Market Insights: Tariff Delays, Robust Q1 Earnings, and the Case for Rate Cuts in May 2025

Market Insights: The financial markets the end of May were a rollercoaster, driven by shifting trade policies, resilient corporate earnings, and cooling inflation. As investors navigated tariff uncertainties, strong Q1 earnings, and economic indicators, the question on everyone’s mind is: 

Are Federal Reserve interest rate cuts on the horizon? 

This article dives into the key events shaping the markets, supported by data from trusted sources, to provide a comprehensive overview of the economic landscape.

Tariff Delays Ignite Market Volatility

The week began with a surge in market optimism as President Trump delayed tariffs on the European Union until July 9, 2025, providing temporary relief for global trade tensions (Reuters). 

This decision followed a volatile period, with markets initially rallying but losing steam after the U.S. Court of International Trade issued an injunction on Trump’s tariff imposition powers, only for a federal appeals court to reverse it (Baker Law). The legal tug-of-war left markets bouncing around, ending the week slightly below Tuesday’s peak.

Compounding the uncertainty, U.S.-China trade talks hit a snag, particularly over rare-earth minerals, with Treasury Secretary Bessent noting that a meeting between Trump and President Xi is crucial to move forward (CNBC). 

Markets have followed a predictable pattern: they dip on negative trade news or aggressive tariff proposals and rally when extensions or softer stances emerge. This volatility underscores the challenges of reshaping 80 years of trade policy, but it also hints at a potential for a more self-sufficient U.S. economy in the long term.

Q1 Earnings: Corporate Resilience Shines

Despite concerns that tariffs and high interest rates would dent corporate performance, Q1 2025 earnings painted a picture of resilience. With 98% of S&P 500 companies reporting, 78% delivered positive earnings per share (EPS), and 64% reported revenue growth, achieving a 13.3% earnings growth rate (FactSet). 

While this is lower than the 16.9% growth in the previous quarter, it marks two consecutive quarters of double-digit gains, defying expectations of a tariff-driven slowdown.

Corporate leaders have demonstrated agility, adapting to anticipated tariff impacts by diversifying supply chains and optimizing operations. However, with tariffs announced in Q2, their full effect on earnings may not be visible until later reports. 

For now, the forward 12-month price-to-earnings (P/E) ratio for the S&P 500 stands at 21.3, above the five-year average of 19.9 and the ten-year average of 18.3, suggesting valuations remain elevated but supported by strong fundamentals.

Falling Inflation Fuels Rate Cut Speculation

Inflation showed promising signs of cooling, with the April Personal Consumption Expenditures (PCE) index dropping to 2.1%, a key metric closely watched by the Federal Reserve (BEA PCE Index). Core PCE also declined, countering fears that tariffs would spark runaway inflation. 

Meanwhile, the first revision of Q1 GDP adjusted to -0.2% from -0.3%, signaling a cooling but not collapsing economy (BEA GDP Data).

The labor market remains steady but not overheated, with May’s non-farm payrolls expected to add 125,000 jobs, down from 177,000 in April, and the unemployment rate holding at 4.2% (BLS, FINRA). 

These trends bolster the case for Federal Reserve rate cuts. High interest rates, if sustained, could strain consumers and businesses, raising borrowing costs and risking a recession. 

Critics argue that the Fed’s “wait and see” approach lacks the proactive stance needed to.

Conclusion

The end of May underscored the complex interplay of trade policies, corporate earnings, and economic indicators.

Tariff delays provided a temporary boost, while strong Q1 earnings highlighted corporate adaptability. With inflation cooling and the economy showing signs of stabilization, the case for Federal Reserve rate cuts is gaining traction. 

As markets navigate these dynamics, having a team that is staying informed and adjusting as needed is crucial. Follow us for the latest insights into economic trends and investment strategies.

Sources

1. FactSet Earnings Insight
2. U.S. Court of International Trade Strikes Down IEEPA Tariffs
3. Bankrate Mortgage Rates
4. BEA GDP Data
5. BEA PCE Index
6. BLS Non-Farm Payrolls
7. FINRA BrokerCheck
8. CNBC: U.S.-China Trade Talks
9. CNBC: Germany 10YR Yield
10. CNBC: Japan 10YR Yield
11. CNBC: U.S. 10YR Yield
12. Business Insider: Oil Price
13. MarketWatch Economic Calendar
14. Morningstar: DJIA
15. Morningstar: S&P 500
16. Morningstar: NASDAQ
17. Reuters: Trump Extends EU Trade Deadline
18. YCharts: U.S. Gas Price