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Good Morning!
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Now let’s break down what actually moved markets this past week and what to watch next.
Market Recap
This was a week of important storylines that ultimately left markets roughly flat. Stocks spent most of the week building on recent gains before selling off hard on Friday, ending the S&P 500 and Nasdaq barely positive for the week and snapping the winning streak for small caps. The three big themes were a troubling inflation report, a landmark change in Fed leadership, and a Trump-Xi summit that disappointed.
The most important economic release of the week was Tuesday's inflation report. Inflation accelerated in April to an annual rate of 3.8%, the highest since May 2023, as the Iran war pushed up energy costs and raised prices across the economy. The concerning detail is that inflation is no longer just an energy story. The inflation surge broadened in April compared to March, with grocery prices jumping sharply as rising oil costs filtered through to food production and transportation. For the first time in three years, Americans' wages are no longer outpacing inflation, a meaningful shift that puts real pressure on consumer spending going forward. Traders raised the odds for a Fed rate hike by the end of the year to about 30% following the report.
The Fed itself underwent its most significant change in nearly a decade this week. Friday marks Jerome Powell's final day as Fed chair after eight years at the helm. The Senate confirmed Kevin Warsh as the 17th Fed chair in a 54-45 vote, the narrowest margin since the current approval process was put in place in 1977. Warsh's public statements point to tighter inflation discipline and a more narrowly focused central bank, with his first meeting as chair set for June 16-17. Markets will be watching closely for any early signals about how he plans to navigate rising inflation, a stalled labor market, and ongoing energy uncertainty.
The Trump-Xi summit in Beijing dominated headlines midweek and drove a brief rally on hopes of a major breakthrough. The reality was more subdued. From a market perspective the outcome was meager, with no grand economic breakthrough but rather a stabilization of relations and a broad effort to prevent the rivalry from spiraling further. On the Iran front, Trump said he and Xi agreed Tehran should not have a nuclear weapon, and Trump is considering lifting sanctions on Chinese companies that buy Iranian oil. Xi indicated China would be helpful in reopening the Strait of Hormuz and pledged not to send military equipment to Iran, though analysts cautioned any Chinese influence on Tehran would likely be subtle and not immediately visible. Markets sold off Friday as the lack of concrete breakthroughs sank in, with oil and Treasury yields both rising sharply. The 10-year Treasury yield spiked to its highest level in nearly a year, with chances of a Fed rate hike sometime this year climbing to 45% according to market pricing.
Retail stocks have been under particular pressure this week, with the sector on pace for its worst weekly performance since October 2025, as investors grow increasingly cautious on the consumer backdrop. With wages now falling behind inflation, that caution is well founded.
What's Coming Next Week
Earnings take center stage again with a heavy slate of major retailers reporting results. This will be the most important read yet on how the American consumer is holding up under the weight of the highest inflation in three years. Given the record-low sentiment readings and wages now losing ground to prices, the guidance from these companies will matter enormously.
The FOMC minutes from the May meeting are also due Wednesday, which will give markets the clearest look yet at how divided the committee remains on the path for rates. With a new Fed chair now in place, investors will be parsing every word for clues about how Warsh plans to steer policy.
The Iran situation and the ripple effects from the China summit will also remain in focus. China's potential behind-the-scenes influence on Iran is now the most watched diplomatic variable in the energy market. Any sign of progress on reopening the Strait would send oil lower and provide the inflation relief the economy badly needs.
The bottom line: inflation is broadening beyond energy, real wages are now falling, and markets are starting to price in rate hikes rather than cuts. The new Fed chair inherits a very difficult situation. Earnings from major retailers next week will tell us whether the consumer can hold on.
We will continue monitoring these developments closely and keep you updated with new opportunities as they emerge.
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SmallCapStocks Team
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