Globalization has been great for U.S. corporate profit margins 🌎
Plus a charted review of the macro crosscurrents 🔀
📈The stock market rallied to all-time highs last week, with the S&P 500 setting an intraday high of 6,187.68 and a closing high of 6,173.07 on Friday. The index is now up 5% year to date. For more on how the market moves, read: Stocks usually look past geopolitical events 🫣
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The prospect of higher tariffs and other unfriendly trade policies is bad news for everyone exposed.
By definition, tariffs raise costs, which is bad for inflation, productivity, economic activity, and corporate earnings. And what’s bad for corporate earnings is bad for the stock market.
Policies that facilitate global trade have enabled countries to focus on their strengths and trade with others that can produce certain goods and services more efficiently. It’s a basic economic concept called “comparative advantage,” and it explains why international trade is a win-win.
“U.S. companies have clearly benefited from globalization,” Societe Generale analysts wrote. “The S&P 500 (ex-Financials) has benefited on the cost front too, with its cost of goods sold as a % of sales having dropped by 700bps since China joined the WTO.“
This chart from Societe Generale is striking. The cost of goods, as a percentage of sales, has been falling for years, helping explain why profit margins have been expanding.
Some of this chart can be explained by technology companies, which boast relatively high margins, accounting for a larger share of the S&P.
But as the analysts observed, eight of 11 sectors experienced gross margin expansion since China joined the WTO.
This trend could be blunted or potentially reversed depending on how aggressive any new protectionist trade policies are. That’s assuming all other things are held constant.
It’s worth mentioning that Corporate America continues to be very good at figuring out how to maintain profitability and profit growth despite emerging challenges. So it's possible that many companies will find creative ways to navigate Washington's tariff roller coaster.
That said, it’s hard to see how new tariffs or any other policy that disincentivizes globalization wouldn’t eventually lead to higher cost inflation, lower economic activity, or some combination of both.
To that end, Q2 earnings season will be informative as Corporate America updates us on how the uncertain trade policy outlook is affecting business conditions.
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More from TKer:
Wall Street's view on tariffs summed up in two lengthy sentences 📝
The simple explanation for why the stock market is holding up 💪
Listen up! 🎧
The one-and-only Barry Ritholtz invited me onto Bloomberg's At The Money podcast to chat about markets, geopolitics, tariffs, and more! Download it wherever you get your podcasts!
Catch it on Spotify, Apple Podcasts, and YouTube!
Review of the macro crosscurrents 🔀
There were several notable data points and macroeconomic developments since our last review:
🛍️ Consumer spending ticks lower. According to BEA data, personal consumption expenditures declined 0.1% month over month in May to an annual rate of $20.59 trillion.
Adjusted for inflation, real personal consumption expenditures fell by 0.3%.
For more on consumer spending, read: Americans have money, and they're spending it 🛍️ and 9 once-hot economic charts that cooled 📉
💳 Card spending data is mixed. From JPMorgan: “As of 17 Jun 2025, our Chase Consumer Card spending data (unadjusted) was 1.2% above the same day last year. Based on the Chase Consumer Card data through 17 Jun 2025, our estimate of the US Census June control measure of retail sales m/m is 0.41%.”
From BofA: “Total card spending per HH was down 0.5% y/y in the week ending Jun 21, according to BAC aggregated credit & debit card data. Relative to last week, in our categories, department stores, entertainment & transit saw the biggest decline in y/y spending. Meanwhile, lodging, airlines and home improvement saw the biggest increase relative to last week.“
For more on consumer spending, read: Americans have money, and they're spending it 🛍️
🎈 Inflation remains cool. The personal consumption expenditures (PCE) price index in May was up 2.3% from a year ago. The core PCE price index — the Federal Reserve’s preferred measure of inflation — was up 2.7% during the month, up from April’s 2.6% rate. While it’s above the Fed’s 2% target, it remains near its lowest level since March 2021.
