Markets Jump on AI Optimism and Eased Tariffs

 US Weekly Recap: Dow +3.41%, S&P 500 +5.27%, Nasdaq +7.15%, Russell 2000 +4.46%

Friday, May 16, 2025 (GMT)

Overview:

• US equities were higher this week as the S&P 500 and Nasdaq both finished up for a third week in the past four. The S&P 500 is now around 3% off its February record close, and Nasdaq 5% from its December peak. Tariff-exposed stocks, most shorted names, high beta, and retail favorites were among the standouts this week. Big tech was also a leader, notably NVDA +16% and TSLA +17.3%. Other outperformers included apparel, semis (SOX 10.2%), cruise lines, road/rails, machinery, banks, and credit cards. Underperformers included managed care (UNH -23.3%), precious metals miners, grocers, food, telecom, China tech, and exchanges.
• Treasuries were weaker across the curve, with the policy-sensitive 2Y yield near 4% and 10Y just under 4.50%. The dollar index was up 0.8%. Gold was down 4.7%, posting the worst week since Jun-21. Bitcoin futures were up 0.6%. WTI crude was up 1.6%.

• What happened?:
  • Stocks rallied this week with the Monday announcement that the US and China would ease trade tensions the biggest catalyst. The agreement was more aggressive than expected, with the US tariff rate on Chinese goods being cut from 145% to 30%, while the China tariff rate on US goods will come down from 125% to 10%. The reductions are effective for next 90 days as the two sides work on a broader deal. Following the agreement, several Street economists raised their US growth forecasts, cut inflation projections, and see less risk of recession. Investors are also more confident on growth outlook with this week’s de-escalation, with BofA’s latest FMS showing an increase in soft landing expectations from 37% in April to 61% in May.
  • The AI trade was also a big support this week. Nvidia and other AI-linked names rallied on some bullish updates including an expected purchase of $18K GB300 Blackwell units by Saudi Arabia’s new AI company, Humain, while other companies including AMD +13.9%, CSCO +6.4% will supply the new venture. SMCI +44.3% had its second-best week on record after announcing a deal with Saudi Arabia’s DataVolt. This week’s CRWV +56.3% results were mostly well received by analysts, highlighting strong AI demand and new deal momentum, while an SEC filing showed Nvidia holds $900M stake in the company. However, there was some caution around AI capex narrative after Meta reportedly is delaying the release of its “Behemoth” AI LLM over challenges to significantly improve its capabilities (link).
  • Other pieces of the bullish narrative included a thawing IPO market (Bloomberg, FT), dampened volatility with the VIX and MOVE Index both back below pre-Liberation Day levels, macro data resilience, positive earnings trends, and still-depressed positioning and sentiment. Consumer spending remains a support despite the weak April retail sales report. Mastercard and Visa offered upbeat messaging at the JPMorgan conference, BofA noted card spending has moderated but spending momentum remains, while JPMorgan said its early May card spend suggests May retail sales control group sales up 0.5% m/m. In its Q1 results, WMT +1.6% comps also beat and offered a solid Q2 comps forecast.
  • Some of the pieces of the bearish narrative included ongoing tariff uncertainty, particularly given the effective tariff rate of 16% is several times the level from the start of the year and the highest since 1937. There was also a big focus on Walmart comments that shoppers will see tariff-driven price increases this month (CNBC). The reconciliation bill continues to face challenges, with the bill blocked in the House Budget Committee on Friday by fiscal hawks over deficit concerns (NY Times). This week’s saw a hawkish shift in Fed rate cut expectations after the trade de-escalation. Despite cooler inflation trends, Fed officials continued to stress patience to wait to see how trade policy ultimately impacts inflation and the labor market. Markets are now pricing in just ~50 bp of cuts through year-end, down from 68 bp a week ago (and 85 bp two weeks ago).
  • Data this week included April core CPI and PPI both coming in cooler than expected. However, economists said the impact of the trade disruptions since the Trump tariffs were implemented may not be apparent until May. May preliminary Michigan Consumer Sentiment missed and posted the second lowest headline print since 1952 (Jun-22 50.0). However, the survey was period through 13-May, so it included results pre-US and China trade agreement. Year-ahead inflation expectations of 7.3% were the highest since Nov-81, while 5-10Y expectations of 4.6% were the highest since Jan-91. April retail sales were softer than expected, including control group sales posting a surprise decline, though March figures were revised higher.
• Corporate updates:
  • Beyond Walmart, other results the tail end of earnings season included a Cisco beat, with management highlighting AI equipment orders that have already passed their $1T target. DE +7.9% beat though cut guidance on tariff impact. AEO +11% scrapped FY guidance due to macro uncertainty.
  • Outside of earnings, CHTR +6.4% announced it is in agreement to combine with Cox Communications in a $34.5B deal. DKS (3.6%) is in agreement to purchase FL +98.6% in $2.5B deal. Qatar Airways announced a $96B order for BA +5.6% jets, while UAE’s Etihad Airways announced a $14.5B order. NVO (2.1%) announced it is replacing its CEO over its flagging stock price. UnitedHealth Group is reportedly under investigation by the DoJ over Medicare fraud. COIN +33.7% is set to join the S&P 500, though the company also announced a potential $400M cybersecurity incident, and an SEC investigation over possible misstatement of user numbers.
• Week ahead:
  • There are only a handful of S&P 500 earnings next week, including HD, KEYS, and PANW on Tuesday; BBY, LOW, TGT, TJX, and WSM on Wednesday; and ADI, RL, INTU, ROST, and WDAY on Thursday. A very light week of data include S&P Global May flash Manufacturing and Services PMI (22-May; 9:45 ET), April existing home sales (22-May; 10 ET), and April new home sales (23-May; 8:30 ET).
• S&P 500 Sector Performance:
  • Outperformers: Tech +8.14%, Consumer Disc. +7.72%, Communication Services +6.55%, Industrials +5.53%
  • Underperformers: Healthcare +0.26%, Real Estate +0.90%, Consumer Spls. +1.51%, Utilities +2.28%, Materials +2.47%, Energy +3.15%, Financials +3.50%

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