The Setup & Where to Focus

The S&P 500 fell into correction territory by last Thursday’s close. 

• US large caps posted their fastest 10% drop since the COVID crash precisely five years ago. 

• Equities bounced back for a third straight Friday, though, and the week’s losses were pared to just 2.3% on the SPX. 

• The Magnificent Seven stocks had been the epicenter of the pullback since February 19, but there was a modest tone shift last week. 

• Consumer Discretionary (XLY) and Consumer Staples (XLP) were the worst performers, which is key ahead of this week’s Retail Sales report. 

• Two sectors were positive during March’s second week: Energy (XLE) and Utilities (XLU). 

• Oil continues to hover near multi-year lows and interest rates were about flat, but these value sectors caught a bid nevertheless. 

2025 has featured value over growth in a big way, too. 

• Year-to-date, the Vanguard Value ETF (VTV) is up 1.2%, while the Vanguard Growth ETF (VUG) has lost 8%. 

• That style shift is akin to what macro investors witnessed during the bear market year of 2022. 

• Similar price action unfolded after the March 10, 2000, dot-com bubble peak. 

Last week, we noted weakness in the two largest consumer stocks, Walmart (WMT) and Costco (COST), and those two high-P/E names plunged again, both losing more than 6%.

• The former has given back about 20% in the past four weeks, while the latter nearly reached bear-market territory last Thursday. 

• There remain concerns about the health of the consumer. On its earnings call earlier this month, Costco described households as being “choiceful” with their spending; that has become a meme of sorts among internet trolls. 

• More retailers joined the chorus voicing uncertainty about household spending: Kohl’s (KSS), Dollar General (DG), Delta Airlines (DAL), McDonald’s (MCD), and Macy’s (M), among others, point to consumer angst. 

• It’s a cautious setup into Monday’s February Retail Sales report.

Weakness in tech is ongoing, too. 

• Apple (AAPL) narrowly avoided notching its worst week since March 2020; the world’s most valuable company shed 11%. 

• It, along with the other Mag 7 stocks, are either in or very near correction territory. 

• It’s a big week for NVIDIA (NVDA)--its GTC AI Conference and Game Developers Conference take place this week. 

• CEO Jensen Huang takes the stage Tuesday morning to deliver a keynote address, so Wall Street will surely tune in. 

• The chipmaker holds a financial analyst Q&A session on Wednesday morning, too.

Elsewhere, international stocks outperformed for an eighth straight week. 

• A slight sag in the US Dollar Index (DXY) helped, but it’s more than just a currency story. 

• Europe, namely Germany, continues to ramp up its defense spending plans, which acts as a stimulus for the chronically low-growth continent. 

• German and French yields pushed to their highest marks since 2011 in recent days, and Greek debt was notched higher to investment grade, closing the door on a painful era of austerity and recurring fears of sovereign default. 

• Europe (VGK) gave back 1.2%, outperforming the S&P 500, while the broader Vanguard FTSE All-World ex-US ETF (VEU) was down half a percent for the week. 

• China (FXI) rallied 2%, pushing to its highest weekly close since late 2021 on a total return basis. Year to date, FXI is +24%, among the best country ETFs so far in 2025.

Over in the bond market, the yield on the benchmark 10-year Treasury note was down a basis point to 4.31%. 

• Rates have crept higher from their March lows, and last week’s price action was perhaps concerning considering the generally sanguine set of inflation data received (not to mention the 50% plunge in wholesale egg prices in the last three weeks, which will actually have a material impact on March CPI). 

• Both the February CPI and PPI reports verified to the cool side, better than what economists were expecting. 

• The quirk is that the numbers that feed into the PCE Price Index (the Fed’s preferred inflation gauge) were warm, so Wall Street’s estimates for the end-of-month PCE Price Index report rose. 

The Fed meets this week, and amid heightened uncertainty around fiscal matters, the FOMC will be on hold. 

• Macro onlookers will parse the Fed’s statement, listen intently to Chair Powell’s press conference, and inspect the fresh set of FOMC Summary of Economic Projections (SEP). 

