Here's the Deal - May 26, 2025

Economy: In early Recessionary Phase (Not necessarily a recession, yet.)

Market Cycle: Bull Market

_{Week 21 of 52 for 2025: 40.38% of the way through 2025}

Weekly Note:

On this Memorial Day, let’s remember: the only reason we’re able to have conversations about a resilient economy and stock market is because of the sacrifices others made long before us. The freedoms we take for granted, including the freedom to argue over dumb political stuff, were paid for by those who never got the chance to enjoy them to the same extent.

Let’s not waste that gift. Instead, let us use that foundation to build something even better which positively impacts more people.

“One Big Beautiful” Tax Bill Clears the House

The latest on the tax and spend bill moving through Congress:

Where the Bill Currently Stands

• Passed in the House: On May 22, the Republican-controlled House narrowly approved the bill, officially called the House Reconciliation Bill or the “One Big, Beautiful Bill” by a 215–214 vote. All Democrats and a few Republicans voted against it.

• Next Stop: The Senate. Expect heated debate, possible amendments, and changes before it comes up for a final vote.

Key Tax Provisions in the Bill

• Extending Trump-Era Tax Cuts: The bill continues and expands parts of the 2017 Tax Cuts and Jobs Act, many of which were set to expire at the end of 2025.

• New Deductions: There are fresh tax breaks for tip income, auto loan interest, and a higher standard deduction.

• SALT Deduction Cap Raised: The cap on deducting state and local taxes goes from $10,000 to $40,000, but only for households earning under $500,000.

• Child Tax Credit Boosted: Temporarily increases the credit to $2,500 per child from 2025–2028, though with some restrictions.

Small Business: A Clear Winner

• Bigger Deductions: The bill raises the cap on Section 179 deductions and makes 100% bonus depreciation permanent. Both major perks for small business investments.

• Expanded QBI Deduction: Business owners who file as pass-through entities (like LLCs or S-corps) get more flexibility and a larger deduction.

• Avoiding Expiring Tax Hikes: By extending the 2017 tax cuts, the bill prevents an automatic tax increase for many small businesses.

Middle Class: Gains, But With Strings Attached

• Some Relief: Yes, the bill increases the standard deduction and child tax credits, but those benefits are offset by cuts to safety net programs like Medicaid and SNAP.

• Net Impact: For lower- and middle-income families, especially the bottom 20%, the average household could actually lose about $820 by 2026 when you factor in lost benefits and reduced tax credits.

• Long-Term Outlook: Wages might dip in the short term, and while projections show a slight increase decades down the line, many working-class families could end up worse off overall, especially as government support erodes.

Top Earners: Big Winners

• 70% of the Benefits: The top 10% of earners take home the lion’s share of the bill’s total tax benefits. Why? Because they pay the most in federal taxes. The truth is that the top 10% in the US pay between 60% - 76% of all federal income taxes. So, whenever taxes are cut they will always be the biggest beneficiaries.

Unfortunately, the bill increases government spending without much in the way of spending cuts. That means more borrowing, more national debt, and the potential for more inflation over time.

Bond Markets Fired a Warning Shot This Past Week

On Wednesday, the U.S. Treasury held a $16 billion auction of 20-year bonds. But something important happened: demand was far weaker than expected.

When investors hesitate to buy U.S. government debt, it’s often a sign that they’re worried about rising deficits, out-of-control spending, and the broader direction of fiscal policy. And right now, those concerns are front and center as Congress debates a tax and spending bill that could add trillions more to the national debt.

Immediate Fallout from the Auction

• Yields Jumped: The interest rate (or "yield") on the 20-year Treasury bond spiked above 5%, the highest level since November 2023 as investors demanded higher returns to compensate for what they see as rising financial risk. Exactly the opposite of what should be happening at this point in the credit cycle. which increases the future risks of the the fallout.

• Stocks Dropped: Higher bond yields tend to spook the stock market, and that’s exactly what happened. The Dow Jones fell almost 2% from the auction to the open the following morning.

• A Message to Washington: When bond buyers start to balk, it’s often a form of protest. These so-called “bond vigilantes” are essentially saying: “You need to get your fiscal house in order, or we’ll demand more to lend you money.”

But It Wasn’t Just the US as Global Markets, such as the UK and Japan experienced the same.

Joe Weisenthal of Bloomberg said it best:

The World Is Changing

Ultimately bond markets are telling us that the period of easy and cheap borrowing is over. The good news is that yields and rates are still at the low-end, historically speaking. Unfortunately, that also means you can expect to see them continue to move higher in the coming decade.

More proof that the secular winds are changing from bullish to bearish. Secular changes are a perfectly normal and expected occurrence every decade or so. The key is to recognize the change, and then make the needed adjustments to our own lives to meet the current and future reality, instead of making decisions based on an economic environment from the previous decade which is no longer present.

Fed Naysayers Proven Wrong… Again

As bond yields continued to rise this week, one thing became clear: the Federal Reserve was correct to not cut interest rates this year. In fact, based on how bond yields are behaving now, the Fed may be forced to pivot and once again begin hiking rates. Which would be a catastrophic pivot in this latter part of the credit cycle after which they were already cut.

This is yet more proof of the horrendous timing regarding high tariffs rates by the Trump Administration.

Rather than respecting the rhythm of the credit cycle, the administration chose to push aggressive inflation inducing fiscal moves as economic conditions were in the early stages of slowing while inflation rates remained elevated. That’s a mistake with potentially massive consequences.

In markets and the economy, timing is everything. Policies that might have helped earlier or later can become destructive if applied at the wrong times. And this appears to be one of those cases, as what we’re seeing now could go down as one of the most poorly timed economic policy decisions in modern history.

The Trump Administration whiffed badly with their timing, which could easily send everything they hoped to accomplish off the rails.

