'Big' Bill on a Tightrope, Broad Rally on the Books
How 'beautiful' this legislation is depends on who's looking at it, but the big question is, will it pass? Also, let's chart the market and an old Sarge bank fave.
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Senate Republicans worked through the day on Monday and apparently through most of the overnight as well headed into Tuesday. The bill currently being debated across our legislative branch of government's upper body may be big and beautiful in the eyes of certain beholders, but easy to pass, it has not been. Republicans can only lose three votes and still pass the bill. We already know that the fiscally conservative Rand Paul of Kentucky and Thom Tillis of North Carolina stand firmly against the bill as based on the Congressional Budget Office's estimate, it is expected to exacerbate an already fragile federal fiscal reality.
I don't know if the CBO's estimate is accurate or not, but I do know that CBO estimates, historically, have been wildly inaccurate. This particular estimate projects an increase to the national debt of some $3.3 trillion to $3.4 trillion over ten years. Some of the assumptions, however, that went into the CBO's estimate are highly unlikely in my opinion.
For starters, the CBO assumes that the bill adds an average of just 0.09 percentage points to real gross domestic product from 2025 to 2029 and just 0.04% after that. I may be wrong, but that seems rather conservative, especially if such concepts as no taxes on tips and overtime get through and especially if the larger SALT (state and local tax) deduction for highly populated blue states gets through. The CBO also, in a separate study, projected that tariffs implemented this year would reduce deficits by $2.8 trillion over the next ten years, but did not allow that as an offset for their estimate concerning this bill. I understand this, given that these tariffs have been evolving since they were announced and cannot be counted on, but discounting them all together? That seems somewhat disingenuous.
According to the Wall Street Journal, Ron Johnson of Wisconsin described the bill as being in a state of "flux." Apparently, Lisa Murkowski of Alaska and Marsha Blackburn of Tennessee were still on the fence, either in need of some convincing or trying to negotiate better terms for their particular constituencies.
Marketplace
The equity market rally that had already been in place and then technically re-confirmed last week, continued with its momentum on Monday although with a bit less "gumption" than had been witnessed on either Thursday or Friday. Trading volume eased a bit as the last day of what had been an outstanding quarter packs a punch, but not in the way that Friday's Russell rebalancing had. Treasury debt securities were strong as well on Monday as the U.S. Ten Year Note paid 4.24% by day's end (-5 basis points). Treasuries have continued to rally overnight even though equity index futures appear less certain in where to go this morning.
On Monday, the S&P 500 gained 0.52%, while the Nasdaq Composite gained 0.47%. Both of these indexes set new all-time intraday highs and all-time closing highs for a second consecutive trading session. The broader market, however, did not do as well. The Dow Transports gave up 0.65%, while the Philly Semiconductors closed relatively flat (+0.03%). The small- to mid-cap stocks were stuck in the mud as well. The Russell 2000 gained 0.12%, while the S&P SmallCap 600 lost 0.23% and the S&P MidCap 400 closed up less than 0.01%.
Eight of the 11 S&P sector SPDR exchange-traded funds closed out the Monday session in the green, led in a northerly direction by Technology XLK as quantum computing and software stocks did well. Growth more or less dominated again, as it had last week, but largely without much help from the semis, while defensive type sectors finished in the day in the middle of the pack, which is an improvement in the daily tables for those groups.
Breadth
Winners beat losers at the NYSE by a rough 5-to-4 margin and at the Nasdaq by about 7 to 5. Advancing volume took a 65.5% share of composite NYSE-listed trade and a 62.4% share of composite Nasdaq-listed activity. Aggregate trade, however, despite being higher than it had been last Thursday, was down on a day-over-day basis from Friday by 26.7% across NYSE-listings, and down 24.9% across Nasdaq-listings.
Does that make Monday's price discovery less meaningful than what we saw late last week? Possibly. It does probably mean that some managers were unsure about the bill that the Senate is debating as the quarter came to a close. Keep in mind that the market has to some degree, priced in the tax relief included in that bill.
