorating fundamentals; it was about yields, tariffs, and a sudden shortage of clarity.
Tonight’s Nvidia print is unlikely to change the long-term AI trajectory, even if the short-term reaction is noisy. I continue to see Nvidia as a foundational piece of the AI infrastructure trade, with sovereign demand, hyperscaler capex, and ecosystem expansion all reinforcing its strategic moat. But that doesn’t mean earnings day is a moment to chase.
The broader setup still favours staying constructive, not defensive. Breadth is improving. Consumer sentiment is rebounding. And with Friday’s PCE print and more bond auctions ahead, the macro narrative is still evolving.
This isn’t a time for hero trades. It’s a time to stay aligned with structural trends—and let volatility do the work for you.
Dan Sheehan
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This newsletter is for informational purposes only and should not be considered as investment advice. Please consult with your financial advisor about your specific situation.