On a month-over-month basis, the core PCE price index was up 0.1%. If you annualized the rolling three-month and six-month figures, the core PCE price index was up 1.7% and 2.9%, respectively.
For more on inflation and the outlook for monetary policy, read: The Fed closes a chapter with a rate cut ✂️ and The other side of the Fed's inflation 'mistake' 🧐
⛽️ Gas prices tick higher. From AAA: “U.S. airstrikes over the weekend caused petroleum futures to spike Sunday evening, with oil creeping up to $78/bbl. That quickly dissipated by Monday, and as of this morning, oil prices are back to what they were pre-conflict. With Independence Day around the corner, and 61.6 million holiday travelers preparing to hit the road next week, gas prices may increase slightly. The national average for a gallon of regular gasoline is $3.22, two cents higher than last week and 27 cents cheaper than this time last year.”
For more on energy prices, read: Higher oil prices meant something different in the past 🛢️
🏭 Business investment activity improves. Orders for nondefense capital goods excluding aircraft — a.k.a. core capex or business investment — increased 1.7% to $76.0 billion in May.
Core capex orders are a leading indicator, meaning they foretell economic activity down the road.
For more on core capex, read: An economic warning sign in the hard data ⚠️
👎 CEOs are concerned. From the Business Roundtable’s Q2 CEO Economic Outlook Survey: “The overall Index dropped by 15 points from last quarter to 69, well below its historic average of 83. The decline is the result of decreases in all three subindices, driven by a downward shift in CEO plans and expectations, most notably in the employment subindex.“
👎 CFOs are concerned. From the Richmond Fed’s Q2 CFO survey: “Financial decision-makers’ outlooks deteriorated in the second quarter of 2025, amid record concern about the impact of trade policy. Forty percent of respondents indicated tariffs and trade policy were a pressing concern for their firm this quarter, a record share of respondents citing the same concern going back to the second quarter of 2020.“
👎 Consumer vibes deteriorate. The Conference Board’s Consumer Confidence Index ticked 5.4 points lower in June. From the firm’s Stephanie Guichard: “The decline was broad-based across components, with consumers’ assessments of the present situation and their expectations for the future both contributing to the deterioration. Consumers were less positive about current business conditions than May. Their appraisal of current job availability weakened for the sixth consecutive month but remained in positive territory, in line with the still-solid labor market. The three components of the Expectations Index—business conditions, employment prospects, and future income—all weakened. Consumers were more pessimistic about business conditions and job availability over the next six months, and optimism about future income prospects eroded slightly.”
Relatively weak consumer sentiment readings appear to contradict relatively strong consumer spending data. For more on this contradiction, read: What consumers do > what consumers say 🙊 and We're taking that vacation whether we like it or not 🛫
👎 Consumers feel worse about the labor market. From The Conference Board’s June Consumer Confidence survey: “Consumers’ views of the labor market cooled somewhat in June. 29.2% of consumers said jobs were ‘plentiful,’ down from 31.1% in May. 18.1% of consumers said jobs were ‘hard to get,’ down slightly from 18.4%.“
Many economists monitor the spread between these two percentages (a.k.a., the labor market differential), and it’s been reflecting a cooling labor market.
For more on the labor market, read: The labor market is cooling 💼
💼 New unemployment claims tick lower. Initial claims for unemployment benefits declined to 236,000 during the week ending June 21, down from 246,000 the week prior. This remains at a level historically associated with economic growth.
For more context, read: The labor market is cooling 💼
🏠 Mortgage rates tick lower. According to Freddie Mac, the average 30-year fixed-rate mortgage declined to 6.77%, down from 6.81% last week. From Freddie Mac: “Borrowers should find comfort in the stability of mortgage rates, which have only fluctuated within a narrow 15-basis point range since mid-April. Although recent data show that home sales remain low, the resulting available inventory provides homebuyers with a wider range of options to consider when entering the market.”
