Tim Hoyle, Chief Investment Officer
thoyle@haverfordquality.com

Deal-Making and Strong Corporate Profits

Since the administration capitulated to market forces on April 9th, significant progress has been made in three distinct areas of Trump’s big gamble of imposing wide-ranging tariffs. As of Friday, May 23rd, the S&P 500 has increased by roughly 17% during this period. There has also been a broad de-escalation in tariff rhetoric as Peter Navarro, senior counselor for trade and manufacturing to President Trump, has been sidelined in favor of a more pragmatic advisor in Scott Bessent, the Treasury Secretary. Additionally, the most significant positive development of the month is the outcome of trade negotiations with China. Although tariffs on Chinese imports remain at 30%, China’s embargo on rare earth metals, which had posed a substantial threat, has been lifted.

The deal making continued in the Middle East, where the administration signed a series of major deals between the U.S. and several Gulf nations, totaling over $2 trillion in investments. These deals span sectors including defense, aviation, artificial intelligence, energy, and critical minerals. The U.S. and UAE plan to build the largest AI data center outside the U.S. in Abu Dhabi, and in a reverse of Biden-era AI export controls, the administration is allowing the UAE to import 500,000 Nvidia chips annually. These agreements represent a significant strategic shift in U.S. policy, positioning Gulf nations as hubs for AI infrastructure and clients for semiconductors with the aim of directing investment into American technology firms rather than Chinese counterparts.

Movement was made on what is potentially the biggest deal of all as the House passed the “one big beautiful” reconciliation bill by the narrowest of margins, 215-214. The final cost of the bill would likely add over $4 trillion to the debt over the next ten years, which is likely positive for your stock portfolio but negative for your grandchildren. The bullish corporate provisions we have previously detailed are included in the bill, as well as the extension of the personal tax code and an increase in the state and local tax (SALT) exemption to $40,000. For the most part, markets have cheered these developments. However, the cost of the tax bill could push Treasury yields higher, spook investors, and reintroduce market volatility.

The technology sector has been the biggest beneficiary of all of this activity. Corporate earnings have also been a bright spot amid the macro noise of the past two months. S&P 500 earnings expectations currently stand at $264, down from $275 to start the year, but remarkedly resilient in the face of macro headwinds. Given the market’s advance, stocks are once again “priced to perfection” leaving very little room for error. The market currently trades north of 22x this year’s earnings and close to 20x 2026 earnings.

Due to the absence of significant corporate earnings news in June (Nvidia reports tomorrow, May 28^th) the market’s near-term path will likely be dictated by President Trump’s social media posts and the Senate’s actions on the budget reconciliation bill.  We believe the most scenario for markets and consumer sentiment has the Senate passing the reconciliation bill with few meaningful revisions before the July 4^th recess. Any delays beyond July 4^th may give rise to more tariff uncertainty and the deadline of the debt ceiling.

While acknowledging ongoing policy uncertainty, we are encouraged by ongoing trade negotiations and the resilience of corporate earnings. The stock market has recovered from the significant volatility which began at the start of the second quarter. We remain optimistic that progress thus far portends more to come.