Records, Rates, and Resilience

Fresh news and strategies for traders. SPY Trader episode #1285. Welcome back to Spy Trader, your daily dive into what's moving the markets! I'm your host, Chet Gainsville, and it's 6 am on Friday, July 4th, 2025, Pacific time. Happy Independence Day, everyone! Just a friendly reminder that the U.S. stock market is closed today for the holiday, and it also closed early on Thursday, July 3rd. We'll be back to regular trading hours on Monday, July 7th. But even with the market taking a breather, there's plenty to talk about from the robust activity leading up to the long weekend. The U.S. equity markets have been showing significant strength, with major indices hitting new highs. On Thursday, July 3rd, both the S&P 500 and the Nasdaq 100 closed at record highs, and the Dow Jones Industrial Average also posted substantial gains. Looking back over the past month, the S&P 500, or US500, climbed 5.25% and is up an impressive 12.28% compared to this time last year. For the second quarter of 2025, the S&P 500 gained 10.6%, and the Nasdaq surged an incredible 17.7%, both closing at record levels. The Dow Jones Industrial Average also saw a solid 5.0% gain. However, it's worth noting that smallcap U.S. stocks, as measured by the Russell 2000, have continued to struggle, remaining down 2.5% yeartodate as of the end of Q2. Sector performance paints an interesting picture. Technology was the top performer in Q2, gaining 23%, driven by robust AIdriven earnings momentum from companies like Nvidia and Synopsys. This was further bolstered by the White House's decision to lift export restrictions on chipdesign software to China. Basic Materials led the week ending July 3rd, up 3.59%, with Financial Services also performing well, up 2.64%. On the flip side, Utilities and Communication Services were the worstperforming sectors in the week ending July 3rd. Energy and Health Care both saw declines of 8% and 7% respectively in Q2. Homebuilders like Lennar and D.R. Horton experienced declines, likely due to concerns about elevated interest rates making mortgages more expensive. Shifting to recent news and macroeconomic conditions, the June jobs report showed nonfarm payrolls rising by 147,000, exceeding expectations, and the unemployment rate unexpectedly fell to 4.1%, reinforcing the view of a resilient U.S. economy. While wage increases are outpacing inflation, supporting consumer spending, the Federal Reserve held its policy rate steady at 4.25% to 4.5% throughout Q2. Some forecasts anticipate two more rate cuts in the second half of 2025, but that strongerthanexpected jobs report has tempered expectations for immediate cuts. Core inflation is projected to be in the 3.0% to 3.5% range by yearend 2025. On the fiscal front, the nearfinal House approval of President Trump's $3.4 trillion taxandspending bill is a significant development. Trade and geopolitics have also played a role. Easing fears around tariffs and progress on trade deals, such as a U.S.Vietnam trade agreement, have bolstered market optimism. The U.S. dollar experienced a downward trend in Q2, which acts as a tailwind for U.S. exporters. However, real GDP growth expectations for 2025 were revised lower to 1.4%, and the U.S. economy experienced a 0.5% contraction in Q1 2025, the first decline since 2022. The U.S. goods and services trade deficit also increased in May 2025 to $71.5 billion. On the company front, Nvidia continued its strong performance, gaining 1.3% and approaching a $4 trillion market capitalization. Datadog shares soared by 10% to 15% following its upcoming inclusion in the S&P 500 index. However, Centene shares plummeted almost 40% after the company pulled its fullyear guidance, dragging down other major healthcare insurers like UnitedHealth and Elevance Health. Oracle jumped over 8% to new alltime highs after confirming a $30 billion data deal. Tesla launched its robotaxi service in Texas, but its shares fell 8.3% in June. Finally, solar stocks like Array Technologies, SolarEdge Technologies, and Sunrun saw significant gains after the Senate passed President Trump's spending bill without an excise tax on solar or wind projects. Sunrun specifically gained 40.99% and SolarEdge Technologies was up 39.02%. Now, for some analysis and insights into what all this means for your portfolio. The U.S. stock market's recent robust performance and record highs are primarily driven by a resilient labor market, easing trade tensions, and the continued strong performance in the technology sector, particularly related to artificial intelligence. That betterthanexpected June jobs report certainly boosted investor confidence, suggesting our economy can withstand higher interest rates for longer. The deescalation of tariff policies has also reduced