At a glance

Airstrikes between Israel and Iran drove oil prices higher and equity prices lower last week. Slowing U.S. inflation helped pressure U.S. Treasury yields.

Number of the week:

2.4%

The increase in the Consumer Price Index in May compared to a year earlier.

Term of the week:

Commodities

Raw materials used to manufacture consumer products, including energy, metals and agricultural goods. They are inputs in the production of other goods and services, rather than finished goods sold to consumers.

Quote of the week:

The Consumer Price Index showed little evidence of tariff-induced price increases so far. Vehicle prices fell and price changes across other goods exposed to tariffs such as clothing, appliances, furniture and technology commodities were mixed. Despite the encouraging inflation reports with slowing services inflation contributing to price stability, Bloomberg’s consensus forecast indicates economists anticipate a reacceleration in consumer price inflation to 3.4% year-over-year by the end of 2025.

― Bill Merz, CFA, Senior Vice President, Head of Capital Markets Research and Portfolio Construction, U.S. Bank

Global economy

Quick take: Encouraging inflation reports last week indicate tariffs have yet to result in material price increases for consumers. High frequency data on credit and debit card transactions highlight healthy consumer spending activity while trade negotiations continue. Upcoming data on retail sales provides important context on consumer spending while housing starts and building permits offer insight into the housing market amid high mortgage rates.

  • Slowing services inflation highlighted subdued price pressures in May. Last week’s Consumer Price Index (CPI) and Producer Price Index releases rose less than Bloomberg consensus economists’ inflation forecast, increasing 2.4% and 2.6% year-over-year, respectively. The CPI showed little evidence of tariff-induced price increases so far. Vehicle prices fell and price changes across other goods exposed to tariffs such as clothing, appliances, furniture and technology commodities were mixed. Despite the encouraging inflation reports with slowing services inflation contributing to price stability, Bloomberg’s consensus forecast indicates economists anticipate a reacceleration in consumer price inflation to 3.4% year-over-year by the end of 2025.
  • The U.S. and China agreed on a trade framework to be approved by Presidents Trump and Xi. American and Chinese officials reaffirmed tariff agreements reached last month with additional efforts to ease trade restrictions, including resuming Chinese exports of rare earth minerals to the U.S. The U.S. retained a 55% tariff on Chinese imports and China retained a 10% tariff on the U.S. The Group of Seven summit in Canada this week may provide additional opportunities for the U.S. to negotiate trade agreements with other countries. To date, high frequency data have shown little evidence of tariffs materially disrupting supply chains. Freight shipments from China to the U.S. are near pre-tariff norms and shipping activity at the Port of Los Angeles remains steady.
  • The Congressional Budget Office expects Congress needs to resolve the debt ceiling by August or September. The U.S. Treasury has been spending down its cash balance to continue funding the government while Congress deliberates the One Big Beautiful Bill Act that includes legislation to raise the debt ceiling. Quarterly tax collections this week and ongoing tariff duties provide revenue for the government that impacts when the debt ceiling constrains government spending. Regardless, Congress’s August recess creates a deadline to pass the tax bill before the break.

Equity markets

Quick take: Equities traded mixed last week following Israel’s air strikes on Iran, with rising Middle East tensions driving oil prices higher. Year-to-date, foreign equities continue to outpace domestic stocks. At present, inflation, interest rates and earnings continue to support higher-trending equity prices. Geopolitics and second quarter corporate reports beginning in mid-July are among catalysts likely to impact investor sentiment and equity prices.

