Market Update – May 19th, 2025

Financial Markets

Stocks turned positive year-to-date last week, supported by improving inflation data and limited evidence that tariffs are putting upward pressure on prices. Despite this positive week, Moody’s downgraded the U.S. credit rating by one notch on Friday, citing concerns over long-term fiscal stability. As of Friday, May 16th, the Nasdaq Composite gained 7.15%, the S&P 500 was up 5.27%, and the Dow Jones Industrial Average rose 3.41%, while the Bloomberg Barclays U.S. Aggregate Bond Index was down 0.10%.

Market News

April CPI

April’s Consumer Price Index came in better than expected, offering a positive surprise amid growing concerns about the inflationary impact of tariffs. Headline inflation rose 0.2% month over month and 2.3% year over year, the lowest annual reading since 2021, while core inflation increased 2.8% year over year. The report suggests inflationary pressures remain contained for now, even as potential tariff impacts loom.

Energy prices declined 3.7% over the past year, though there was significant divergence within the category; gasoline fell 11.8%, while utility gas service rose 15.7%. Shelter inflation remained sticky at 4% annually, and grocery prices declined 0.4% in April, largely due to normalizing egg prices, but were still up 2% year over year. Apparel prices were down 0.7% from a year ago, an interesting dynamic given the sector’s heavy reliance on imports and exposure to tariffs. Overall, April’s inflation data was a better-than-expected result, even as economists remain watchful for the potential inflationary impact of new tariffs.

April PPI

Alongside the CPI, the Producer Price Index showed an encouraging decline in wholesale prices for April, with headline PPI falling 0.5% and core PPI down 0.1% for the month. On a year-over-year basis, producer prices were up 2.4%, while core prices increased 2.9%.

The monthly decline was led by a 0.7% drop in service prices, driven largely by falling trade service margins, suggesting that wholesalers and retailers may be absorbing higher input costs, likely tied to tariffs. Food prices also fell 1% month over month, while energy declined 0.4%. Altogether, April’s PPI report adds to evidence that inflation pressures remain contained, and that tariffs have not yet had a significant impact on prices.

Survey of Professional Forecasters

The Federal Reserve Bank of Philadelphia’s quarterly Survey of Professional Forecasters, also known as the Anxious Index, revealed a more pessimistic outlook for the U.S. economy compared to three months ago.

The probability of a real GDP contraction in Q2 2025 jumped to 37.0%, more than double the prior estimate of 15.4%. This increase was likely influenced by the actual negative GDP growth recorded in the first quarter, which has heightened concerns about continued weakness, although it was heavily swayed by a surge in imports which are a subtraction from GDP. Historically, this probability tends to rise above 40% ahead of a recession, so creeping close to that threshold is a bearish signal.

The updated forecast also reflected a downgrade in expected GDP growth for 2025, now projected at 1.4%, down from 2.4% in February’s projections. Labor market expectations softened as well, with the unemployment rate forecast to average 4.3% in 2025 and 4.5% in 2026, both modestly higher than previous estimates. Forecasts for job creation also edged lower, with average monthly payroll growth now expected to reach 140,900, down from 145,000. This latest survey underscores growing uncertainty among economists about the trajectory of the U.S. economy.

Consumer Sentiment

The University of Michigan’s Consumer Sentiment Index declined 2.7% in May and is now 26.5% lower than a year ago, reflecting growing unease among households. While most components of the index were little changed from April, perceptions of current personal finances fell sharply, down nearly 10%, as consumers reported anticipating weaker future incomes.

Concerns over tariffs also rose notably, with nearly three-quarters of respondents mentioning them, up from 60% in April. Year-ahead inflation expectations also surged, climbing from 6.5% to 7.3%. Overall, consumer sentiment remains a weaker spot in the economic data, as reflected in this month’s results.

Summary

Equities rose last week, supported by better-than-expected inflation data and limited signs of tariff-driven price pressures. April’s CPI and PPI reports showed inflation remains contained, helping lift market sentiment. However, consumer sentiment weakened further, and economists downgraded growth expectations and raised recession odds, reflecting rising uncertainty despite the week’s positive market tone.

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