Market Rally Isn’t Surprising

IN THIS WEEK’S NEWSLETTER:

💸 Tokenized Money Market Funds
📈 S&P 500 And Nasdaq Hit All-Time High
🗓️ Important Next Week
🔥 DORK - Meme Stocks Are Back
💪 Strong Earnings Continue
🌐 US Strikes Major Trade Deals
🔍 Why The Rally Isn’t Surprising

QUOTE OF THE WEEK:

“Word of the year for the first half was uncertainty. The word of the second half of the year, we think, is going to be resiliency. You've had so much going on in markets—deepseek, tariffs, trade issues, debt sustainability—and throughout all of that, we've got an economy that's still growing, and we think 1.6% for the year. We've got an S&P that's at an all-time high. And there's a lot that will be revealed over the next couple of weeks, and that will play out into the second half of the year.” - Greg Calnon, co-head of public investing at Goldman Sachs Asset Management

KEY US ECONOMIC EVENTS NEXT WEEK:

MARKET CLOSE:

WEEKLY MARKET WRAP:

CURATED INSIGHTS & ANALYSIS:

• Why The Market Rally Makes Sense — and Could Persist:

  The recent market rally since Liberation Day, combined with the fact that the tariff impact has not been felt in the economy or inflation, has come as a surprise to many. Fundstar’s Tom Lee mentioned on CNBC this week that many sophisticated institutional investors are still on the sidelines, having missed the rally, and are waiting to get in. The media narrative on tariffs was definitely over the top, and I explain this as one of the key factors why many are baffled by the market comeback with other facts below:
  
  Mainstream Media Exaggeration:

  • Late Realization of No Recession: Late last year, there was considerable discussion about inflation resurging and a recession being a strong possibility, particularly after the Sahm indicator issued a warning. In this newsletter, I conducted a detailed analysis of why inflation is expected to continue declining, citing strong macroeconomic data that does not indicate any signs of inflation. As facts are always supreme, recession fears proved wrong, and now markets have generally accepted it

    

  • Tariff Panic: There was a lot of this, for lack of a better word, after liberation day. I explained this in detail on April 6th, but below are key factors why the impact is not substantial due to tariffs -

    • Approximately 70-80% of the US GDP or economy is service-based, which was largely immune to the tariff war.

    • Of the remaining, goods imports are only 10-14% of the GDP. Tariffs directly impact only this part of the economy.

    • Additionally, the tariff impact is divided among the foreign exporter, the US importer, and the US consumer. The first two take the most pain, trying to avoid any negative effect on the consumer and their business top line. So there will be a marginal slowdown in earnings, but it’s offset by the weak dollar.

  
  Weak Dollar To Help Earnings:
  Thanks to fears of a tariff war and fiscal concerns that have persisted since the start of this year, the US Dollar has depreciated against all major currencies. The Dollar Index is down ~10%. However, the Dollar index is heavily skewed, with the Euro being the largest component, accounting for ~58% of the weight. Hence, I believe it’s better to examine the major currencies separately.

  
  Below you can see the four major currencies. The EUR/USD graph is upward sloping, as it represents the EUR/USD pair (and not USD/EUR), but it still indicates weakness in the dollar. So, whether you look at the Dollar index (DXY) or compare major currencies individually, one thing is clear: the Dollar has weakened this year.

  

  Source: Wall Street Journal

  Over the long term, it’s detrimental to inflation, but more on that later. The main thing to note here is that, according to Apollo, 41% of the S&P 500 companies’ revenues are international. This means that the dollar weakness will help company earnings and be reflected in the ongoing earnings season. Even though the Dollar index is down 10%, we can’t assume it will have a linear impact on earnings, as it’s a gradual move, as seen in graphs. So conservatively, if this 41% international revenue is up by 5-6% thanks to the weak dollar, overall, it's a 2-3% benefit for the overall S&P 500 earnings (not revenue, but earnings, as it’s straight up additional income due to the weak dollar). This will help S&P 500 companies exceed expectations in the coming weeks, driving the markets higher. The only exception to this will be low-margin retail businesses, which are most affected by the tariffs and dollar weakness, as these negatively impact importers.

  
  Google Results Proof:
  The primary reason for US exceptionalism and stock market performance is the concentration of Mag 7 or tech sector outperformance, driven by innovation. The earnings of Google's parent company, Alphabet, this week provided a glimpse of what to expect from the earnings of other major tech companies starting next week. I have no doubt that most major tech companies will beat estimates and can fuel further upside, as these companies are still not overvalued and are showing strong earnings growth.
  
  PCE Inflation Forecast:
  Next week, the Fed’s preferred inflation gauge, the PCE, will be released. The Cleveland Fed forecast indicates that the Core PCE will be ~2.7% and the headline number will be ~2.46%. If inflation remains under 3%, the market will consider it a positive development and also spur rate cut expectations, which is beneficial for the markets. Most institutional forecasts prior to Liberation Day were for a tariff rate of approximately 10%, with inflation expected to be around 3% by the end of 2025. The new effective tariff rate is ~10% and is expected to stay in that range. With this, the PCE is expected to jump to 3% in the coming months. However, the US has seen double-digit inflation not so long ago, and 3% will not be a panic situation or deter investors. Also, even the Fed believes the tariff is a one-time shock, so this slightly higher inflation will dissipate over time. In short, inflation is not making a significant comeback.
  
  Tariff Revenue:

  The US is expected to earn an additional $400 billion due to tariffs, which should help alleviate the fiscal deficit or stimulate growth if the money is effectively put to work.

  
  Conclusion:
  Earnings are the most significant factor that drives stock prices. Most recent earnings have exceeded expectations. The FOMC is expected to reduce the rates in the September meeting, and overall, the US monetary policy remains restrictive. There is a decent scope for rates to further decrease in the next year, which should continue to push markets higher.

  At the end of the day, only facts matter and not the narrative. Narrative can cause short-term movements. If you read this newsletter, you don’t have to rely on nonsense like TACO (Trump Always Chickens Out). People who missed the rally are attributing it now to Trump somehow backing out, and hence, the markets rallied. However, that’s not true. Yes, Trump made some concessions, but ultimately, the effective tariff rate increased from 2% to 10% or more — that’s a significant rise and an additional $400 billion in revenue per year. These concessions were expected, and you would have understood why if you read this newsletter 😃 
  In the short run, there can always be a pullback or profit booking. However, I won’t be surprised if stocks continue to rise from here for quite some time.

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This newsletter's content is for informational and educational purposes only and should not be considered trading or investment recommendations. All the opinions in this newsletter are personal and do not belong to any organization.