  • Equities traded mixed last week across major geographic regions. Including dividends, the S&P 500, technology-oriented NASDAQ Composite and small cap-oriented Russell 2000 retreated between 0.5% and 2.0% on the heels of rising Middle East tensions. The international developed-oriented MSCI EAFE and MSCI Emerging Markets indices were fractionally higher, posting modest gains of 0.7% and 0.9%, respectively.
  • Broad-market momentum remains strong year-to-date, despite last week’s drawdown. The S&P 500 is up 1.6% for the year, a modest 2.8% shy of all-time highs of 6.144 reached on February 19. The S&P 500 closed last Friday at 5,976, roughly 3.5% above its 100-day moving average of 5,773 and 2.9% above its 200-day moving average of 5,806, plausible levels of technical support.
  • Consensus S&P 500 earnings projections for 2025 and 2026 remain stable. Analysts currently project earnings of $263 for 2025 and $297 for 2026, according to Bloomberg, FactSet and S&P Cap IQ, representing 7.5% and 13.0% year-over-year growth, respectively. The S&P 500 ended last week trading at 24.4 times 2024 actual results and 22.7 times 2025 estimates. Valuations can stay elevated for a prolonged period, absent inflation and rising interest rates. We expect analysts will adjust 2025 and 2026 earnings projections modestly lower following second quarter reports, beginning in mid-July, when analysts hope a greater portion of S&P 500 companies offer forward guidance, and pending greater clarity around the magnitude of tariffs.
  • The early read on second quarter S&P 500 sales and earnings reflect modest growth. Analysts currently project second quarter year-over-year sales and earnings to advance 4.0% and 4.5% respectively, according to FactSet. This compares to respective first quarter sales and earnings growth of 4.6% and 12.7%. The second quarter reporting period unofficially begins during the week of July 14 with reports from several money center banks.

Bond markets

Quick take: Treasury yields fell in response to slower-than-expected inflation data last week, fueling increased investor expectations for Federal Reserve (Fed) rate cuts later this year. Multiple central banks meet this week, including the Fed. Investors will focus on the Fed’s forward guidance considering bond yields price in a near certainty that the Fed will hold rates steady this week.

  • Investors expect the Fed to cut rates later this year. A resilient economy, sticky inflation and tariff-related uncertainty pushed back investors’ expectations for the next Fed interest rate cut to September or October. Fed members will update their growth, inflation and policy rate projections this week, providing important forward guidance amid trade policy uncertainty. In addition to slower U.S. inflation data last week, unemployment claims are slightly elevated, which could motivate the Fed to cut in support of steady labor market conditions once they gain clarity on any inflationary impact of tariffs.
  • Investors expect the Bank of England (BoE) and Bank of Japan (BoJ) to hold rates steady this week. The BoE cut rates by 0.25% in May citing growth risks from trade policy but is expected to hold rates steady this week as it takes a “careful and gradual approach” to monetary policy. Similarly, the BoJ is also expected to hold rates steady considering ongoing uncertainty surrounding the economic outlook. Unlike most other central banks, the BoJ has raised rates this year, and investors view another hike later in the year as a possibility.
  • Treasury yields declined and bond prices rose last week, supporting positive investor returns. Longer-maturity bonds, which are more sensitive to yield changes, performed the best. Despite concerns regarding elevated government spending, the 10-year and 30-year Treasury bond auctions last week were met with solid investor demand.
  • Lower Treasury yields helped propel corporate and municipal bond prices higher. The extra yield on high yield corporate bonds versus Treasuries increased slightly on renewed geopolitical tensions in the Middle East. Corporate bonds are slightly expensive compared to the past, suggesting investors remain confident in issuers’ ability to make debt payments.

Real assets

Quick take: Real estate investment trust (REIT) prices fell slightly last week. Renewed geopolitical tensions in the Middle East caused a broad decline in asset prices on Friday, including REITs, but commodity prices rose, with energy-related prices rising the most due to concerns over oil supply impacts.

  • REITs returned -0.2% last week. REITs started the week positive, but Friday’s 0.9% loss dragged the sector into negative territory. REIT categories most sensitive to economic growth saw some of the largest declines, with hotel and resort REITs falling 2.9%. Categories that typically generate consistent cash flows less sensitive to the economy, like telecommunication, fared the best. Year-to-date, REITs have returned nearly 1.6%, slightly lower than broader equity indices. Broad REIT exposures currently generate around 5.1% in net operating income, a measure of properties’ profitability, presenting meaningful income opportunities for investors. High-quality bond yields ranging from 4.0% to 5.0% are a competitive income source relative to REITs, but rental income on real estate that grows alongside broader economic growth and inflation can provide important diversification benefits for portfolios.
  • Broad commodity exposures gained on the surge in oil prices. Oil prices rose nearly 12% last week after Israel launched airstrikes on Iranian targets, stoking concerns of potential supply disruptions. Oil prices declined earlier in the year in anticipation of weaker demand and rising supply but recovered in May as trade tensions eased and the outlook for summer demand improved. Gold, which some investors view as a safe haven asset, also gained on Friday and ended the week up nearly 4%.
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Based on our strategic approach to creating diversified portfolios, guidelines are in place concerning the construction of portfolios and how investments should be allocated to specific asset classes based on client goals, objectives and tolerance for risk. Not all recommended asset classes will be suitable for every portfolio. Diversification and asset allocation do not guarantee returns or protect against losses.

