Stocks Waver as Middle East Risks Resurface and Fed Stays Cautious
Stocks kicked off last week on a strong note, as easing tensions in the Middle East helped push the S&P 500 back toward multi-month highs. Investors were encouraged by Iran’s willingness to re-engage in nuclear talks and by soft economic data that hinted the Federal Reserve might soon consider easing interest rates. By mid-week, however, that momentum faded as geopolitical risks re-emerged and the Federal Reserve struck a more hawkish tone during their June policy meeting, as they implied the likelihood of keeping interest rates higher for longer, to attempt to ensure inflation continues to cool amidst the tariff backdrop.
Economic data continued to reflect a gradually slowing U.S. economy, but not one headed for recession (there is a fine line there…). Retail sales declined slightly, seemingly largely due to lower gas and auto spending, but the underlying figures (excluding certain volatile categories) showed consumer spending remained relatively resilient. That’s important given how critical consumer activity is to overall economic growth.
When all was said and done, the major stock indices closed the week mixed, but relatively flat, with the benchmark S&P 500 closing near the middle of its 3-week trading band. Bonds were not too surprised with any of the happenings last week as yields traded in a tight range while the US dollar got a modest bump from the Fed’s lack of urgency to lower rates. Commodities were a bit more volatile given the escalating Middle East tensions and trade war concerns.
Source: stockcharts.com
The Week Ahead — All eyes on inflation, Fed signals, and global headlines
As we head into the final full week of June, markets will likely remain on edge following this past weekend’s U.S. airstrikes on Iran’s nuclear facilities. While tensions remain high, investors are watching closely to see whether the situation escalates or stabilizes. Any signs of further conflict or retaliation could drive short-term volatility in markets.
On the economic front, the spotlight will be on Friday’s release of the Personal Consumption Expenditures (PCE) inflation report, the Federal Reserve’s preferred inflation gauge. If inflation continues to cool, it could reinforce expectations for interest rate cuts later this year. We may also hear from several Fed officials throughout the week, which could provide more insight into the timing and likelihood of future rate adjustments. After last week’s slightly more cautious (or “hawkish”) tone from the Fed, investors will be keying in on any clues that could shape sentiment.
Beyond inflation and Fed speak, markets will be digesting consumer confidence data and housing numbers, offering additional clues about the strength of the U.S. economy. So far, data has suggested a soft but steady economic environment, not strong enough to delay potential rate cuts, but not weak enough to raise serious recession concerns.
Tying it all together:
Markets are currently walking a fine line. The economic data we’ve seen lately paints a picture of a soft but steady environment as growth is slowing, but not enough to spark recession fears. At the same time, it’s not strong enough to take rate cuts off the table. The Federal Reserve has left interest rates unchanged, but recent comments from officials suggest they remain open to easing policy later this year, especially if inflation continues to trend lower. That outlook has helped support equity markets, which currently remain near multi-month highs.
The labor market continues to be a relatively bright spot. While job growth has cooled somewhat from last year’s pace, unemployment remains low, and wage pressures have moderated without falling off a cliff. This “not too hot, not too cold” dynamic is giving the Fed more flexibility with enough economic strength to avoid a downturn, but not so much that it risks reigniting inflation. Still, the Fed is walking a narrow path, and any surprises in inflation or employment data could shift the outlook quickly.
At the same time, stock market valuations remain elevated, reflecting a high level of investor confidence, or perhaps complacency. Despite ongoing geopolitical risks, tariff and trade war concerns, and an uncertain Fed timeline, sentiment remains relatively optimistic. The market seems to currently be pricing in a near-perfect scenario where inflation continues to fall, the labor market remains strong, the Fed starts cutting rates, and the economy avoids a recession. While that outcome is possible, it leaves little room for error.
Looking ahead, we see both risks and opportunities. On the one hand, volatility could pick up if the current narrative begins to change. On the other hand, a stable labor market and easing inflation pressures could create a supportive environment for well-positioned portfolios. In this kind of landscape, staying diversified, focusing on quality, and remaining flexible and adaptive as the backdrop emerges has consistently served investors well.
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