Last week was a historic one for U.S. stocks, characterized by dramatic market swings and a powerful rally. The S&P 500 and Dow Jones recorded their strongest weekly gains since October 2023, climbing 5.7% and 5%, respectively. Meanwhile, the Nasdaq Composite rose 7.3%, marking its best weekly performance since November 2022. The surge was largely fueled by a pause in reciprocal tariffs announced by President Trump.

While the gains were broad-based, the three sectors  — Technology Select Sector SPDR ETF (XLK Quick QuoteXLK - Free Report) , Industrial Select Sector SPDR ETF (XLI Quick QuoteXLI - Free Report) and Financial Select Sector SPDR ETF (XLF Quick QuoteXLF - Free Report) — were the biggest winners. AI chipmaker NVIDIA (NVDA Quick QuoteNVDA - Free Report) led the "Magnificent Seven" group higher last week.

Will the Rally Continue?

President Donald Trump halted the "reciprocal" tariffs for 90 days on some 75 countries. The administration has exempted smartphones, computers and other electronics from its proposed reciprocal tariffs. The products not subject to Trump’s new tariffs also include machines used to make semiconductors. The move will significantly benefit tech giants. 

However, the new administration increased levies on China to 145%. In response, China retaliated, increasing duties on all U.S. imports from 84% to 125%, escalating the trade war between the two countries (read: US-Sino Trade War Escalates: ETF Areas Under Pressure). 

The uncertainty over the impact of tariffs on the economy is making investors jittery. Consumer sentiment tumbled to its lowest level since 2022 in April as the expected inflation level hit its highest since 1981, per the latest survey of the University of Michigan. The expectation for inflation over the year jumped to 6.7%, the highest level since November 1981, and is up from 5% in March. At the five-year horizon, the expectation climbed to 4.4%, a 0.3 percentage point increase from March and the highest since June 1991.

Inflation slowed sharply in March, underscoring the continued strength and resilience of the economy. Per the latest data, the core consumer price index, which strips out volatile food and energy prices, rose at its slowest pace in four years. The cooling inflation may encourage the Fed to move toward a more accommodative stance in the months ahead, particularly if wage growth and labor market pressures continue to moderate. Interest rate futures markets are already pricing in a potential rate cut as early as June or July.

Further, the recent stock market sell-offs have made U.S. stocks the cheapest in nearly 18 months, making them compelling ahead of earnings. The forward price-to-earnings ratio (P/E) for the S&P 500 fell to 18.01 on April 8. It was the lowest level since November 2023 and below its 10-year average of 18.63, according to Dow Jones Market. 

Though the first-quarter earnings picture looks decent, the rapidly fluctuating U.S. trade policy has clouded the outlook for the company’s earnings for the rest of the year. Most companies may be forced to withdraw or lower their earlier guidance, given the tariff-induced uncertainty. 

According to the latest Earnings Trends report, total first-quarter earnings for the S&P 500 Index are expected to be up 5.8% year over year on 3.8% higher revenues. This will follow the 14.1% earnings growth on 5.7% revenue growth in the preceding period. First-quarter earnings estimates steadily came down from 10.4% at the start of January 2025 (read: 5 Sector ETFs Set for Q1 Earnings Growth Amid Tariff Woes).

Bottom Line

Volatility is expected to continue in the weeks ahead. A softening economy, potential earnings pressure and geopolitical volatility still cast long shadows over the bullish case.