In a broad-based rally on May 16, U.S. equities surged as investors cheered a 90-day U.S.–China tariff truce and cooling inflation data. The Dow Jones Industrial Average rose 331.99 points (0.78%) to close at 42,654.74, its strongest finish since late March, while the S&P 500 added 41.45 points (0.70%) to 5,958.38, putting it within striking distance of its record closing high (source).
What’s Driving the Rally?
- Trade Truce: On May 12, Washington and Beijing agreed to slash many tariffs—U.S. duties cut from 145% to 30%, China’s from 125% to 10%—pausing the global trade stand-off that had fueled recession fears (USTR.gov).
- Cooling Inflation: The U.S. Bureau of Labor Statistics reported April CPI rose just 0.2% (2.3% year-on-year), the slowest 12-month increase since early 2021, easing pressure on consumer wallets (bls.gov).
- Fed’s Wait-and-See: With inflation “still somewhat elevated,” the Federal Reserve held rates at 4.25–4.50% in early May, signaling patience amid tariff uncertainties and pricing in roughly two 25-bp cuts by year-end (federalreserve.gov).
Expert Analysis
“This rally reflects relief more than euphoria,” says Dr. Mary Daly, President of the Federal Reserve Bank of San Francisco and a Ph.D. economist with 25 years of monetary policy experience.
“While tariff relief is welcome, durable gains hinge on whether these temporary truce measures translate into lower consumer prices.”
In an exclusive interview, Dr. Daly noted that high one-year inflation expectations (~7.3%) remain a concern and could sway the Fed’s path if consumer sentiment fails to recover.
5 Key Takeaways
- Broad Leadership: Health care and tech led gains; UnitedHealth Group jumped ~6.4%, Nvidia +6%.
- Energy Lags: S&P energy sector dipped ~0.2% as oil prices fell on geopolitical news.
- Labor Market Resilience: April nonfarm payrolls +177,000; unemployment steady at 4.2%.
- Credit Watch: Moody’s downgraded U.S. sovereign rating to Aa1 on May 16, briefly shaking bonds.
- Retail Signals: Walmart announced U.S. price hikes later this month due to tariffs, hinting businesses may pass costs onto consumers.
What Happens Next?
- Fed Watch: Markets expect the first rate cut in late summer or early fall if inflation remains tame.
- Earnings Focus: With over 90% of S&P companies reporting Q1, guidance will drive near-term moves.
- Tariff Updates: Investors will parse U.S.–China talks for signs of extension or rollback.
Daily Digest (Ongoing Stories)
- May-2025 Fed Minutes Release: Expected June 18 – glimpse into policymakers’ thinking.
- China Economic Data: April export/import figures due May 20.
- Tech Earnings: Alphabet and Microsoft Q1 reports on May 22 (Alphabet IR, Microsoft IR).
Fact-Check
| Claim | Verification |
|---|---|
| “Inflation is accelerating again.” | April CPI rose 0.2%, not a spike; core CPI at 2.3% Y/Y is lowest since early 2021 (bls.gov). |
| “Trade truce removes all tariff risks.” | Only a 90-day pause on select goods; broad duties remain in place across many categories (USTR.gov). |