There are 147.8 million housing units in the U.S., of which 86.1 million are owner-occupied and about 34.1 million are mortgage-free. Of those carrying mortgage debt, almost all have fixed-rate mortgages, and most of those mortgages have rates that were locked in before rates surged from 2021 lows. All of this is to say: Most homeowners are not particularly sensitive to the small weekly movements in home prices or mortgage rates.
For more on mortgages and home prices, read: Why home prices and rents are creating all sorts of confusion about inflation 😖
🏚 Home sales tick higher. Sales of previously owned homes increased by 0.8% in May to an annualized rate of 4.03 million units. From NAR chief economist Lawrence Yun: “The relatively subdued sales are largely due to persistently high mortgage rates. Lower interest rates will attract more buyers and sellers to the housing market. Increasing participation in the housing market will increase the mobility of the workforce and drive economic growth. If mortgage rates decrease in the second half of this year, expect home sales across the country to increase due to strong income growth, healthy inventory, and a record-high number of jobs."
Prices for previously owned homes increased from last month’s levels and year ago levels. From the NAR: “The median existing-home sales price for all housing types in May was $422,800, up 1.3% from one year ago ($417,200) – a record high for the month of May, and the 23rd consecutive month of year-over-year price increases.”
🏘️ New home sales fall. Sales of newly built homes fell 13.7% in May to an annualized rate of 623,000 units.
🏠 Home prices cool. According to the S&P CoreLogic Case-Shiller index, home prices were up 2.7% year-over-year in April but declined 0.4% month-over-month. From S&P Dow Jones Indices’ Nicholas Godec: “The housing market continued its gradual deceleration in April, with annual price gains slowing to their most modest pace in nearly two years. What's particularly striking is how this cycle has reshuffled regional leadership—markets that were pandemic darlings are now lagging, while historically steady performers in the Midwest and Northeast are setting the pace. This rotation signals a maturing market that's increasingly driven by fundamentals rather than speculative fervor.”
🏢 Offices remain relatively empty. From Kastle Systems: “Peak day office occupancy was 64.2% on Tuesday last week, up nearly a full point from the previous week. However, occupancy in all tracked cities was down on the prior Thursday and Friday, leading up to political protests over the weekend across the country. Washington, D.C. experienced the largest decline, falling 6.7 points to 52.6% on Thursday and 8.7 points to 27.1% on Friday. The average low was on Friday at 34.2%, down a full point from the previous week.”
For more on office occupancy, read: This stat about offices reminds us things are far from normal 🏢
👎 Activity survey deteriorates. From S&P Global’s June U.S. PMI: “The June flash PMI data indicated that the US economy continued to grow at the end of the second quarter, but that the outlook remains uncertain while inflationary pressures have risen sharply in the past two months. Although business activity and new orders have continued to grow in June, growth has weakened amid falling exports of both goods and services. Furthermore, while domestic demand has strengthened, notably in manufacturing, to encourage higher employment, this in part reflects a boost from stock building, in turn often linked to concerns over higher prices and supply issues resulting from tariffs. Such a boost is likely to unwind in the coming months.”
Keep in mind that during times of perceived stress, soft survey data tends to be more exaggerated than actual hard data.
For more on this, read: What businesses do > what businesses say 🙊
🇺🇸 Most U.S. states are still growing. From the Philly Fed’s May State Coincident Indexes report: "Over the past three months, the indexes increased in 42 states, decreased in six states, and remained stable in two, for a three-month diffusion index of 72. Additionally, in the past month, the indexes increased in 38 states, decreased in eight states, and remained stable in four, for a one-month diffusion index of 60.”
📈 Near-term GDP growth estimates are tracking positively. The Atlanta Fed’s GDPNow model sees real GDP growth rising at a 2.9% rate in Q2.
