Wentz Weekly: Stocks Rally to New Highs

Wentz Weekly Insights
Stocks Rally to New Highs, Valuations Back Near Cycle Highs

The US stock market rallied again last week to end the week with a new intraday and closing high, the first time since mid-February. It wasn’t just the S&P 500 that hit a new high, after a 3.44% gain on the week, but the Nasdaq that did as well, after rising 4.25% on the week. The Dow index is just 3% away from new highs while the Russell 2000 (an index of small sized US companies) has been the significant underperformer, still 12% away from new highs.

Markets were on a solid start to the week after a ceasefire agreement was made between Israel and Iran which followed the US airstrikes on Iranian nuclear facilities.

Sentiment improved further after Fed Governor Waller voiced his support for a rate cut at the Fed’s next meeting in July, one of the first to directly support such move. Markets are now pricing in about a one-fifth chance of a rate cut in July, up from a roughly one-tenth probability a week prior. One trend we have seen at the Fed this year is more division in regards to the impact of tariffs on inflation and the path of inflation. We don’t see a rate cut in July, but it is looking much more likely the first cut of the year will be the following meeting in September, pending incoming economic data.

Toward the end of the week stocks experienced another boost after the US and China both confirmed they finalized the trade framework that was agreed on when both sides met in May. China will increase its delivery of rare earth minerals to the US while the US will remove a series of restrictive measures it took against China. Trump officials also said there were imminent plans to reach agreements with several other major trading partners.

Although the market closed at new highs, it brings back some of the same questions we had during the previous time highs were set (February), particularly given the higher degree of uncertainty now versus four months ago.

The first comes down to valuation with stocks back to being historically overvalued. The S&P 500 is currently trading at a 22 times price-to-earnings ratio (P/E – one of the most common valuation metrics for stocks that tells how much investors are willing to pay for a company’s, or the market’s, earnings). This is up from an 18x P/E in April when stocks bottomed. For historical perspective, the average P/E ratio is 17.5x. The chart below illustrates the P/E level of the market over the last 20 years (as of June 25, 2025).

As Barron’s notes, an increase of four points in the P/E ratio (higher valuations) is extremely rare and is a four standard deviation event. When it has happened, the following 12-month returns are mixed; they were up double-digits when it occurred in 2009 and 2020, shortly after the two recessions that preceded. But in 2001 when it occurred, later in the cycle, the markets were down over double-digits.

While earnings estimates have come down for 2025, investors could be looking ahead to 2026 when earnings are expected to accelerate to a 13% growth rate. This would be an acceleration from the current estimates of a 7.5% growth rate for 2025, which has steadily been reduced through the first six months of the year – at the beginning of the year the 2025 earnings growth estimate was closer to 13%.

The other observation made with the recent rally is it has been very narrow, technology, and large cap driven, similar to the market environment from 2023-2024. The Magnificent 7 companies (Nvidia, Microsoft, Apple, Google/Alphabet, Meta/Facebook, Amazon, and Tesla) are up roughly 50% since the April lows, double the increase of the S&P 500 index of about 25%. At the same time, the equally-weighted S&P 500 is up about 19%.

Markets are trading on a lot of optimism and confidence. There is a greater chance Congress will pass the reconciliation bill that includes permanent tax cuts, an increasing chance the US will reach more trade deals and receive more favorable trade terms, data has been following a trend that would allow the Fed to resume rate cuts this year, and the economy is still growing. However, it is likely all of these must hold true for markets to continue the higher valuations.

Outside of the wave of labor market data, it will be a quieter week with markets closing early Thursday at 1:00pm and closing all day Friday for Independence Day.

Week in Review:
US stocks had a solid week with upside driven by large cap, technology, and a more narrow group of names (like the Magnificent 7). The S&P 500 and Nasdaq closed the week at new all-time highs with the major indices finishing as follows: Nasdaq +4.25%, Dow +3.82%, S&P 500 +3.44%, and Russell 2000 +3.00%. The volatility index dropped 21% to the lowest since pre-Liberation Day as several concerns diminished. The (possible?) resolution to the Israel-Iran conflict and dovish comments from several Fed members led to lower Treasury yields with the 2-year yield falling 17 basis points to 3.75% while the 10-year yield fell 9 basis points to 4.29%. The dollar index continued its decline, dropping another 1.33%. Gold fell 2.80%. Bitcoin rallied with risk assets, up 3.66%. Finally, after a big increase due to the Middle East conflict, oil retreated to pre-conflict levels after a 12.56% weekly decline.

