At a glance

Government policy and economic uncertainty continue to weigh on U.S. markets. Consumers may be pulling forward some spending to avoid tariff-related price hikes.

Number of the week:

1.4%

The increase in U.S. retail sales in March.

Term of the week:

Federal Reserve System

The central bank of the United States and arguably the most powerful financial institution in the world. It was founded to provide the country with a flexible and stable monetary and financial system. The Fed is composed of 12 regional Federal Reserve Banks that are each responsible for a specific geographic area of the U.S.

Quote of the week:

President Trump criticized Fed Chairman Jerome Powell for not cutting rates in acknowledgement of recent declines in energy and food prices, which fueled investor concern regarding growing tension between the President and Fed. Most legal scholars do not believe the President holds the power to fire the Fed Chairman, whose term ends May 2026, but concerns around Fed independence have taken center stage. Bond yields reflect investor expectations that the Fed will cut rates three or four times this year.

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

Global economy

Quick take: Tariff concerns accelerated some economic activity, as evidenced by U.S. retail sales and Chinese industrial production. U.S. housing activity remains challenged by elevated mortgage rates and rising construction costs.

Our view: U.S. tariff announcements are dampening global economic growth prospects, with magnitude and duration of tariffs key factors driving near-term prospects. Asian economies, including China, are likely to see the biggest impacts with more modest hits to European growth.

  • Trade remains a key headline issue, but with few updates in the past week. The U.S. is reportedly negotiating with 14 countries to lower reciprocal tariffs. President Trump joined talks with Japan, and more meetings are scheduled later this month as the clock ticks on the President’s 90-day hold on some tariffs. In a meeting with Italy’s Prime Minister Meloni, Trump said he expects a trade deal with the European Union. Trade tensions remain high with China; both the U.S. and China are courting key Asian trading partners such as Vietnam, Malaysia and Cambodia.
  • U.S. retail sales rose 1.4% in March, led by strong sales gains for tariff targets including autos, building materials and consumer electronics. Spending continued its recovery from the January challenges of weather and California wildfires. Control group retail sales, which closely tracks the impact to gross domestic product, rose a healthy 0.9% in the first quarter. However, the data period is prior to the April 2 tariff announcements.
  • The U.S. housing market remains challenged by elevated mortgage rates and now potential rising construction costs from tariffs. Homebuilder sentiment remains low in April, with the National Association of Home Builders Housing Market Index at 40 on rising costs and still-high mortgage rates. Housing starts fell to a 1.3 million seasonally adjusted annual rate, near the lowest levels since the Federal Reserve (Fed) pushed up interest rates. Building permits recovered modestly to a seasonally adjusted annual rate of 1.5 million.
  • China’s pre-April tariff activity was constructive. The government reported year-over-year gross domestic product expanded 5.4% in the first quarter, matching fourth quarter growth. Industrial production growth of 7.7% for the period improved from 6.2%, likely spurred by demand ahead of U.S. tariffs. Retail sales also improved sequentially, rising 5.9% year-over-year after a 4% gain in the fourth quarter. Imports continued to contract, slipping 4.3% year-over-year, likely reflecting concerns about export demand as U.S. tariffs take effect.

Equity markets

Quick take: U.S. equity performance remains subdued amid government policy and economic uncertainty as the first quarter reporting period ramps.

Our view: President Trump’s tariff initiative sparked fears of a global trade war resulting in stagflation, in which inflation inches higher while the pace of economic growth slows. Broad market performance is lagging while earnings projections are trending lower.

  • April and year-to-date performance reflect broad-based weakness, negatively impacted by tariffs and fears of economic slowing. As of Thursday’s close, the popular broad-based U.S. indices are down between 8.0% and 15.7% year-to-date, with nine of 11 sectors negative. Communication Services and Information Technology, two sectors widely regarded as being most negatively impacted by tariffs, are the worst performers, down 19.7% and 18.4%. Energy is the worst-performing sector, off 12.6%, while the small-cap oriented Russell 2000 retreated 6.5%. Energy and smaller company pullbacks are among indicators of looming economic weakness.
  • First quarter corporate results are trending in line with expectations. As of last week’s close, with 12% of S&P 500 companies having released quarterly results, sales and earnings are up 6.3% and 6.8%, respectively, compared to consensus projections at the start of the quarter for increases of 4.2% and 7.0%, according to FactSet. To be determined is whether these early trends are masking looming economic weakness or include demand pull-forward as consumers and businesses order in advance of looming tariffs.
  • Another 61% of S&P 500 companies plan to release results the next two weeks, according to Bloomberg. By then, 73% of companies will have reported results. Greater visibility on the pace of economic growth, including indications of consumer and business spending trends as seen through the lens of company managements across all sectors, will be forthcoming over this two-week period.
  • Earnings projections for 2025 and 2026 are trending lower. Consensus projections currently reflect S&P 500 earnings of approximately $265 per share for 2025, according to Bloomberg, FactSet and S&P Cap IQ, reflecting 8.5% year-over-year growth. We expect consensus projections to trend still lower as companies temper or suspend guidance due to tariff and economic uncertainty.