Past performance is no guarantee of future results. All performance data, while obtained from sources deemed to be reliable, are not guaranteed for accuracy. Indexes shown are unmanaged and are not available for direct investment. The S&P 500 Index consists of 500 widely traded stocks that are considered to represent the performance of the U.S. stock market in general. The NASDAQ Composite Index is a market-capitalization weighted average of roughly 5,000 stocks that are electronically traded in the NASDAQ market. The Russell 2000 Index measures the performance of the 2,000 smallest companies in the Russell 3000 Index and is representative of the U.S. small capitalization securities market. The MSCI EAFE Index includes approximately 1,000 companies representing the stock markets of 21 countries in Europe, Australasia and the Far East (EAFE). The MSCI Emerging Markets Index is designed to measure equity market performance in global emerging markets. The Consumer Price Index is a measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food and medical care. It is one of the most frequently used statistics for identifying periods of inflation or deflation. The Producer Price Index (PPI) is a family of indexes that measures the average change over time in selling prices received by domestic producers of goods and services. PPIs measure price change from the perspective of the seller.

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This information represents the opinion of U.S. Bank Wealth Management. The views are subject to change at any time based on market or other conditions and are current as of the date indicated on the materials. This is not intended to be a forecast of future events or guarantee of future results. It is not intended to provide specific advice or to be construed as an offering of securities or recommendation to invest. Not for use as a primary basis of investment decisions. Not to be construed to meet the needs of any particular investor. Not a representation or solicitation or an offer to sell/buy any security. Investors should consult with their investment professional for advice concerning their particular situation. The factual information provided has been obtained from sources believed to be reliable but is not guaranteed as to accuracy or completeness. U.S. Bank is not affiliated or associated with any organizations mentioned.

Based on our strategic approach to creating diversified portfolios, guidelines are in place concerning the construction of portfolios and how investments should be allocated to specific asset classes based on client goals, objectives and tolerance for risk. Not all recommended asset classes will be suitable for every portfolio.

Diversification and asset allocation do not guarantee returns or protect against losses.

Past performance is no guarantee of future results. All performance data, while obtained from sources deemed to be reliable, are not guaranteed for accuracy.

Equity securities are subject to stock market fluctuations that occur in response to economic and business developments.

International investing involves special risks, including foreign taxation, currency risks, risks associated with possible differences in financial standards and other risks associated with future political and economic developments. 

Investing in emerging markets may involve greater risks than investing in more developed countries. In addition, concentration of investments in a single region may result in greater volatility.

Investments in fixed income securities are subject to various risks, including changes in interest rates, credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications and other factors. Investment in fixed income securities typically decrease in value when interest rates rise. This risk is usually greater for longer-term securities. Investments in lower-rated and non-rated securities present a greater risk of loss to principal and interest than higher-rated securities.

Investments in high yield bonds offer the potential for high current income and attractive total return, but involve certain risks. Changes in economic conditions or other circumstances may adversely affect a bond issuer’s ability to make principal and interest payments.

The municipal bond market is volatile and can be significantly affected by adverse tax, legislative or political changes and the financial condition of the issues of municipal securities. Interest rate increases can cause the price of a bond to decrease. Income on municipal bonds is free from federal taxes, but may be subject to the federal alternative minimum tax (AMT), state and local taxes.

There are special risks associated with investments in real assets such as commodities and real estate securities. For commodities, risks may include market price fluctuations, regulatory changes, interest rate changes, credit risk, economic changes and the impact of adverse political or financial factors. Investments in real estate securities can be subject to fluctuations in the value of the underlying properties, the effect of economic conditions on real estate values, changes in interest rates and risks related to renting properties (such as rental defaults).

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The information provided represents the opinion of U.S. Bank and is not intended to be a forecast of future events or guarantee of future results. It is not intended to provide specific investment advice and should not be construed as an offering of securities or recommendation to invest. Not for use as a primary basis of investment decisions. Not to be construed to meet the needs of any particular investor. Not a representation or solicitation or an offer to sell/buy any security. Investors should consult with their investment professional for advice concerning their particular situation.

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