• There remains a 28% implied chance of a May cut with 66 basis points of easing priced into 2025, down from more than three quarter-point cuts assumed 10 days ago.

Despite a deal to avoid a government shutdown, gold prices closed Friday at a new all-time high. 

• The precious metal settled at $2984 after briefly climbing above $3000 for the first time. 

• Silver rallied multiple percentage points last week as that bull market rolls on.

• It's the same story—hefty central bank buying and strong US gold imports have supported the precious metals. Bitcoin, however, dropped about 2.6% as it got caught up in the tech and momentum unwind. 

• The world’s most valuable cryptocurrency fell to its worst level in four months at the week’s nadir but jumped to the close on Friday.

The focus over the coming days will be on retail. The S&P Retail ETF (XRT) touched 52-week lows last week ahead of Monday’s Retail Sales report. Tuesday is all about NVIDIA. Wednesday is Fed Day. Key earnings from multinational bellwethers such as Nike (NKE), FedEx (FDX), and Micron (MU) drive the narrative Thursday, and Friday’s only notable feature is the monthly options expiration.

Weekly Calendar Look Ahead

Monday’s Retail Sales report is a true show-me story—we'll see if the luck of the Irish is with the bulls. But January’s consumer spending numbers were bad—there is no sugar-coating it. A 0.9% sequential slump in consumption was pinned to weather effects and a purse-string pullback after a pronounced spending splurge in Q4 2024. The February tally will be crucial as it comes amid one company after another waving a warning flag about decreasing household spending. We will find out in the pre-market Monday—the consensus calls for a 0.7% rise in the headline increase while the month-on-month core control group, which feeds into the GDP calculation, is expected to climb by 0.5%. This should be a “good news is good news” event (or vice versa). We've seen sellside Q1 GDP estimates come down lately, along with strategists slashing year-end S&P 500 price targets. The February Retail Sales report could exacerbate that or cause a more bullish macro view. After the opening bell, we will get January Business and Retail Inventories, the March NAHB Housing Market Index, and Treasury auctions in the afternoon. 

Tuesday’s macro dataset is notable but won’t be as impactful as what comes in Monday’s premarket. Building Permits and Housing Starts for February, two leading indicators, come at 8:30 a.m. ET, as well as February Import/Export Prices. Prices related to trade will remain in macro analysts’ eyes amid the ongoing tariff war. Johnson Redbook Retail Sales runs strong in the +5% to +7% range, and we’ll get a fresh read later in the morning. February Industrial Production is the biggest data point of the day, and we will see if the 2% YoY pace keeps up. Weaker utility demand could weigh this time. The media’s focus will then quickly pivot to the NVIDIA event.

Wednesday is all about the Fed, but the FOMC will not want to stir the puddin' too much amid so many macro unknowns. We expect no change in the policy rate and for Powell to largely reiterate what he voiced in January. Recent CPI and PPI trends have been encouraging, but consumers’ views of inflation have increased, given the media’s portrayal of tariff impacts. There’s a difference today versus rising household inflation expectations from 2022—last Friday’s University of Michigan Surveys of Consumers report revealed the highest 5–10-year inflation outlook since 1993, but the survey’s respondents also expect a much weaker jobs market, so few folks will be asking for a raise at work. That’s the important inflation gauge in the report, in our view. So, rate cuts are increasingly likely toward the middle and end of the year compared to when the Fed last convened. The FOMC’s SEP will be more of a guesstimate, thanks to the ever-changing tariff landscape. In December, voting members asserted that they wouldn’t forecast impacts from things like tariffs, but that seemed to change according to the minutes from the January Fed gathering. We expect some changes to their outlook in the dot plots in light of tariffs.

Before notable earnings reports after the bell on Thursday, Initial Claims is in focus again—last week’s 220,000 sum was better than expected and certainly does not suggest a current recession. Impacts from DOGE should become more pronounced, and the March payrolls survey is being conducted this week, so recent corporate layoffs could make their way into the survey, but we don’t see a negative monthly job change in the immediate future yet. Philly Fed, Existing Home Sales, and Consumer Confidence hit on the morning of the 20th too. Recall that Existing Home Sales YoY plunged to a record low in January, and the previous Consumer Confidence survey (which has more to do with feelings on the labor market than inflation) was weak.

