This week, Federal Reserve Chair Jerome Powell warned that the U.S. may be entering a period of more frequent and persistent supply shocks—a difficult challenge for both markets and policymakers. It’s a notable shift in tone and a cue for advisors to keep both inflation risk and economic growth outlooks in view.
Markets were mixed last week:
Among sectors, Industrials (+1.1%), Consumer Discretionary (+0.8%), and Utilities (+0.6%) posted gains, while Health Care (-4.2%), Communication Services (-2.4%), and Real Estate (-0.8%) lagged. In fixed income, Treasury yields edged higher, with the 10-year yield rising to 4.37%. High yield bond spreads narrowed by 7 bps to 353bps, reflecting cautious optimism around policy stability.
Despite trade-related concerns and rate policy in flux, Q1 earnings season came in strong: 90% of S&P 500 companies have reported, with EPS growth now at 13.4% (FactSet). If trade policy moderates, this strength could support ongoing recovery in equity markets.
The Fed held its benchmark rate steady at 4.25%–4.50%, reiterating a data-dependent stance. Powell emphasized balance—acknowledging risks from both inflation and unemployment—and pointed to “neutral” policy levels for now.
The evolving balance between Fed neutral policy and supply shocks is shaping the macroeconomic outlook more than any single data point. The Fed’s neutral stance masks a deeper tension. Powell’s recent remarks about supply shocks suggest the path ahead could be more volatile than recent cycles. While the Fed has historically been aggressive in fighting downturns, it now faces the challenge of acting without overstimulating.
Trade policy remains a wildcard. If tariffs re-escalate or the consumer pulls back, the Fed may eventually be forced to respond. But the threshold appears higher than in past cycles—especially with stagflation risks lingering.
While monetary policy remains neutral and earnings are holding up, the message is clear: uncertainty is back. For advisors, this is a time to stay disciplined:
Quartz’s Adaptive Risk Premium (ARP) score sits at +0.44, maintaining a “Risk On” environment. While near-term risk remains elevated, the underlying macro regime continues to support measured risk exposure.
ARP Score: +0.44 Market Risk Status: Risk On Shiller PE: 36.36
High yield bond spreads surged to 461bps in early April after U.S. tariff announcements. They’ve since narrowed to 320bps, reflecting stronger sentiment and earnings resilience. A move below 300bps may be difficult without policy relief or a decline in volatility.
We continue to monitor the balance between policy risk and market resilience. If you'd like to discuss how this evolving environment could impact your allocation strategy, let’s connect.