Weekly Market Recap: Tariff Truce Ignites Rally - U.S. Markets Surge on Trade Optimism and Cooling Inflation

Market Overview

Markets staged a robust comeback the week ending May 16, 2025, led by a powerful rebound in U.S. equities. The S&P 500 jumped 5.33%, pushing year-to-date returns into positive territory (+1.8%), while the tech-heavy NASDAQ surged 7.21% amid upbeat AI developments and eased chip export restrictions. Trade optimism surged after the U.S. and China agreed to a 90-day tariff rollback—cutting U.S. tariffs on Chinese goods from 145% to 30% and China's on U.S. goods from 125% to 10%—far more aggressive than expected. That truce sparked risk-on sentiment across markets and propelled major indexes back toward new highs.

Technology (+8.2%), Consumer Discretionary (+7.8%), and Communication Services  (+6.6%) were the week’s top S&P 500 sectors, while Health Care lagged due to earnings headwinds and regulatory concerns.

International equities gained as well, though not at the same pace. Developed markets saw modest increases, with European stocks buoyed by easing trade tensions and strong U.K. GDP data. Emerging markets rose 3.09%, helped by relaxed chip policies and robust activity in India and Taiwan.

Federal Reserve Insights and Economic Roundup

Investor focus remained divided between the Fed and fiscal uncertainty. April’s consumer and wholesale inflation came in cooler than expected, with annual core CPI slowing to 2.3%—the softest since February 2021. Retail sales posted another monthly gain (+0.1%), driven by home improvement and discretionary spending, suggesting household strength despite policy uncertainty.

Nonetheless, the Fed remains cautious. Despite earlier expectations of four rate cuts in 2025, markets now only see two. With the Fed Funds Rate steady at 4.50%, the central bank appears to be in wait-and-see mode amid persistent uncertainty around inflation expectations and the economic impact of recent trade moves.

Compounding this caution is looming debt ceiling stress. Treasury Secretary Scott Bessent warned that the U.S. may exhaust its borrowing capacity by August without action. The market has begun to price in slight risk for late-summer Treasury bills, hinting at increased investor skittishness around potential delayed payments.

In the bond market, yields moved modestly. The 10-year Treasury fell 3 bps, closing at 4.45%, while global and U.S. bonds edged lower on the week. Commodity markets saw broad weakness, with the Bloomberg Commodity Index falling 1.5% on dollar strength, plunging gold prices (-4%), and continued natural gas oversupply (-12%).

The Week Ahead

Markets will be watching key economic indicators in the week ahead to gauge the Fed’s next move. On deck:

Monday: April Leading Index

Tuesday: Philadelphia Fed Non-Manufacturing Index

Wednesday: MBA Mortgage Applications

Thursday: Jobless Claims, April Existing Home Sales, S&P Global Flash PMIs, Chicago and Kansas City Fed Reports

Friday: April New Home Sales, Final Building Permits, Kansas City Fed Services Activity

As the market digests tariff news and inflation data, attention will turn toward clarity on the Fed’s June outlook and any movement on the debt ceiling debate.