The Stock Market is Facing a Test This Week From Inflation, but Trade Talks May Set the Tone

In the week ahead, stock-market investors appear to be paying closer attention to trade negotiations and tariff developments rather than economic indicators like inflation. According to Adrian Helfert, chief investment officer at Westwood, the market's focus has shifted even more intensely toward tariffs, particularly in light of President Donald Trump's recent moves, and perhaps even more so than before the Federal Reserve's latest meeting.

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During a press conference following the Fed’s decision to keep interest rates unchanged, Chair Jerome Powell emphasized ongoing uncertainty. The central bank continues to balance inflationary pressures against the risk of rising unemployment.

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If inflation gains momentum, the Fed may lean toward maintaining tighter monetary policy, but weaker economic growth could push them toward more accommodative action. Powell stressed a patient approach, using “wait and see” repeatedly throughout the briefing.

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Despite this wait-and-see stance, the upcoming release of April’s consumer price index on Tuesday could still influence markets. Inflation eased in March — marking its first monthly drop since 2020 — but higher tariffs imposed by the Trump administration could keep inflation concerns alive.

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Still, analysts at BMO Capital Markets, including Ian Lyngen and Vail Hartman, believe inflation stemming from tariffs is likely to stay within recent ranges, rather than cause a major shift in consumer prices.

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Yet concerns persist. Some investors are worried that even if trade negotiations show signs of progress or if the Trump administration relaxes tariffs, uncertainty may still weigh on corporate earnings. Many companies are finding it difficult to provide forward-looking guidance due to the unpredictable policy landscape.

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George Young, a portfolio manager at Villere & Co., expressed caution, saying that while they are typically optimistic, they’re currently inclined to step back and reduce exposure due to ongoing uncertainty.

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Back in February, the S&P 500 was near all-time highs and largely brushing off tariff-related concerns. However, markets were rattled after Trump announced plans in early April for sweeping reciprocal tariffs and a 10% universal tariff across most trade partners.

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The S&P 500 dropped nearly 19% from its February peak in just over a week. Markets rebounded later in April after Trump eased some tariff proposals and hinted at scaling back extreme measures, including a proposed 145% tariff on Chinese imports. As of Friday’s close, the S&P 500 had recovered significantly and was only 7.9% below its record high.

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Despite this rebound, Young remains cautious. While his firm has made small moves back into the market, he believes it’s prudent to stay defensive until the full impact of the trade conflict becomes clearer. He pointed out that investors can earn 4% returns from money-market funds or 5% from 10-year corporate bonds — relatively safe alternatives to equities, which may offer inconsistent returns of 8% or 9%. In uncertain times, “you’re kind of paid to sit and wait,” said Young, adding that it might be wiser to avoid market turbulence in the short term.

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The major indexes posted modest losses last week: the S&P 500 slipped 0.5%, the Dow fell 0.2%, and the Nasdaq declined 0.3%.

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Helfert sees some clarity emerging around the purpose of the Trump administration’s tariff strategy. Initially pitched as a way to generate revenue and reduce the deficit, the tariffs also aimed to rebalance trade. These goals, however, are not entirely compatible.

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More recently, the administration has framed the tariffs as a way to boost economic security across five critical sectors: pharmaceuticals, food, energy, semiconductors, and rare-earth elements.

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Understanding tariffs through this lens — as a strategic push for U.S. self-reliance — suggests that investors could benefit by targeting companies operating in these sectors. It’s not a wholesale transformation of the economy, Helfert explained, but rather a push to develop domestic manufacturing in these key areas. Success will depend on selecting the right industries and companies poised to thrive in this environment.

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Even within these sectors, there will be winners and losers. For example, in the energy sector, the administration’s efforts to boost oil output and reduce fuel prices are placing pressure on exploration and oilfield service companies. At the same time, pipeline and energy infrastructure providers may stand to gain from these shifts.

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Helfert also sees a positive in Trump’s sensitivity to the stock market, suggesting the president is unlikely to pursue policies that would risk triggering steep market declines. Just last Thursday, Trump encouraged investors to buy stocks while speaking optimistically about a potential U.K. trade deal and progress in U.S.-China negotiations.

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Aside from tariff headlines, the coming week is also packed with economic data. Tuesday brings April’s consumer-price index. Thursday features several reports: retail sales, the producer-price index, industrial production and capacity utilization, regional manufacturing indexes from the New York and Philadelphia Feds, business inventories for March, and home-builder sentiment.

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On Friday, the market will get updates on April import prices, housing starts, building permits, and the University of Michigan’s early May consumer-sentiment reading.

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