​The Markets
 
Nobody likes to balance the budget.
 
Some pundits said Moody’s rating downgrade of U.S. Treasuries was a nothing burger. After all, the rating change didn’t provide investors with any new information. Moody’s was the third rating service to lower U.S. government bond ratings. S&P Global downgraded U.S. Treasuries in 2011, and Fitch Ratings followed suit in 2023.
 
However, Moody’s decision focused attention on fiscal policy – the way the United States government taxes and spends. In 46 of the past 50 years, the U.S. government has run a deficit, meaning it has spent more than it received from taxes and other sources of revenue, reported FiscalData. Every annual deficit adds to the public debt, which is about $36 trillion, according to the U.S. Debt Clock.
 
The U.S. government finances annual deficits (and the overall debt) by issuing Treasury bills, notes, and bonds. The U.S. promises Treasury buyers (a group that includes individuals, institutions, and governments) that it will pay interest for a specific period and then repay the amount borrowed.
 
When yields increase, so does the amount of interest the United States must pay
 
When government bond buyers have concerns about a government’s fiscal policy, demand for bonds may fall and yields may rise. That happened to U.S. Treasuries last week. The yield on the 30-year U.S. Treasury bond exceeded five percent. “The move above 5 [percent] is striking because that has been the general cap on the 30-year for about two decades,” reported Karishma Vanjani of Barron’s.
 
While higher yields make U.S. Treasuries more attractive to investors, they also may create challenges for economic growth. “As the national debt grows and interest rates rise, the United States will spend more of its budget on the cost of servicing that debt – crowding out opportunities to invest in the economy,” reported The Peter G. Peterson Foundation.
 
The United States is already paying a hefty amount of interest. In 2024, interest payments on the U.S. debt were about $880 billion, more than the U.S. budget for national defense, reported Michael Mackenzie, Liz Capo McCormick, and Ye Xie of Bloomberg.
 
The U.S. isn’t the only country where yields are rising. “From the U.S. to Japan, long-term borrowing costs for the world’s biggest economies have surged as investors question the ability of governments to cover massive budget deficits,” reported Alice Gledhill and Mia Glass of Bloomberg.
 
Over the week, major U.S. stock indexes moved lower amid worries about rising yields and fiscal policy.  Yields on longer maturities of U.S. Treasuries finished the week higher.

Guidance Wealth will be closed Monday, May 26th in Observance of Memorial Day
 
 The Markets
 
Last week, the U.S. stock market showed why it’s a good idea to stay invested through bouts of volatility.
 
Major U.S. stock indices notched sizeable gains as investors celebrated a trade truce with China and better-than-expected inflation numbers, while brushing off a tepid consumer sentiment reading. Here’s what happened:
 
The administration negotiated a trade truce with China. The United States and China agreed to reduce tariffs for 90 days. U.S. tariffs on Chinese imports will fall to 30 percent, while China’s tariffs on U.S. imports will drop to 10 percent. The Wall Street Journal reported, “The agreement lowered tariff levels far more than Wall Street had expected, with one analyst…calling the deal a ‘best-case scenario’ for investors. Goldman Sachs cut its U.S. recession odds to 35 [percent] from 45 [percent] and boosted its growth forecast.”
 
Inflation is closing in on the Federal Reserve’s target. Prices increased by 2.3 percent year over year in April. That put headline inflation just a smidge above the Fed’s two percent target. When the volatile categories of food and energy were excluded, prices were up 2.8 percent year over year. The price of eggs fell by 13 percent month to month leading a decline in the cost of food. Five of six major grocery store food group indexes moved lower in April.
 
Consumers were concerned about inflation. While the Consumer Price Index’s April inflation numbers were encouraging, the inflation numbers in the University of Michigan’s Consumer Sentiment Survey were less so. “Year-ahead inflation expectations surged from 6.5 [percent] last month to 7.3 [percent] this month…Long-run inflation expectations lifted from 4.4 [percent] in April to 4.6 [percent] in May...,” reported Surveys of Consumers Director Joanne Hsu.
 