Recent Economic Data

• Personal Income & Outlays: There were a couple disappointments in the personal income and outlays data:
  • Personal income declined 0.4% in the month of May versus the expectation of a 0.3% increase. this does come after a streak of strong monthly income gains. However, it was not centered in one of the most important categories wages and salaries – this category saw a 0.4% increase (and is up 3.9% over the past year). The decline was due to a 50% drop in farm income and 7.3% drop in social security benefit payments due to decrease in payments associated with the Social Security Fairness Act (there was a large increase in May, the decline is a return to “normal” levels).
  • Consumer spending declined 0.1% versus the expectation for a 0.2% increase and is the biggest decline since February 2021. Spending on goods fell 0.8%, and up 3.0% over the past year, while spending on services increased just 0.1%, up 5.3% over the past year.
  • The personal savings rate was 4.5%, in the middle of the range it has been in since last year, but still below the historical average of about 7.5%.
  • The personal consumption expenditure price index (inflation index) increased 0.1% in the month (matching the prior month’s increase) and is up 2.3% over the past year, accelerating from 2.1% in April. Both were as expected. The Core PCE price index, which excludes food and energy categories, rose slightly more than expected with the monthly increase at 0.2% and the annual increase at 2.7%, up from 2.5% from April.
• Existing Home Sales: Existing home sales for May were basically unchanged versus the expectation for a slight decline, coming off the slowest sales pace since 2009 in April. Compared to a year ago sales of existing homes are down 0.7%. Existing homes sales measure closings, so these numbers reflect houses signed in March and April when interest rates were slightly lower. Inventory of existing homes have made big improvements the past year – the number of existing homes for sale rose 6.2% to 1.54 million in May and is up over 20% from a year ago. The median sales price was $422,800, up 1.3% from a year ago, the smallest annual gain since early 2023. First time home buyers made up just 30% of sales, down from 31% a year ago and still well below the historical average of 40%.
• New Home Sales: The number of new home sales in May was at a seasonally adjusted annualized rate of 623,000, a decline of 13.7% from the rate in April, and well below expectations. New home sales have declined 6.3% over the past year. Like existing homes, supply of new homes has steadily improved over the past year with the number of new homes for sale at the end of May at 507,000 which is about 8% higher from a year ago. Most of the supply increase is from homes for sale where construction has not started yet. The median home price increased 3% year-over-year to $426,600.
• Case Shiller Home Price Index: The Case Shiller home price index reported home prices saw a 0.4% decline in April (on a seasonally adjusted basis; but 0.6% before seasonal adjustments). Over the past year home prices are up 2.7%, slowing from the 3.4% annual gain in March, for the slowest annual increase in over two years. There has been a big geographical rotation when it comes to home prices over the past year or two – the “pandemic darlings” like San Francisco and other Western and Southern cities are seeing low/no price gains while older cities like rustbelt and Northeast cities are seeing the highest home price gains. The cities with the highest annual increases were New York, Chicago, and Detroit up 8.0%, 6.0%, and 5.5% respectively, while Tampa and Dallas were the only to see slight declines.
• Jobless Claims: The number of jobless claims the week ended June 21 was 236,000, down 10k from the prior week with the four-week average relatively unchanged at 245,000. The number of continuing claims was 1.974 million, up 37k from the prior week and the highest since November 2021. The four-week average of continuing claims was up 17k to 1.941 million, also the highest since late 2021.
• Durable Goods Orders: New orders for durable goods, which have been quite volatile lately and have increased 5 of the last 6 months, increased by 16.4% in May which was much more than the 7.0% increase that was expected, however is a bounce back from the 6.6% decline that was experienced in the month prior. Nearly all of this, like usual, is due to the transportation category, more specifically aircraft orders. This category increased 231% in the month. The index of core orders (known as nondefense core capital goods excluding aircraft) rose 1.7% while shipments of this category increased 0.5%, a key input to GDP in measuring business investments.
• Consumer Confidence Survey: The consumer confidence index was a disappointment in June, falling 5.4 points to 93.0 versus the expectation of a slight increase to 100. The present situations index fell 6 points to 129.1, the expectations index fell 5 points to 69.0 and remains at a historically low level, one that typically signals recessionary conditions ahead.

Company News

• Super Micro Computer: Super Micro shares fell 10% last Monday after it said it will offer $2 billion in convertible notes (potentially diluting existing shareholders).
• Fair Isaac: Fair Isaac, known for the FICO score, said it launched a new credit score that incorporates buy now pay later (BNPL) data due to its emerging importance in the credit ecosystem. The new score is to help give lenders greater visibility into consumers repayment behavior and help financial inclusion as many consumers’ first credit experience is through buy now pay later.
• Tesla: Shares of Tesla were about 10% higher to open the week after it was reported it had a successful launch of its robotaxi service in Austin. It was done on a limited basis and was not open to the public with it described as a smooth and comfortable experience after navigating areas such as road construction, speed bumps, and narrow lanes. However, later in the day it was reported the National Highway Traffic Safety Administration (NHTSA) is investigating reports that the robotaxis may have violated traffic laws.
• Starbucks: According to sources by Caixin Global, a Chinese media group, Starbucks is considering a full sale of its Chinese operations. Shares initially shot higher but gave up all the gains after Starbucks released a statement saying it was not considering a full sale of its China operations.
• Shell: The WSJ reported Shell is in early talks to acquire BP for at least $80 billion which would make it one of the largest oil deals ever. The sources say the talks are active and BP is approaching it carefully. Both companies later denied the report.