My buddy, Jason Perz, wrote a very informative post this week entitled: When Bond Markets Break, Inflation Follows.

I highly recommend you give it a read.

I also recommend that you remember this warning shot from the bond market and keep this issue at the top of your list of things to watch in the coming months.

Spring Housing Market Came Up Weak

Existing homes sales continue to be tepid this Spring as higher mortgage rates are keeping buyers on the sidelines. (At this point in the cycle, the higher mortgage rates are a direct result of Trump’s tariff policies and chaotic rhetoric causing increased uncertainty.)

Spring is usually the busiest time of year for real estate. But this year? Not so much.

The good news is that New Home Sales are holding up, showing some demand exists. Just not as much at current mortgage rate levels, as builders can offer to buy down rates as an incentive to buy their inventory instead of an existing home on the market.

The weakness in the housing sector will continue to put downward pressure on the economy in the coming months as housing makes about ~15-18% of the US economy.

This Week in Tariffs

Late last week, President Trump reignited trade tensions by threatening a steep 50% tariff on all goods imported from the European Union, set to take effect on June 1. He accused EU leaders of being “very difficult to negotiate with” and said trade talks were “going nowhere.”

Stock markets across both the U.S. and Europe tumbled, with traders pricing in the risk of disrupted supply chains, slower growth, and higher inflation.

Apple in the Crosshairs

As part of the broader push, Trump also threatened a 25% tariff on iPhones that are not made in the United States. While no date was given, the threat added to investor uncertainty, especially given Apple’s global supply chain and its heavy reliance on overseas manufacturing.

Sunday Night Turnaround: EU Tariff Delay Announced

But in a sudden shift, Trump announced late Sunday night that he would delay the 50% EU tariff until July 9. The move came after a phone call with European Commission President Ursula von der Leyen, who asked for more time to resume negotiations.

Trump described the delay as an effort to “work something out” and said that talks would begin swiftly. Von der Leyen echoed the sentiment, with both leaders stressing the importance of maintaining a strong U.S.–EU trade partnership.

The delay helped ease tensions. As European stocks bounced back Monday morning, recouping some of the losses from Friday’s drop. The threat is still on the table, and if negotiations stall again, markets will more than likely react just as sharply, or worse.

Home Depot Not Raising Prices Due to Tariffs

While WalMart announced it would raise prices in response to rising costs from tariffs last week, Home Depot took the opposite stance this week. Stating that it would not raise prices this year.

At first glance, it’s tempting to frame this as a political statement. One company siding with Trump, the other opposing him. But that’s not how things operate in the real world.

The key thing to understand is that WalMart and Home Depot are in very different businesses:

• WalMart operates in the high-volume, low-margin world of consumer staples: groceries, household items, clothing. Its profit margin is around 2.75%, meaning even small increases in costs hit hard.

• Home Depot, on the other hand, focuses on home improvement and big-ticket durable goods. It operates with a much higher profit margin, around 9.28%, giving it more cushion to absorb cost increases, at least in the short term.

So this isn’t about politics. It’s about business models, profit margins, the business cycles of each sector, and pricing power.

While Home Depot is holding prices steady for now, that doesn’t mean it’s unaffected. Instead of raising prices, Home Depot said they would instead stop carrying certain products that are no longer profitable to sell because of rising import costs due to tariffs.

In other words, the impact is still there. It’s just showing up in product availability rather than price tags. Both are adapting in their own way. And both show how tariffs don’t just affect governments and trade negotiations, but more importantly how they shape the decisions businesses make every day which ultimately affect your choices and decisions.

Markets:

We’re now entering the seasonally weakest stretch of the year for markets. Historically, late May through October tends to bring lower returns and greater volatility, and the potential for a rug pull is elevated as trading volume dries up over the Summer.

This risk is even greater now, given a growing dilemma facing the Trump Administration: Will they protect the stock market, or the bond market?

If forced to choose, the answer is increasingly clear that they’ll prioritize the bond market. As achieving lower interest rates (and keeping government borrowing costs in check) is more important to the current health of the economy right now. Even if that comes at the expense of stocks.

Plus, the Stock Trader’s Almanac highlights a long-standing seasonal strategy known as the Six-Month Switching Strategy:

• Buy QQQ when the MACD turns positive after October 1.

• Sell QQQ when the MACD turns negative after May 1.

This rule-based approach has historically delivered strong returns and is especially useful for traders or investors who don’t want to actively manage positions year-round. The sell trigger goes into effect Tuesday, when markets reopen.

Finally, a short-term catalyst to watch for this week is the $NVDA ( ▲ 1.76% ) earnings after the close on Wednesday.

If markets continue drifting higher into NVIDIA report, don’t be surprised by a “sell the news” reaction, unless they absolutely knock it out of the park. However, at this point it’s more likely that won’t be the case.

This could easily trigger a sharp pullback in the broader indices given NVIDIA’s outsized influence on the S&P 500 and NASDAQ.

$SPY ( ▲ 0.5% ) S&P 500:

Markets seem to have found support at $575 on Friday. Should that continue and markets begin the week higher, likely from the extended tariff deadline for the EU, look for resistance at $585.

At this point I think SPY fails at $585 and then heads for $565-555 in the following weeks to set up the Summer Rally in the next month or two.

Finding momentary support at $576, $571 along the way.

Should SPY break and hold above $585, look for $597, $605, and $613.25 for levels of resistance.

$DIA ( ▲ 0.94% ) Dow Jones Industrial Average:

$QQQ ( ▲ 0.34% ) Nasdaq:

$IWM ( ▲ 0.03% ) Russell 2000 (Small Caps):

Significant Economic Data from the previous week:

Economic Data to watch this week:

Quote of the Week:

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