The U.S. bond market was in a less cheerful mood than the U.S. stock market last week. On Friday, Moody’s lowered the rating for U.S. government bonds on concerns about the deficit (the difference between how much the government spends each year and how much it takes in through taxes) and rising interest costs. The rating service explained:
 
“Successive U.S. administrations and Congress have failed to agree on measures to reverse the trend of large annual fiscal deficits and growing interest costs. We do not believe that material multi-year reductions in mandatory spending and deficits will result from current fiscal proposals under consideration.”
 
Over the week, U.S. stock markets saw solid gains with the Standard & Poor’s 500 Index moving into positive territory for the year to date. U.S. Treasury yields ended the week near where they started.            

​The Markets
 
The winds of uncertainty are blowing, and the waters are choppy.
 
In recent weeks, United States stock markets saw steady gains, recovered from the April downturn as investors set aside uncertainty,” reported Connor Smith of Barron’s.
 
Last week, investors became more cautious as they considered:
 
Trade successes and negotiations. Last week, President Trump announced a trade deal with the United Kingdom and, over the weekend, U.S.-China trade negotiations began. “With talks between the US and China about to start, trillions of dollars are hanging in the balance for American companies. The average member of the [Standard & Poor’s 500 Index] made 6.1 [percent] of its revenue from selling goods in China or to Chinese companies in 2024, according to an analysis from Bloomberg Intelligence’s Gina Martin Adams and Gillian Wolff,” reported Rita Nazareth of Bloomberg. 
 
The outlook for the economy. Last week, the Federal Reserve left rates unchanged. Fed Chair Jerome Powell offered assurances that the economy is solid, the unemployment rate remains low, and inflation is closer to the Fed’s two percent goal but not there yet. In a post meeting press conference, Powell stated,“…we’ve judged that the risks to higher employment and higher inflation have both risen [compared to March]…there’s a great deal of uncertainty...”
 
The outlook for company earnings. Companies in the S&P 500 Index performed well in the first quarter. Overall, the earnings growth rate for companies that have reported so far is 13.4 percent, reported John Butters of Factset. However, as Butters explained, analysts lowered [earnings per share] estimates more than normal for S&P 500 companies because of uncertainty, including a possible economic slowdown or recession.
 
Last week, major U.S. stock indexes finished flat to slightly lower. Yields on many maturities of U.S. Treasuries moved slightly higher over the week.

​The Markets
 
American companies did well in the first quarter.
 
During earnings season, publicly held companies tell investors how they performed during the previous quarter with a particular focus on earnings, which reflect company profits.
 
Currently, we’re more than halfway through earnings season, and companies in the Standard & Poor’s (S&P) 500 Index have reported solid performance results overall. “Both the percentage of S&P 500 companies reporting positive earnings surprises and the magnitude of earnings surprises are above their 10-year averages,” reported John Butters of FactSet.
 
As of last Friday, 72 percent of S&P 500 companies had reported earnings, and the blended earnings growth rate was 12.8 percent. If earnings stay at this level, we will see a second consecutive quarter of double-digit earnings growth for the S&P 500, reported Butters.
 
While first quarter earnings were strong, it’s unclear whether future earnings growth will be as robust. “During the month of April, analysts lowered EPS [earnings-per-share] estimates for the second quarter by a larger margin than average…Analysts also continued to lower EPS estimates for [calendar year] 2025,” reported Butters.
 
The reasons for changing expectations may be related to two words that have been popping up more than usual on earnings calls: “tariffs” and “uncertainty”.
 
“Several companies noted that the uncertainty surrounding tariffs is making businesses hesitant about investment decisions. That means they are delaying stocking up on inventory (or in some cases, overstocking), hiring, and dealmaking,” reported Sabrina Escobar of Barron’s. “All the uncertainty has made it hard for companies to make accurate projections for the year ahead.”
 
Last week, major U.S. stock indexes rose. “As of Friday, the S&P 500 index had risen nine days in a row, its longest streak since 2004. It jumped 10.2% in that span – 2.9% of that in the past week – a remarkable performance given the cloud of uncertainty hanging over American businesses,” reported Avi Salzman of Barron’s.
 
Yields on most maturities of U.S. Treasuries moved higher over the week.