S&P 500 weekly report: Trump's tariff threats stoke market uncertainty

Trump’s tariff threats stoke market uncertainty

Fresh threats from US president-elect Donald Trump to hike tariffs on China, Mexico, and Canada have shaken the risk environment at the start of the week. Markets are grappling with uncertainty over whether additional countries could find themselves in Trump’s crosshairs. Floating the tariffs as “one of his many first executive orders” suggests that trade restrictions may come earlier than expected, although significant ambiguity surrounds his recent statements.

A 25% tariff on goods from Canada and Mexico appears more aggressive than the previously mentioned 20% blanket tariff. Meanwhile, an additional 10% tariff on Chinese imports represents a step back from his earlier 60% threat, possibly explaining the resilience in Chinese equities today. However, Trump’s statements have generated confusion in markets, with the US dollar paring earlier gains and Asian indices consolidating after an initial dip.

Markets react to tariff uncertainty

On the economic front, focus turns to the US core Personal Consumption Expenditures (PCE) price index. With market rate expectations for December split, the data could help build consensus.

What to expect from the US core PCE price index this week

The September reading for headline PCE met forecasts of 2.1% year-on-year, following a 2.3% increase in August. However, core PCE surpassed expectations, rising 2.7% compared to the 2.6% consensus. This marked the first uptick in core PCE since August 2023, underscoring the challenges in achieving the Fed’s inflation target.

For October, core PCE is expected to increase slightly to 2.8% from 2.7%, while headline PCE may edge higher to 2.3% from 2.1%. On a month-to-month basis, headline and core PCE are forecast to remain unchanged, rising 0.2% and 0.3%, respectively.

Inflation pressures challenge Fed's easing path

A higher-than-expected reading could renew concerns about stubborn inflation, pushing rate expectations further towards a Federal Reserve (Fed) rate hold in December. With the current core PCE already above the Fed’s 2024 year-end projection of 2.6%, further inflationary pressures would challenge the case for easing. Markets are currently pricing a 25 basis point (bp) rate cut in December with a 55% probability, leaving sentiment highly sensitive to the inflation data.

US headline and core PCE price index chart

Source: Refinitiv

S&P 500: eyeing a new record high

Despite facing resistance at the key psychological level of 6000, retracements in the S&P 500 have been shallow, with buyers stepping in at 5861 to form a new higher low. The index continues to aim for fresh record highs, supported by its daily relative strength index (RSI), which signals a near-term upward bias after defending its mid-line last week.

While growth stocks have underperformed recently, other less rate-sensitive sectors are catching up. The financial sector now leads as the top-performing sector year-to-date, followed closely by utilities and industrials.

Strong US economic surprises, now at their highest level since April, bolster hopes of a soft landing. Any new trade restrictions by the US are likely to impact trade-dependent regions more severely, potentially highlighting the resilience of the US economy. A move to fresh record highs could place the next resistance level at 6,168, where an upper channel boundary lies.

Key levels:

• R2: 6168
• R1: 6000
• S1: 5861
• S2: 5674

US 500 daily chart

Sector performance: growth rotation into value

Sector performance over the past week highlights a rotation from growth into value. Industrial (+3.3%), materials (+3.2%), and real estate (+3.1%) outperformed, while technology (+1.0%), consumer discretionary (+1.7%), and communication services (-0.6%) lagged. Rising Treasury yields diverted interest away from rate-sensitive growth stocks, particularly those with higher valuations, as robust US economic data supports a slower pace of Fed easing.

Year-to-date, there appears to be further upside for value stocks. Expectations for more dovish Fed rhetoric at the next meeting could set the stage for a potential rate hold into 2025. Over the past week, mega-cap tech stocks have underperformed despite delivering resilient earnings, reflecting an extended rotation into value sectors.

SPX sector returns: one-week and one-month

SPX sector returns: one-month and year-to-date

Sector ETFs summary
*Note: the data is from 19 – 25 November 2024

Top 15 winners and losers
*Note: The data is from 19 – 25 November 2024

Top stocks by sectors
*Note: The data is from 19 – 25 November 2024