For more on GDP and the economy, read: 9 once-hot economic charts that cooled 📉 and You call this a recession? 🤨
Putting it all together 📋
🚨 The Trump administration’s pursuit of tariffs threatens to disrupt global trade, with significant implications for the U.S. economy, corporate earnings, and the stock market. Until we get more clarity, here’s where things stand:
Earnings look bullish: The long-term outlook for the stock market remains favorable, bolstered by expectations for years of earnings growth. And earnings are the most important driver of stock prices.
Demand is positive: Demand for goods and services remains positive, supported by healthy consumer and business balance sheets. Job creation, while cooling, also remains positive, and the Federal Reserve — having resolved the inflation crisis — shifted its focus toward supporting the labor market.
But growth is cooling: While the economy remains healthy, growth has normalized from much hotter levels earlier in the cycle. The economy is less “coiled” these days as major tailwinds like excess job openings and core capex orders have faded. It has become harder to argue that growth is destiny.
Actions speak louder than words: We are in an odd period, given that the hard economic data decoupled from the soft sentiment-oriented data. Consumer and business sentiment has been relatively poor, even as tangible consumer and business activity continues to grow and trend at record levels. From an investor’s perspective, what matters is that the hard economic data continues to hold up.
Stocks are not the economy: Analysts expect the U.S. stock market could outperform the U.S. economy, thanks largely to positive operating leverage. Since the pandemic, companies have aggressively adjusted their cost structures. This came with strategic layoffs and investment in new equipment, including hardware powered by AI. These moves are resulting in positive operating leverage, which means a modest amount of sales growth — in the cooling economy — is translating to robust earnings growth.
Mind the ever-present risks: Of course, we should not get complacent. There will always be risks to worry about, such as U.S. political uncertainty, geopolitical turmoil, energy price volatility, and cyber attacks. There are also the dreaded unknowns. Any of these risks can flare up and spark short-term volatility in the markets.
Investing is never a smooth ride: There’s also the harsh reality that economic recessions and bear markets are developments that all long-term investors should expect as they build wealth in the markets. Always keep your stock market seat belts fastened.
Think long-term: For now, there’s no reason to believe there’ll be a challenge that the economy and the markets won’t be able to overcome over time. The long game remains undefeated, and it’s a streak that long-term investors can expect to continue.
For more on how the macro story is evolving, check out the previous review of the macro crosscurrents. »
Key insights about the stock market 📈
Here’s a roundup of some of TKer’s most talked-about paid and free newsletters about the stock market. All of the headlines are hyperlinked to the archived pieces.
10 truths about the stock market 📈
The stock market can be an intimidating place: It’s real money on the line, there’s an overwhelming amount of information, and people have lost fortunes in it very quickly. But it’s also a place where thoughtful investors have long accumulated a lot of wealth. The primary difference between those two outlooks is related to misconceptions about the stock market that can lead people to make poor investment decisions.
The makeup of the S&P 500 is constantly changing 🔀
Passive investing is a concept usually associated with buying and holding a fund that tracks an index. And no passive investment strategy has attracted as much attention as buying an S&P 500 index fund. However, the S&P 500 — an index of 500 of the largest U.S. companies — is anything but a static set of 500 stocks.
The key driver of stock prices: Earnings💰
For investors, anything you can ever learn about a company matters only if it also tells you something about earnings. That’s because long-term moves in a stock can ultimately be explained by the underlying company’s earnings, expectations for earnings, and uncertainty about those expectations for earnings. Over time, the relationship between stock prices and earnings has a very tight statistical relationship.
Stomach-churning stock market sell-offs are normal🎢
Investors should always be mentally prepared for some big sell-offs in the stock market. It’s part of the deal when you invest in an asset class that is sensitive to the constant flow of good and bad news. Since 1950, the S&P 500 has seen an average annual max drawdown (i.e., the biggest intra-year sell-off) of 14%.
How the stock market performed around recessions 📉📈
Every recession in history was different. And the range of stock performance around them varied greatly. There are two things worth noting. First, recessions have always been accompanied by a significant drawdown in stock prices. Second, the stock market bottomed and inflected upward long before recessions ended.
