The Rhino Report - Markets Rise Amid Mixed Economic Signals

The S&P 500 finished the week higher by 5.27%, in contrast to some mediocre economic data that highlighted growing uncertainty and persistent headwinds. Markets were encouraged by a temporary reduction in U.S.-China tariffs: the U.S. cut tariffs on Chinese imports from 145% to 30%, while China reduced tariffs on U.S. goods from 125% to 10%.

Inflation showed signs of easing, with April's Consumer Price Index coming in at 2.31%, marking the lowest annual increase since early 2021. However, core categories like housing and utilities remained stubbornly high. Although markets are expressing exuberance over the tariff deal, as we move into the back-to-school and holiday shopping seasons, I wonder if consumers will feel better about only absorbing a portion of a 10% to 30% tariff increase. And have investors realized that the portion not passed on to consumers in higher prices will result in compressed corporate profit margins?

Producer prices posted their largest monthly decline since 2020, falling 0.47% — suggesting weakening demand in key service sectors. It's too early to tell, but it's likely that wholesalers are struggling to pass on tariff-increased prices. It would be a troubling development for the overall economy if this becomes the trend.

The University of Michigan's Consumer Sentiment Index fell to 50.8, down from 52.2 in April, delivering its second-lowest level on record, driven by heightened inflation concerns and growing anxiety over trade policy. While these survey results represent a limited sample size, they provide a useful sentiment indicator worth monitoring.

Home builder confidence took a significant hit in May, according to the NAHB (May 2025). The Housing Market Index dropped to the lowest level since November 2023, suggesting the spring selling season has been disappointingly soft.

78% of builders reported difficulty pricing homes due to material cost uncertainty, with lumber prices fluctuating thanks to tariff changes and skilled labor shortages becoming the norm rather than the exception. Over a third of builders are reducing home prices despite rising costs, signaling a market struggling to find equilibrium between construction realities and what buyers can—or will—pay.

However, real estate is local, and recent conversations with clients in the real estate business indicate homes are moving despite the challenges.

Together, the week's data point to an economy navigating mixed signals—where softening inflation and resilient markets coexist with policy-driven uncertainty and fragile consumer confidence. For investors, this environment suggests continued vigilance and diversification remain prudent strategies.

By The Numbers

Employment Indicators

Employment data helps gauge whether consumers have jobs and money to spend. Consumer spending accounts for more than 70% of GDP.

Indicator	Current Value	Status
Initial Claims for Unemployment	229,000	Stable
4-Week Average of Initial Claims	230,500	Caution
Continuing Claims	1.881M	Elevated
Unemployment Rate	4.2%	Stable

Note: Values above 250K for the 4-Week Average, combined with rising unemployment, would signal a weakening economy. Next unemployment report: June 6, 2025. Source: Department of Labor

Economic Growth (Real GDP)

Period	Growth Rate	Status
Q3 2024	2.8%	Positive
Q4 2024	2.3%	Slowing
Q1 2025	-0.3%	Contraction
Q2 2025 (est.)	2.4%	Projected Recovery

GDP growth provides a broad measure of overall economic activity and signals whether the economy is expanding or contracting.
Source: Bureau of Economic Analysis; Q2 estimate from Federal Reserve Bank of Atlanta

Inflation Measures (CPI Year-over-Year)

Month	Rate	Trend
June 2024	2.98%	-
July	2.89%	Improving
August	2.53%	Improving
September	2.44%	Improving
October	2.60%	Deteriorating
November	2.75%	Deteriorating
December	2.89%	Deteriorating
January 2025	3.00%	Deteriorating
February	2.82%	Improving
March	2.39%	Improving
April	2.31%	Improving
May (est.)	2.38%	Deteriorating

Source: Bureau of Labor Statistics; May estimate from Federal Reserve Bank of Cleveland

Note: While inflation has moderated, new tariffs may cause temporary spikes in monthly data. Once tariffs have been in place for a full year, inflation should revert closer to the underlying trend.

Interest Rate Outlook

Current Fed Funds Rate: 4.25-4.50%

Expected Cut Date	Amount	Projected Rate After Cut
September 17, 2025	0.25%	4.00-4.25%
December 10, 2025	0.25%	3.75-4.00%
March 18, 2026	0.25%	3.50-3.75%
July 29, 2026	0.25%	3.25-3.50%

Note: Changes in monetary policy expectations reflect market participants' views on how the Fed will likely respond to shifts in inflation or employment.
Source: CME FedWatch Tool

Corporate Earnings Outlook (S&P 500 Estimates for 2025)

Date	Earnings Estimate	Trend
June 28, 2024	$276.29
Sept 30, 2024	$274.73	Deteriorating
Dec 31, 2024	$271.25	Deteriorating
Mar 31, 2025	$266.39	Deteriorating
Current	$257.92	Deteriorating

Source: S&P Dow Jones Indices

Market Valuation

Metric	Value	Assessment
Current S&P 500 P/E ratio	23.10	Expensive
Historical P/E (pre-1980)	14.0
Historical P/E (post-1980)	19.0

Note: Equity valuations remain expensive by historical standards.