Friday is light with just the Fed’s Williams speaking in the morning. Earnings from Carnival (CCL) will help spin the consumer narrative.

Fiscal Policy Framework

The Senate passed a stopgap measure to avert a government shutdown last Friday night, ensuring the government is funded through September. Senate Democratic Leader Chuck Schumer balked at passing the legislation initially but ultimately supported the House-approved Continuing Resolution, perhaps fearing what DOGE might do amid a shutdown as Elon Musk’s department would have had carte blanche to slash federal spending further.

Both chambers are in recess this week, and the focus soon shifts to sussing out the House and Senate approaches to budget reconciliation, which is key to President Trump’s agenda. There will be compromises on spending cuts, tax policy, and immigration issues. 

Aside from Capitol Hill drama, the president’s imposition of 25% tariffs on steel and aluminum sparked retaliation from the EU and Canada, with duties potentially getting ratcheted up after the early April reciprocal tariff date. Last week, Trump threatened a 200% tariff on European wine, which domestic distillers were none too pleased about. With all the tariff talk, though, it’s important to point out that the US does hold the cards since we are the primary importer—retaliatory tariffs to Trump’s moves just don’t have as much oomph as our import duties. The endgame of tariffs is lower tariffs across the globe from other nations that currently take advantage of the US, potentially higher US revenue to help offset tax cuts, and reducing the flow of drugs coming into the US.

Treasury Secretary Scott Bessent spoke with CNBC last Thursday. He doubled down on the White House view that the economy must go through a detox period from all the trillions of federal stimulus since the pandemic. A 10% stock market drop is not meaningful in the long run (the average intra-year drop since 1980 is –14.1%), though Trump 2.0 has been among the worst in terms of equity returns to begin a presidential term. Bessent expressed confidence that the right policies would ultimately support real private-sector-led economic growth. BofA pointed out last week that 2024 featured a record 85% of job growth tied to government-related activities, while government spending accounted for 33% of all expenditures. Budget deficits of 6-7% are historic highs outside of crisis periods. Americans understand this can’t keep going on.

Risks and Opportunities

The case for an oversold bounce is strengthening. We’ve seen three consecutive positive Fridays, indicating hints of risk appetite in markets. There have also been three straight dreadful AAII Investor Sentiment reports, suggesting that pessimism is extreme. Since 2005, stocks have typically rallied from mid-March through much of May, so there’s bullish seasonality at play, too. With the S&P 500’s P/E dipping to under 20 for the first time since the yen carry trade unwind event of early August 2024, valuation hawks are less vocal today.

Furthermore, dip-buyers were out there late last week. NVDA got to a sub-market earnings multiple, Alphabet (GOOGL) trades just 16x forward EPS, and AAPL’s P/E has come in multiple figures. Of course, valuations mean little in the short run, but they eventually do matter. Also consider that interest rates are about half a percentage point below their highs from earlier this year, bringing up the equity risk premium.

Consumer stocks could certainly catch a relief rally after this week’s Retail Sales report, and small caps may catch a bid if the Fed’s tone and dot plots are relaxed on Wednesday afternoon. Resilient US economic data would support the falling dollar, which may cause a corrective move in ex-US stocks. The greenback is off to its worst start to a year in decades, so it wouldn’t take much to see a bullish near-term DXY reversal. Either way, volatility is likely to continue—the S&P 500 had its worst day of the year last Monday and its best day of 2025 on Friday.

Widening credit spreads last week is a risk, though, and a further deterioration among corporate bonds would pressure stocks, particularly if the jobs market turns sour. Investors will also have to battle more sellside earnings downgrades and reduced S&P 500 price targets in the headlines.

Quick Hits

• The 5630-5640 SPX range has emerged as resistance—a close above that would be short-term bullish

• 5-year breakeven inflation has dropped to its lowest level since January 21

• The VIX approached 30 last week, not indicative of a washout

• The Mag 7 P/E hit a 2-year low on Thursday

• President McKinley’s 1890 tariffs were popular, but the GOP went on to lose 100 House seats in the ensuing midterms