Undeniably... a Great Q2
Whatever happens from here, Q2 2025 was a great quarter for U.S. investors. This morning, I see that the above-mentioned U.S. Ten-Year Note is yielding less than 4.2% as you rip that greasy melon away from that disgusting thing you call a pillow, after having paid more than 4.6% as recently as May 21. The S&P 500 added 10.57% over the three-month period as the Russell 2000 tacked on 8.28%. Both were easily outdone by the Nasdaq Composite that gained a stunning 17.75%.
For the quarter, the Technology SPDR ETF gained 22.9%, supported by the Dow Jones US Semiconductor Index that ran 40.77%. Among large caps, the semis were led by Broadcom AVGO, Arm Holdings ARM and Nvidia NVDA. Those three names were up 63.37%, 50.04% and 44.07% respectively.
The Dow Jones U.S. Software Index gained 27.13% over the three-month period. Large cap software leaders were CoreWeave CRWV, Coinbase Global COIN and Cloudflare NET. Those three names, respectively, gained 307.65%, 101.51% and 70.41% over the period. Incredible. Just an aside, Goldman Sachs GS added NET to its U.S. Conviction List this morning, removing Snowflake SNOW.
How Broad Is This Rally?
This is a three-month chart of the S&P 500 (black) overlaid with the equal-weight S&P 500 (red). Not much of a difference is there. The love, at least across larger stocks, was well-spread.
An Ally for Powell
In Monday's Market Recon column, we mentioned that as Fed Chair Jerome Powell has chosen to either remain cautious on policy or had simply turned into a dear in the headlights that two Fed Governors (Waller, Bowman) and two regional Fed presidents (Goolsbee, Schmid) had spoken in opposition to Powell's stance last week. On Monday, Atlanta Fed Pres. Raphael Bostic spoke out in support of Powell's inaction.
Bostic, on tariffs, said: "I think there is actually more pricing (inflation) to come, and it is more a question of time, of when and not if."
Despite that we noted on Monday that Fed Funds futures are now pricing in three-quarters of a percentage point worth of rate cuts by year's end, Bostic stuck to his guns on his projection for just a quarter-percentage point worth of rate cuts over the balance of the year. On that, Bostic commented, "I'm still there. I think we actually have some luxury to be patient, because labor markets are actually quite solid."
For what it's worth, Atlanta does not vote on policy this year, while Chicago (Goolsbee) and Kansas City (Schmid) do. Fed Governors always have policy voting rights.
Just a Heads Up: KeyCorp
I initiate an old friend on Monday. A reader, Bill L., reminded me to take a look at one of the stocks that I have been known to trade in the past and I liked what I saw. Take a look at this chart of KeyCorp KEY, which is a Cleveland, Ohio- based regional bank...
Readers will see the stock breaking out from an inverted head & shoulders pattern with a $16.60 pivot. The stock has also, within the past week or so, retaken its 200-day simple moving average, which forces portfolio managers with an interest to increase long-side exposure. Relative Strength has reached across the 70 bound for the first time since November, while the daily Moving Average Convergence Divergence has taken on a decisively bullish posture. My initial target price is $21, which would take out those November highs.
Economics (All Times Eastern)
09:45 - S&P Global Manufacturing PMI (Jun-F): Flashed 52.0.
10:00 - ISM Manufacturing Index (Jun): Expecting 48.8, Last 48.5.
10:00 - JOLTs Job Openings (May): Last 7.391M.
10:00 - JOLTs Job Quits (May): Last 3.194M.
10:00 - Construction Spending (May): Expecting -0.1% m/m, Last -0.4% m/m.
4:30 p.m. - API Oil Inventories (Weekly): Last -4.277M.
The Fed
(All Times Eastern)
09:30 - Speaker: Federal Reserve Chair Jerome Powell.
Today's Earnings Highlights
(Consensus EPS Expectations)
Before the Open: MSM (1.03)
After the Close: STZ (3.29)
At the time of publication, Guilfoyle was long NVDA, KEY equity.
