MARKET UPDATE
After a slow start to the month, equity markets rallied over the last 10 days to reach new all-time highs in the S&P 500. With that, investors have witnessed a stunning turnaround from the volatility and fear that characterized the April market lows.
What’s the difference between April and today? Trade negotiations. Nearly all the volatility in April was attributed to trade policy, so it makes sense that the market recovery is directly tied to the somewhat positive developments in negotiations with China and the EU, despite recent setbacks with Canada. The coming week will be closely watched by market participants, as the July deadline for the “pause” in global tariffs looms large over the global economy.
In the background, the Fed continues to monitor both inflation and the labor market closely. The most recent press conference indicated that two rate cuts are still anticipated, although many analysts believe only one is likely. Any rate cut would provide a short-term boost to equity markets, but the underlying reason for a cut is a growing concern over an economic slowdown. The negative Q1 GDP report can be partially explained as an anomaly, driven by the rapid acceleration of inventory purchases by U.S. companies trying to get ahead of tariffs, but that may not be the full story. Many critical economic indicators continue to soften at a pace suggesting the Fed may need to intervene sooner rather than later.
Part of the economic concern stems from a steep inversion in the yield curve between the 3-month and 2-year Treasury rates. The yield on the U.S. 2-Year Treasury note stands at approximately 3.76% and the U.S. 3-Month Treasury Bill yield stands at approximately 4.30%. This signals that credit markets are not functioning normally, creating a barrier for banks to provide the capital needed by companies and consumers. While the spread between the 3-month and 10-year is essentially flat, any further decline in mid-term rates could trigger another inversion point. For bond investors, this month has delivered a modest return, but it has come at the cost of increased stress on the banking system.
Overall, we remain cautiously optimistic that economic data will begin to improve as Q2 comes to a close. If it does, the current market rally could have the momentum to continue through the rest of the year. If not, the next six months in the market may depend heavily on the Fed’s willingness to stimulate growth.
ADVISORS’ PERSPECTIVE
The financial markets are contending with a mix of slowing economic momentum, persistent inflation, geopolitical uncertainty, and uneven signals on recession risk. The U.S. economy remains in expansion mode, but the pace has clearly decelerated from earlier highs. Consumer spending has remained solid, supported by a strong labor market and real wage growth, but there are signs that momentum is cooling. Business investment has cooled, particularly in manufacturing and export-sensitive sectors affected by trade tensions and cost uncertainty.
Trade policy continues to loom large over the economic outlook. The Trump administration’s tariff strategy has led to a meaningful increase in effective trade barriers, with average tariffs peaking above 25% earlier this year. Although some tariffs have been rolled back or delayed, key sectors such as steel, aluminum, copper, and pharmaceuticals still face elevated import duties. Retaliatory tariffs from Canada, Mexico, and the EU have further complicated the trade landscape. The market remains on edge as new tariffs scheduled for August could reignite volatility, especially if they disrupt supply chains or corporate margins.
Oil prices have climbed steadily in recent months, largely due to tightening supply conditions and renewed OPEC+ discipline. However, unlike previous cycles, the correlation between oil and equity markets has weakened considerably. Year-to-date, the correlation between crude oil and the S&P 500 has hovered around zero, reflecting the divergence between energy sector gains and broader market performance. This disconnect stems from the fact that current oil price moves are driven more by geopolitical and supply factors than demand-side growth, limiting their signaling power for equities as a whole. As a result, oil strength has provided little directional clarity for broader market sentiment.
On the inflation front, progress has been uneven. Core PCE inflation remains elevated at 2.4% year-over-year, with housing, healthcare, and other services continuing to drive sticky price pressures. While goods inflation has eased, the Fed remains cautious. Policymakers have held interest rates steady since late 2024 and are signaling no imminent cuts, preferring to see sustained disinflation before making a move. Market participants are currently pricing in a single rate cut by year-end, but the Fed has emphasized data dependency, particularly around labor market trends and service sector inflation.
Recession fears persist, though the hard data remains mixed. The yield curve remains inverted — one of the most persistent warning signs — and leading indicators have been soft. However, real GDP is still tracking positively, and the labor market has only modestly cooled. Weekly jobless claims and private payroll data suggest a gradual slowing rather than a sharp downturn. Credit markets have also remained relatively calm, with spreads widening only modestly. The likelihood of a mild recession by early 2026 remains elevated but not yet a consensus, with most forecasts dependent on consumer resilience and Fed policy outcomes.
Equities have remained resilient despite the crosscurrents. The S&P 500 entered July near record highs, driven by mega-cap tech strength and improving earnings in select sectors. Still, gains have been narrow and sentiment fragile. Investors are cautious, rotating defensively and favoring quality, income-generating stocks. With inflation sticky, trade risks reemerging, and monetary policy still tight, the second half of 2025 is likely to be marked by elevated volatility and a heightened sensitivity to macro data surprises.
We continue to use a quantitative investing approach. In times of uncertainty, it is more important than ever to follow the data and not make decisions based on emotions. Hilltop’s partnership with Helios relies on facts and data, which we use during our recalculations on a bi-weekly basis. Our models adjust appropriately to market conditions.
DISCLOSURE
This update is not intended to be relied upon as forecast, research, or investment advice, and is not a recommendation, offer, or solicitation to buy or sell any securities or to adopt any investment opinions expressed are as of the date noted and may change as subsequent conditions vary. The information and opinions contained in this letter are derived from proprietary and nonproprietary sources deemed by Hilltop Wealth & Tax Solutions to be reliable. The letter may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecast made will materialize. Additional information about Hilltop Wealth Solutions is available in its current disclosure documents, Form ADV, Form ADV Part 2A Brochure, and Client Relationship Summary Report, which are accessible online via the SEC’s Investment Adviser Public Disclosure (IAPD) database at www.adviserinfo.sec.gov, using SEC # 801-115255. Hilltop Wealth Solutions is neither an attorney nor an accountant, and no portion of this content should be interpreted as legal, accounting, or tax advice.