Other News:

• GENIUS Act: The Senate passed a bill, the GENIUS Act, that would create a regulatory framework around stablecoins, establishing guardrails for stablecoins including full reserve backing by US dollar and Treasuries, audits, and other consumer protections. Stablecoins are a type of cryptocurrency made to have a stable value by pegging it to a currency like the dollar. Stocks like Circle and Coinbase (issuers of stablecoins) were up big as a result while those like Visa and Mastercard were lower.

• NATO Summit: NATO members have agreed to a new defense spending hikes, now targeting 5% of each respective country’s GDP, at the NATO Summit that took place last week in the Netherlands which was a push by President Trump. The previous target for NATO members was defense spending of 2% of GDP. It has been questioned if Trump and the US would support Article 5 which requires NATO members to defend each other from attack. But in attempt to secure the commitment, NATO leaders agreed to the spending increase. The only exception was Spain, who asked to get an exemption and which Trump called “terrible.” Trump went on to say the US is negotiating a trade deal with Spain and they are going to pay “twice as much” due to their reluctance on increasing defense spending.

• Rare Earth Minerals: The Wall Street Journal reported China is dragging out the approval of US company’s request (and Western company’s) for rare earth minerals, even after China’s pledge to the US it would increase access as part of the recent trade framework agreement made last month. US companies have said they are barely receiving enough supply for their production, have little visibility in future supply, and are concerned about future shortages that could impact manufacturing. Later that night of the WSJ report, the US and China announced a deal to increase exports or rare earth minerals (see below under trade news).

• Trade:
  • White House economic advisor Kevin Hassett said he sees a sequence of trade deals announced after Congress gets the reconciliation bill (“one big, beautiful bill”) passed, which has an unofficial July 4 deadline.
  • Trump is pushing for rollbacks of the European Union Green Deal climate regulations like greenhouse has regulations in trade negotiations with the EU, as was requested by US oil executives, according to the WSJ. The oil companies argue one of the requirements to cut emissions are impossibly low with current technology and fines are too high. Trade officials have said they will include the issues in trade talks but have still not fully developed all negotiating points.
  • After hinting at it while speaking at the White House, it was confirmed overnight Thursday by Commerce Secretary Lutnick in an interview with Bloomberg News that the US and China have finalized the trade truce reached last month. Lutnick said “they’re going to deliver rare earths to us” and when they do that, the US will “take down our countermeasures.” He also said there are imminent plans to reach agreements with 10 major trade partners.
  • After this, early Friday China said it will approve the exports of rare earth minerals to the US, and after this the US “will cancel a series of restrictive measures taken against China accordingly.”

• Fed Talk:
  • Trump said he is considering announcing the replacement to current Fed Chairman Powell by September or October, or potentially earlier. Trump has been extremely critical of Powell recently for not cutting interest rates. He said he has 3-4 names in mind on who the replacement will be. It was later reported that Trump is not near announcing Powell’s successor and a decision is not imminent, according to Bloomberg.
  • Governor Waller said several days ago he would support a rate cut as soon as July and then Monday Governor Bowman became the second Fed official with such comments, saying if inflation remains at its current level or moves lower, or if labor markets begin to weaken, it would be appropriate to consider cutting rates as soon as its next meeting. She further said due to signs of fragility it puts more weight on the downside risks to the employment mandate.
  • Chicago Fed President Goolsbee said the Fed is still trying to figure out if tariffs will produce one time price increases or bring on more persistent inflationary pressures. He also said he is “very worried about things moving in a stagflationary direction.”
  • Atlanta Fed President Bostic said there is some space and time to assess the incoming data and the Fed should remain in restrictive territory for longer if it helps get to the 2% inflation target. Meanwhile, Cleveland Hammack said she feels the current policy is close to neutral and the risks to maintaining current rates is low.
  • Richmond Fed’s Barkin said there is too much uncertainty on the economy to move quickly on interest rates, saying “given the strength in today’s economy, we have time” to be patient.
  • San Francisco Fed’s Daly said she sees a rate cut on the table for some time in the fall, saying she sees does not believe tariffs will cause persistent inflation.
  • Fed Governor Barr said he expects tariffs to put upward pressure on inflation due to higher short-term inflation expectations, supply chain adjustments, and second-round effects. He added there is considerable uncertainty because the inflation issue could cause the economy to slow and unemployment to rise, so in that case policy is in a position to wait and see how conditions unfold.

• Powell Congressional Testimony:
  Federal Reserve Chairman Jerome Powell’s testimony to Congress was mostly uneventful – he reiterated the Fed is still preferring to be patient when it comes to seeing what the tariff impact is to inflation and the economy. As has been the case for about two months now, this comment summarizes his thinking “we are well positioned to wait to learn more about the likely course of the economy before considering any adjustments to our policy stance.” He continued to describe the economy as solid and said the labor market it balanced, while inflation has eased significantly but remains somewhat elevated. On tariffs, he said their effects on the economy will depend on a number of factors which are still unknown, however saying they are likely to push up prices and weigh on economic activity.

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