Hey everyone, Hedgie here! Welcome to this week's market breakdown. I'm going to walk you through everything that happened in the markets this week and explain what it means for regular investors like you. This was a week of continued recovery as job growth surprised to the upside and trade tensions showed further signs of easing.

All three major indices finished the week higher, with the S&P 500 up 2.9%, the Dow up 3.0%, and the Nasdaq surging 3.4%. As of Sunday evening when this newsletter was prepared, stock futures were pointing to a negative open on Monday (S&P 500 futures -0.75%, Nasdaq futures -0.76%, Dow futures -0.72%) as traders digest the latest jobs report and prepare for a busy week of economic data.

Note: This newsletter was prepared on Sunday evening for Monday morning release. Market conditions may have changed by the time you're reading this.

JOBS SURPRISE AND TRADE PROGRESS: WHAT HAPPENED THIS WEEK

This week we saw several key developments that point to continued economic resilience despite trade concerns:

Strong Jobs Report Calms Recession Fears

The April jobs report released on Friday showed the U.S. economy added 177,000 jobs, significantly above the expected 138,000. This positive surprise helped calm fears about an imminent recession following the negative GDP reading for Q1. The unemployment rate remained steady at 4.2%, which is still historically low despite being up from the 3.4% low we saw in 2023.

Wage growth moderated slightly to 3.8% annually, below the expected 3.9%, which is good news for inflation concerns. This suggests that while the job market remains healthy, wage pressures that could fuel inflation are easing somewhat. The combination of solid job growth with moderating wage gains represents a "goldilocks" scenario for the economy.

The jobs report was particularly reassuring because it came after Wednesday's GDP report showed the U.S. economy contracted by 0.3% in the first quarter. That negative reading was largely due to a surge in imports as companies rushed to purchase goods ahead of tariff implementation, rather than a fundamental weakness in consumer spending or business investment.

Trade Tensions Continue to Ease

Following last week's positive developments on trade, we saw further signs that the U.S. and China may be working toward a resolution. On Friday, China's Commerce Ministry announced it was "evaluating" the possibility of holding trade talks with Washington after the U.S. sent messages through "relevant parties" expressing interest in negotiations.

This follows reports that China has started exempting some U.S. goods from tariffs covering roughly $40 billion worth of imports. While not officially confirmed, the list of exempted products reportedly includes pharmaceuticals and industrial chemicals, suggesting a potential thaw in trade relations.

President Trump also continued to roll back some of his initial tariffs on cars and auto parts, and Commerce Secretary Howard Lutnick announced that a major trade deal was nearing the finish line. These developments have helped ease market concerns about a full-blown trade war, though uncertainty remains about the final outcome.

Corporate Earnings Show Resilience

First-quarter earnings season is now about 70% complete, and the results have been better than expected. Approximately 76% of S&P 500 companies have reported positive earnings surprises, above the 10-year average beat rate of 75%. Earnings growth for Q1 is on track for 12.5% year over year, above the 11.5% expected at the end of last year.

However, guidance for the second quarter has weakened as companies point to uncertainty around consumer spending and the tariff environment. The earnings growth forecast for Q2 has fallen to 5.8%, down substantially from the 11.3% expected at the end of last year.

This past week, we heard from several tech giants and consumer companies. Microsoft and Meta pointed to continued capital expenditure in artificial intelligence and datacenter growth, committing upward of $152 billion in capital expenditures to support AI capacity. This alleviated concerns of a capex slowdown in the tech sector.

On the other hand, companies more exposed to tariffs and consumer spending expressed caution. Amazon and Apple provided soft guidance and reported weaker sales in China, citing tariffs and trade uncertainty. Consumer companies like McDonald's reported negative same-store sales and pointed to declining traffic, joining other food service companies like Starbucks and Chipotle in highlighting softer consumer demand, particularly among low-income consumers.

Bond Market Stabilizes

U.S. Treasury yields fluctuated throughout the week in response to economic data releases. Yields were generally lower through Thursday but increased on Friday following the better-than-expected jobs report. The 10-year Treasury yield closed around 4.31%, relatively unchanged for the week but down from the recent high of 4.59% in mid-April.

The bond market is now pricing in three rate cuts in 2025, down from four before the jobs report. The probability of a June rate cut has declined from 55% to about 33%, according to the CME FedWatch Tool, as the resilient job market reduces the urgency for the Federal Reserve to cut rates.

International Markets Continue to Outperform

While U.S. markets have rebounded nicely over the past two weeks, international markets continue to lead in year-to-date performance. The MSCI EAFE Index, which tracks developed markets outside the U.S. and Canada, rose 0.9% for the week and is now up 9.7% for the year, significantly outperforming U.S. indices.

European markets were particularly strong, with Germany's DAX gaining 4.63%, Italy's FTSE MIB adding 4.13%, and France's CAC 40 advancing 3.57%. The UK's FTSE 100 rose a more modest 2.15%.

Economic growth in the eurozone accelerated in the first quarter to 0.4% from 0.2% in the previous three months, double the consensus estimate of economists. Spain's economy grew by 0.6% and Italy by 0.3%, exceeding forecasts, while Germany and France returned to growth after previous contractions.

Economic Warning Signs Remain