Greetings from Paris. My wife and I are traveling abroad this week and next, so I'm going to try to keep my reports brief and focus on the key drivers of the market action.

U.S. equity markets finished the week with solid gains, driven by surprisingly resilient economic data and easing concerns over the trade/tariff wars.

The upbeat mood was underpinned by Friday's better-than expected U.S. jobs market report, which showed nonfarm payrolls increased by 139,000 in May. The headline easily surpassed the consensus expectations for 125,000 new jobs (although revisions to the two prior months subtracted 95,000 jobs). The unemployment rate remained steady at 4.2%, suggesting ongoing economic resilience despite tariff-related uncertainties.

In terms of market leadership, Technology continued to come out on top, particularly those companies tied to artificial intelligence. Nvidia (NVDA) rose nearly 3% on June 3, briefly overtaking Microsoft (MSFT) as the largest company on the planet in terms of market cap while Broadcom (AVGO) and Micron Technology (MU) gained over 3% and 4%, respectively. Also of note, Tesla (TSLA) experienced significant volatility, diving mid-week on the back of trade-related concerns and a very public squabble between CEO Elon Musk and President Trump.

Once again, trade developments were the primary influencer of trader sentiment. Optimism grew following progress in U.S.-China trade talks and a 90-day pause on new tariffs on China, alongside delayed 50% tariffs on the European Union until July 9. However, ongoing legal challenges to tariff policies and renewed U.S.-China tensions late in the week caused investors to temper some of their enthusiasm.

The rest of the economic data presented a mixed picture last week. It is worth noting that the Atlanta Fed's GDPNow estimate for Q2 2025 was revised down to 3.8% from 4.6%. And while the decline does represent a moderation of expectations, the overall level suggests that growth remains strong. On the flipside, manufacturing, and services PMIs both came in below the contraction line in May, with readings of 48.5% and 49.9%, respectively. Finally, we should note that rising prices in both reports will likely continue to cause concerns regarding inflationary pressures.

As for the market's life blood, corporate earnings continue to support the bulls. According to reports, 78% of S&P 500 companies have exceeded Q1 earnings expectations, with an average upside surprise of 8.3%, contributing to a 13% earnings growth rate for the quarter.

However, downside revisions to full year 2025 earnings estimates continue due to concerns over the potential impact of tariffs. For example, the consensus estimate for 2025 S&P 500 earnings growth currently stands at +9.76%, which is a far cry from the +16.2% rate that was expected at the beginning of the year. The good news is that the growth rate for 2026 has held steady of late with EPS expected to rise by +15.4% next year.

The problem is that as we discussed last week, forward P/E ratios for the S&P remain in nosebleed territory. If my calculator is correct, the market's P/E using full year 2025 EPS estimates currently stands at 23.42, while the current forward P/E for 2026 is 20.29.

However, in my experience this is NOT (note the use of all caps) a reason to run out and sell stocks. Remember, the stock market is a discounting mechanism of future expectations and valuation measures are historically TERRIBLE indicators to trade on. From my seat, valuations are an indication of risk levels in the market which typically require a trigger to prove dangerous. Yet the forward P/E's ARE a reason to look alive and not fall asleep at the switch in the coming months.

Currently, the market's assumption is that T.A.C.O.'s will remain in favor and the economy won't be hurt much by the endless spate of tariff threats. As such, the bulls tell us that earnings are expected to be okay. And if this is the case, then Forward P/E's won't matter much as time and earnings growth will work their magic.

But... (You knew that was coming, right?) Should those expected earnings fail to materialize, then some "adjustments" to the downside would be warranted. And if the trading trends seen recently continue, then we should be prepared for the market to take the "elevator" down to more reasonable valuation levels. Which definitely won't be any fun!

Looking ahead, the focus will be on upcoming inflation reports (CPI and PPI) and the Federal Reserve's next moves, with consensus anticipating no rate cuts until September.

In sum, while tariff uncertainties persist, the resilient U.S. economy and strong corporate earnings provide a supportive backdrop for equities, though elevated valuations and trade risks warrant vigilance.

Thought for the Day:

"Have the courage to follow your heart and intuition. They somehow already know what you truly want to become." -Steve Jobs

Wishing you green screens and all the best for a great day,

David D. Moenning
Founder, Chief Investment Officer
Heritage Capital Research, a Registered Investment Advisor

Disclosures

At the time of publication, Mr. Moenning held long positions in the following securities mentioned: NVDA, MSFT, AVGO, TSLA - Note that positions may change at any time.

NOT INDIVIDUAL INVESTMENT ADVICE. IMPORTANT FURTHER DISCLOSURES