economic uncertainty, creating a more favorable environment for multinational corporations and exporters. And of course, the AI boom continues to fuel earnings momentum for chip designers and software companies. However, the macroeconomic picture isn't entirely clear skies. While the labor market is strong and inflation is generally moderating, updated forecasts indicate a slight uptick in inflation for 2025, which, coupled with the strong jobs data, has led to a reevaluation of the Federal Reserve's rate cut timeline. This has tempered expectations for immediate cuts. Furthermore, the unexpected contraction in Q1 GDP and the rising trade deficit indicate some underlying economic headwinds, even as the overall market rallies. The fiscal stimulus from the new taxandspending bill is expected to support growth, but it also raises concerns about potential additions to the national debt. Sectoral performance reflects these dynamics. Technology's outperformance is a direct consequence of the AI investment cycle and favorable trade policies for the semiconductor industry. The rebound in basic materials and financial services suggests broader economic activity and perhaps expectations of continued demand. Conversely, ratesensitive sectors like homebuilders are feeling the pinch of higher interest rates, and the significant decline in healthcare insurers like Centene highlights the impact of companyspecific operational challenges. The struggle of smallcap stocks, as seen in the Russell 2000, suggests that the current market strength is not evenly distributed, possibly due to their higher sensitivity to domestic economic pressures, tariffs, and inflation compared to larger, more diversified companies. So, given these current market conditions, here are some concrete recommendations for our listeners. First, maintain diversification with a growth tilt. While the market is hitting record highs, the underlying economic signals are mixed. Continue to diversify across sectors and asset classes, but given the strong momentum in technology, especially in AI, maintaining an allocation to growthoriented tech stocks remains advisable. Second, monitor macroeconomic data closely. Pay very close attention to upcoming inflation reports, Federal Reserve commentary on interest rates, and subsequent GDP revisions. The market's interpretation of whether the Fed will cut rates and how quickly will continue to be a major driver. A persistent rise in inflation or slowerthanexpected growth could certainly introduce volatility. Third, assess the fiscal policy impact. The newly approved taxandspending bill could provide a tailwind for certain sectors, but also watch for any longterm implications of increased national debt on bond yields and fiscal stability. Fourth, reevaluate your smallcap exposure. The Russell 2000's underperformance suggests that smallcap companies might be more vulnerable to current economic conditions. Investors should review their smallcap allocations and consider the specific companies' sensitivity to tariffs, inflation, and domestic economic growth. Fifth, let's talk about sectorspecific opportunities and risks. Technology and semiconductors continue to be a strong area, especially companies with exposure to AI and favorable trade conditions. Basic materials and financials are showing recent strength, potentially benefiting from sustained economic activity. In healthcare, be selective. While some areas may offer value, the recent significant decline in major healthcare insurers like Centene due to companyspecific issues highlights the importance of thorough due diligence. Exercise caution in sectors highly sensitive to interest rates, such as homebuilders, as yields have recently risen. On a brighter note for renewables, the Senate's decision to exclude excise taxes on solar and wind projects in the new spending bill could continue to benefit solar energy stocks. Finally, consider quality and fundamentals. In a market near alltime highs, focus on companies with strong fundamentals, healthy balance sheets, and consistent earnings, rather than simply chasing speculative gains. Also, stay informed on companyspecific news. Individual company events can lead to significant price movements, as we saw with Datadog's S&P 500 inclusion or Centene's guidance withdrawal. In summary, the U.S. stock market enters the Independence Day holiday on a strong note, fueled by robust economic data and positive developments in trade and technology. However, investors should remain vigilant about macroeconomic shifts, particularly regarding inflation, interest rates, and the longterm impact of fiscal policies. That's all for today's Spy Trader. Enjoy your holiday weekend, and we'll be back on Monday with more market insights. I'm Chet Gainsville, signing off!