Core Viewpoint - Multiple Wall Street institutions have issued warnings about a potential correction in the U.S. stock market, with UBS taking a notably bearish stance on the U.S. economy, dollar, and equities [2][4]. Group 1: Economic Outlook - UBS predicts a sharp slowdown in U.S. GDP growth from 2.0% in Q2 to 0.9% by Q4, significantly below the consensus estimate of 1% [4]. - Deutsche Bank warns that tariff increases and tightened immigration policies will negatively impact the U.S. economy, raising inflation while weakening growth, with limited room for future rate cuts by the Federal Reserve [10][11]. Group 2: Stock Market Predictions - Stifel analysts forecast a potential 14% decline in the S&P 500 index by the end of 2025, with a target of 5500 points [6]. - UBS sets a year-end target for the MSCI global index at 960 points, with a warning of significant downside risks in the near term [4]. Group 3: Market Sentiment and Risks - There is a growing concern about retail investor enthusiasm, with retail trading accounting for about 20% of total options trading activity, surpassing levels seen during the "meme stock" frenzy in 2021 [7][8]. - The share of stocks in household financial assets has surged to 36%, the highest level recorded since the 1950s, indicating potential market overheating [7]. Group 4: Inflation and Monetary Policy - Deutsche Bank anticipates that core CPI inflation may rise by approximately 0.5 percentage points due to tariff impacts, which is significantly higher than market consensus [10][11]. - The bank suggests that the current nominal neutral interest rate should be viewed closer to 2.5% rather than 2%, indicating limited room for rate cuts by the Federal Reserve [11].

Group 1 - Wall Street's record rally is facing a reality check as market valuations reach levels seen around the 2021 peak [1][2] - Investors have been willing to pay premiums for stocks, but the impact of tariffs on the overall economy is becoming harder to ignore [1][2] - The Stifel team warns of a potential "mild stagflation" that could trigger a market sell-off similar to the "tariff panic" experienced in April [2][3] Group 2 - The upcoming economic slowdown is expected to be more severe, with actual unit sales of goods likely to decline as companies raise prices to offset tariffs [2][3] - The S&P 500 index could drop by up to 14%, aligning with Stifel's year-end target of 5500 points, despite the current index being around 6389 points [2][3] - Stifel remains one of the few bearish voices on Wall Street, maintaining a lower target for the S&P 500 compared to other strategists [3] Group 3 - Investors are advised to consider defensive value stocks, with Philip Morris International and Abbott Laboratories highlighted as potential opportunities [3]

Core Viewpoint - The Federal Reserve decided to maintain the federal funds rate in the range of 4.25% to 4.5%, with a significant reduction in the market's expectation for a rate cut in September from 65% to below 50% [1][2][8]. Group 1: Federal Reserve Meeting Outcomes - The Federal Reserve's decision was supported by a 9-2 vote, with two members advocating for a 25 basis point rate cut, marking the first time since 1993 that two members opposed the chair's decision [4]. - The meeting statement included new language indicating "economic activity has slowed in the first half of the year," reflecting concerns about growth momentum [4]. - There is a shift in focus from solely inflation to also considering employment market risks, suggesting that if employment deteriorates, the Fed may prioritize action [4][8]. Group 2: Future Policy Outlook - The potential for a rate cut in September will depend on upcoming economic data, particularly regarding inflation and employment [7]. - If inflation data shows an increase due to tariffs or rising import prices, it could delay any rate cuts [7]. - The current unemployment rate is stable, but weak corporate investment and reduced immigration could lead to job market deterioration, with a threshold of 4.5% unemployment potentially triggering a rate cut [7]. Group 3: Market Impact - Following the Fed's meeting, market expectations for a September rate cut decreased significantly, with the annual expected rate cuts revised from 2.2 to 1.8 times [8]. - The risk of "moderate stagflation" in the U.S. economy is rising, with second-quarter real private consumption growth at only 1.2% and weak corporate capital expenditures [8]. - Short-term market volatility increased, with declines in U.S. stocks, rising bond yields, and a stronger dollar, reflecting the market's absorption of the Fed's hawkish signals [10]. Group 4: External Variables - Political pressure from former President Trump on Fed Chair Powell regarding rate cuts poses a challenge to the Fed's independence [10]. - Ongoing trade negotiations, particularly with China, Canada, and Mexico, could impact inflation risks if tariffs are escalated [10].

Economic Overview - The Federal Reserve's recent decision to maintain interest rates has raised concerns about the U.S. economy potentially entering a phase of mild stagflation, contrasting sharply with the Trump administration's assertive external posture, which masks underlying fiscal and economic challenges [1][9]. Capital Flows - The U.S. Treasury's International Capital Flow report indicates significant sell-offs of U.S. Treasury bonds by foreign nations, with China selling $8.2 billion and Canada $57.8 billion in April, intensifying pressure on the U.S. Treasury [3]. - In contrast, Japan increased its holdings of U.S. Treasuries by $3.7 billion, maintaining its position as the largest foreign holder at $1.13 trillion, while the UK added $28.4 billion, holding $807.7 billion, showcasing strategic support for the U.S. despite its own economic challenges [5]. Monetary Policy - The Trump administration is under pressure to lower dollar interest rates to reduce the cost of issuing debt, but Federal Reserve Chairman Jerome Powell's stance remains hawkish, with indications that interest rates will not decrease through 2025 [7]. - Powell acknowledged that tariff policies are raising U.S. prices and that the economy may be entering a mild stagflation phase, which has led to a significant reduction in expectations for interest rate cuts in 2025 and 2026 [9]. Economic Indicators - The U.S. Economic Surprise Index has dropped to its lowest point in nine months, indicating that most economic data is falling short of expectations, suggesting a contraction in economic activity [9]. - The semiconductor industry, a key sector for the U.S., has seen sales decline to $16 billion in April, a 24.6% year-over-year drop, and a 10.5% decrease compared to the last quarter of 2024, reflecting broader economic struggles [9].

Group 1 - The US stock market has experienced fluctuations due to escalating tensions in the Middle East and the Federal Reserve's decisions, with the Dow Jones remaining within a range of 42,700 to 42,600 this week [1] - The Federal Reserve's latest monetary policy stance is interpreted as hawkish, maintaining the overnight interest rate target range at 4.25%-4.50%, with a warning from Chairman Powell about potential inflation from tariffs [3] - The Fed's economic forecast indicates a mild stagflation scenario, with expected economic growth slowing to 1.4% this year, an unemployment rate of 4.5%, and inflation reaching 3% [3] Group 2 - Current stock risk exposure is high enough to trigger significant risk-averse actions, while also being low enough to encourage buying on dips, indicating that any minor event could lead to volatility in the US stock market [4] - Hedge funds continued to buy stocks last week, but at a slower pace, while mutual funds saw an outflow of $10 billion, indicating a cautious market sentiment [6] - The upcoming rebalancing by pension and target-date funds, which are expected to sell $89 billion worth of stocks, may further weigh on the market in the coming days [4] Group 3 - As trade tensions ease, there is a partial recovery in US economic confidence, but investors are advised to reconsider geopolitical issues before increasing positions, as the Middle East situation could catalyze further market volatility [7] - The potential for rising energy prices due to prolonged Middle Eastern conflicts could exacerbate inflation fears, negatively impacting the US stock market [7]