GAR Capital Sunday Newsletter

The S&P 500 closed out its 9th straight green day, marking its longest win streak since 2004.

GAR Capital Sunday Edition Newsletter – May 4, 2025

Market Overview: The Rally Rolls On—But for How Long?

The S&P 500 closed out its 9th straight green day, marking its longest win streak since 2004. That’s no small feat—and it signals serious bullish momentum. The post-April 9th rebound has now erased all the Liberation Day losses, pushing the index back into trend with renewed vigor.

But while the rally looks impressive on the surface, we’re watching what’s driving it—and more importantly, what could disrupt it.

S&P 500 & Earnings: AI-Fueled and Margin-Driven

Corporate earnings have outperformed—not just on revenue, but on margins. This is key. The story isn’t about revenue blowouts—it’s about companies maintaining pricing power and cost control even with higher input prices. AI remains a standout driver, especially among MegaCap tech, fueling investor appetite for forward-growth multiples.

However, valuations are stretched, especially with forward P/Es above long-term averages. If margin surprises fade or top-line growth slows, there’s little room for error.

📉 Risks on the Radar: Goldman Sachs recently flagged four major risks that could challenge the sustainability of this rally:

1. Policy volatility – from tariffs to geopolitical shifts, surprises remain possible.
2. High tariffs – deglobalization is accelerating, and global trade friction is returning.
3. Stretched valuations – especially in tech and high-beta names.
4. Sticky inflation – even with soft patches, inflation remains elevated in key components.

Markets often brush off peak uncertainty quickly, but structural risks like deglobalization or persistent inflation don’t disappear—they simmer.

Inflation & The Fed: Markets Repricing Expectations

Rate-cut expectations have shifted significantly. Just a few weeks ago, markets were pricing in 4–5 rate cuts in 2025. Now, it’s down to just 3 cuts, and a June cut is effectively off the table.

Why? Because inflation data isn’t cooperating—services inflation and shelter components remain sticky, and the recent surge in 2Y yields (+22bps) and 30Y yields (+27bps) reflects that repricing. The Fed can’t ease aggressively unless inflation softens in a sustained way.

Our view: The Fed wants to cut—but can’t do so at the expense of credibility. Expect more “wait-and-see” posture through summer unless inflation data rolls over hard.

💡 What’s Next: Key Themes to Watch

🔹 Breadth vs. Narrow Leadership: Mag7 stocks are carrying much of the load. Broader participation is needed for sustained upside.

🔹 Inflation Reports: Next CPI/PPI prints are critical. Any upside surprise could derail this rally quickly.

🔹 Technical Levels: We’re near critical resistance zones. Without new highs or stronger volume, expect some digestion or even reversal.

🔹 Fed Speakers: Keep an ear out. The tone is shifting toward neutral, not dovish. Watch Powell’s language closely.

🚨 Final Takeaway: Optimism, with Caution

There’s no denying the strength in the tape—but beneath it lies a market walking a tightrope. If inflation cooperates and earnings stay firm, we could see new highs. But if risks resurface—tariffs, Fed policy errors, or slowing data—this rally is vulnerable.

"Stay tactical. Stay data-driven. And as always, we’ll keep you one step ahead."

Carlos G & GAR Capital Team Your edge in uncertain markets.