Market Insights Recap — Week of May 26, 2025

Hello, I'm Steve Orr, Chief Investment Officer for Texas Capital's Private Bank.

How about a holiday pause? Hex B takes a step and rate moves, but all these mean for our portfolios? What should we be thinking about? Memorial Day, when we remember our fallen soldiers, traditionally marks the start of summer for markets and kids. Memorial Days in the first year of a presidential administration usually signal the start of a summer rally. Thanks to tariff trauma turmoil, simmering down to a low boil, stocks started that summer rally in May instead of June. S&P is up 4%, Nasdaq is up 8%.

Hey, we'll take it.

Typically after a few weeks of market upswings, it's natural for markets to take a pause, take some risk off the table. That's exactly what we saw last week. After the strong move in stocks from the prior five weeks, the S&P retreated about 2%.

No real reason for concern.

Just time to rebuild some energy into a sustainable bull market later in the year. A good reason for optimism is that the first quarter earnings came in strong. More companies raised guidance for the rest of 2025 than cut. Trend and sentiment indicators suggest you can now put money to work in stocks. But we're in the middle innings of the ball game with regards to tariffs. In the third inning, Trump backed down from some of his most aggressive tariff proposals. That lowered the fear, temperature and uncertainty, brought the VIX down.

But out of the blue last week, Trump threatened Apple with direct tariffs, which logistically and legally may be challenging for the administration to enforce. In addition, Trump also threatened the EU with higher tariffs. So the fourth inning of tariffs are from threat off back to threat on.

Welcome back to Trump 2017.

More of these threats will dampen market sentiment, give us some entry points to put money to work. Now what's that Hex B that I mentioned earlier? The Build Back Better spending bid was the first three Bs. Now the House has passed their version of the next three Bs, or Big Beautiful Bill. So six Bs of spending and tax cuts didn't please Moody's rating service. And they cut the U.S. credit rating from AAA to Aa1. It's long overdue. So the new triple B primarily means two things. Number one, tax rates we've enjoyed the past seven years will continue. And number two, our $36 trillion in long-term debt is still a major work in progress. The overall spending with this bill came down just a little bit, but not enough to materially affect the trajectory of our borrowing problem. It's not doom and gloom, but seeing the 10-year Treasury yield go from 4% up to 4.5% in a matter of months does warrant our attention. We think interest rates head higher in the fall, after the BBB raises the debt ceiling.

I mentioned last time, if you're a buy and hold bond buyer, these are good return levels over inflation. Total return trader? You better wait on this one. We still think the economy does better than our base case of 1.8% GDP growth this year. If so, no recession, no reason for bond prices to go up. But if no recession and inflation stays at 2.8% or drifts higher like we think, no Fed cut either.

So to wrap it up, holiday pause to build energy, favorable tweets and a trade deal or two. A good summer rally. Iran, Russia, take your pick of the five wars or another empty tariff threat, markets are going to pause. The economy continues to grind along in first gear.

Split consumer behavior, credit card usages and delinquencies are up. But service spending looks just fine. Big orders in manufacturing, at worst, are flat or expanding, so consumers are struggling a little bit with savings and their credit cards. We do feel we're always one tweet away, though, from things changing, but the economy is running just fine.

So, let us know how we can help; 'til next time.