Bond markets

Quick take: Treasury yields fell last week, driving positive returns across the bond market. Riskier corporate and municipal bonds slightly outperformed Treasuries. Growing tension between the Trump administration and the Fed late last week and over the weekend fueled investor uncertainty.

Our view: Bonds can align portfolio volatility with investor goals leveraging favorable income opportunities across the bond market. Highly taxed investors can benefit from allocations to municipal bonds while non-taxable investors can find attractive yields in corporate bonds, non-agency mortgages and collateralized loan obligations.

  • The Fed continues to wait for greater clarity on trade policy. Last week, Fed Chair Jerome Powell reiterated his view from earlier this month that consumers could face higher prices, and the economy could see higher unemployment from tariffs. He also repeated his message that the Fed is positioned to wait for greater clarity on tariffs and their effects before considering any adjustment to interest rates. President Trump criticized Powell for not cutting rates in acknowledgement of recent declines in energy and food prices, which fueled investor concern regarding growing tension between the President and Fed. Most legal scholars do not believe the President holds the power to fire the Fed Chairman, whose term ends May 2026, but concerns around Fed independence have taken center stage. Bond yields reflect investor expectations that the Fed will cut rates three or four times this year.
  • Last week, the European Central Bank (ECB) lowered its key policy rate to 2.25% from 2.50%. ECB president Christine Lagarde said downside risks to economic growth have increased. Interest rates fell slightly to price in two to three additional rate cuts in 2025. High-quality bonds offer opportunities to lock in compelling income returns ahead of potential interest rate cuts.
  • Valuations across the bond market have returned to more normal ranges, with many bond categories offering substantial extra yields over Treasuries. Corporate bonds yield 1.0% to 3.8% above Treasuries, depending on the credit rating. On a tax-equivalent basis, municipal bonds yield 2.8% to 5.6% above Treasuries. Riskier corporate and municipal bonds can experience price swings but can generate meaningful income returns over the long run. High-quality structured credit categories such as non-agency mortgages and collateralized loan obligation have yields over 1.0% above Treasuries with significant built-in protection from credit losses.

Real assets

Quick take: Real estate investment trusts (REITs) gained 4.0% last week, with declining bond yields supporting REIT valuations. Broad commodity exposures and global infrastructure benefited from an increase in oil and gold prices.

Our view: Most real estate categories exhibit solid fundamentals with stable cash flows. Including real estate in portfolios provides important income that adjusts higher with inflation and economic growth over the long run.

  • REITs returned 4.0% last week. Declining interest rates benefited REITs given the importance of borrowing costs to real estate companies. Lower rates also make REITs a more attractive income source for investors relative to Treasuries. The first quarter earnings report from one of the largest holdings in publicly traded real estate exposures, an operator of logistics facilities and warehouses, reported strong results and reaffirmed its expectations for the remainder of the year. Company management sees global trade uncertainty due to tariffs spurring demand for U.S. storage space as companies stockpile inventory. Most other real estate companies have yet to report first quarter earnings but entered the year with healthy fundamentals.
  • Broad commodity exposures and global infrastructure delivered positive returns last week. Oil prices rose after the Trump administration threatened additional sanctions on Iran’s energy exports, which could decrease global oil supply. Energy companies, which are included in global infrastructure indices, are sensitive to oil prices and benefit from higher prices. Utility providers are also a large component of global infrastructure investments and performed well last week, since they provide steady income that’s more favorable at lower bond yields. Broad commodity exposures returned 1.5%, with oil up 5.2%, precious metals up 2.4% and industrial metals like copper returning 1.7%. Precious metals such as gold continue to benefit from elevated trade and economic uncertainty but are subject to shifts in investor sentiment that can cause price swings.
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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 NAHB/Wells Fargo Housing Market Index is based on a monthly survey of members belonging to the National Association of Home Builders (NAHB). The index is designed to measure sentiment for the U.S. single-family housing market and is a widely watched gauge of the outlook for the U.S. housing sector.

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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.

U.S. Bank and its representatives do not provide tax or legal advice. Your tax and financial situation is unique. You should consult your tax and/or legal advisor for advice and information concerning your particular situation.