In the stock market, time pays ⏳
Since 1928, the S&P 500 generated a positive total return more than 89% of the time over all five-year periods. Those are pretty good odds. When you extend the timeframe to 20 years, you’ll see that there’s never been a period where the S&P 500 didn’t generate a positive return.
What a strong dollar means for stocks 👑
While a strong dollar may be great news for Americans vacationing abroad and U.S. businesses importing goods from overseas, it’s a headwind for multinational U.S.-based corporations doing business in non-U.S. markets.
Economy ≠ Stock Market 🤷♂️
The stock market sorta reflects the economy. But also, not really. The S&P 500 is more about the manufacture and sale of goods. U.S. GDP is more about providing services.
Stanley Druckenmiller's No. 1 piece of advice for novice investors 🧐
…you don't want to buy them when earnings are great, because what are they doing when their earnings are great? They go out and expand capacity. Three or four years later, there's overcapacity and they're losing money. What about when they're losing money? Well, then they’ve stopped building capacity. So three or four years later, capacity will have shrunk and their profit margins will be way up. So, you always have to sort of imagine the world the way it's going to be in 18 to 24 months as opposed to now. If you buy it now, you're buying into every single fad every single moment. Whereas if you envision the future, you're trying to imagine how that might be reflected differently in security prices.
Peter Lynch made a remarkably prescient market observation in 1994 🎯
Some event will come out of left field, and the market will go down, or the market will go up. Volatility will occur. Markets will continue to have these ups and downs. … Basic corporate profits have grown about 8% a year historically. So, corporate profits double about every nine years. The stock market ought to double about every nine years… The next 500 points, the next 600 points — I don’t know which way they’ll go… They’ll double again in eight or nine years after that. Because profits go up 8% a year, and stocks will follow. That's all there is to it.
Warren Buffett's 'fourth law of motion' 📉
Long ago, Sir Isaac Newton gave us three laws of motion, which were the work of genius. But Sir Isaac’s talents didn’t extend to investing: He lost a bundle in the South Sea Bubble, explaining later, “I can calculate the movement of the stars, but not the madness of men.” If he had not been traumatized by this loss, Sir Isaac might well have gone on to discover the Fourth Law of Motion: For investors as a whole, returns decrease as motion increases.
Most pros can’t beat the market 🥊
According to S&P Dow Jones Indices (SPDJI), 65% of U.S. large-cap equity fund managers underperformed the S&P 500 in 2024. As you stretch the time horizon, the numbers get even more dismal. Over a three-year period, 85% underperformed. Over a 10-year period, 90% underperformed. And over a 20-year period, 92% underperformed. This 2023 performance follows 14 consecutive years in which the majority of fund managers in this category have lagged the index.
Proof that 'past performance is no guarantee of future results' 📊
Even if you are a fund manager who generated industry-leading returns in one year, history says it’s an almost insurmountable task to stay on top consistently in subsequent years. According to S&P Dow Jones Indices, just 4.21% of all U.S. equity funds in the top half of performance during the first year were able to remain in the top during the four subsequent years. Only 2.42% of U.S. large-cap funds remained in the top half
SPDJI’s report also considered fund performance relative to their benchmarks over the past three years. Of 738 U.S. large-cap equity funds tracked by SPDJI, 50.68% beat the S&P 500 in 2022. Just 5.08% beat the S&P in the two years ending 2023. And only 2.14% beat the index in the three years ending in 2024.
The odds are stacked against stock pickers 🎲
Picking stocks in an attempt to beat market averages is an incredibly challenging and sometimes money-losing effort. Most professional stock pickers aren’t able to do this consistently. One of the reasons for this is that most stocks don’t deliver above-average returns. According to S&P Dow Jones Indices, only 24% of the stocks in the S&P 500 outperformed the average stock’s return from 2000 to 2022. Over this period, the average return on an S&P 500 stock was 390%, while the median stock rose by just 93%.
