By Eric Parnell, CFA on April 28, 2025April 28, 2025 Capital markets are finally making some constructive progress following two tumultuous months. After a gradual descent following its February 19 peak, the U.S. stock market accelerated to the downside once the calendar flipped to the second quarter and the Liberation Day trade war was underway. But following a series of steps by the U.S. to scale back their initial trade aggression, we appear to have reached the point where markets may be ready to put this whole April Fools Month for trade policy in the rearview mirror and try to start to get back to normal. Some big steps were made on the technical front for the U.S. stock market late last week. After a bleak start to trading on Monday, the S&P 500 spent the next four days rallying decisively to the upside. In the process, the headline index broke out decisively above its downward sloping short-term 20-day moving average (dashed green line in the chart below) for the first time in over two months when the stock market was at its all-time high peak. At the same time, the Relative Strength Index (RSI) for the S&P 500 moved above 50 (bullish-bearish crossover) also for the first time since mid-February, and momentum readings marking their greatest strength since the rally last August. These are all decidedly bullish signs that markets may finally be on the mend after a most difficult two month stretch. This does not mean that we are in the clear for U.S. stocks just yet by any means, as downside risks abound. First, we remain in a political environment where the next inflammatory comment for financial markets remains one headline away. After all, we’re not yet even one week removed from the “fire the Fed head” diatribes. Next, while the first breakout for the S&P 500 in some time has been a decisive advance to 5525, further work remains with futures lower heading into the overnight and the downward sloping medium-term 50-day moving average (blue line) looming ahead at 5636 and falling and the rolling over long-term 200-day moving average (red line) at 5746 just above it. Moreover, while the S&P 500’s breakout has exhibited some good pace, the breakouts for the equal weighted S&P 500, mid-caps, and small caps has been relatively more muted. In short, last week was a good start for U.S. stocks, but a challenging road still lies ahead. With that said, capital markets are offering no shortage of positive signs as we make our way toward the summer months. First quarter earnings season: We are now just over one-third of the way through the first quarter earnings season, and the results and guidance have been decidedly positive so far. Revenue and earnings results for 2025 Q1 have been rock solid, but more importantly has been the outlook. Not only are analysts still projecting corporate profit market expansion through the remainder of 2025, but the percentage of companies issuing positive earnings guidance exceeds those issuing negative earnings guidance at 55%, which so far is well above the 5-year average of 43%. Put simply, companies are delivering good results for the recently ended quarter, and are sounding a more optimistic tone about the remainder of the year despite all of the ongoing tariff noise. The VIX: The CBOE Volatility Index, or “fear” gauge, spiked over 60 in the days immediately following Liberation Day, which is another way of saying that investors were freaking out a few weeks ago. But in the trading days since, the VIX has steadily descended back lower. This includes a steady decline over the past four trading days to below 25 for the first time since the start of the month. If the VIX continues to fall into the low 20s or even better the high teens, this suggests an S&P 500 driving to reclaim some of those previous support lines (50-day and 200-day MAs) mentioned above, or put more simply the bounce is on like Donkey Kong. Bonds and the U.S. Dollar: A building concern in the days following Liberation Day was the sharp spike in Treasury yields (reflected in the sharp drop in bond prices as shown by the blue line from April 4 to April 10 in the chart below) coupled with the sharp decline in the U.S. dollar that remained adrift along with thrashing U.S. Treasury yields through last Monday April 21 when the leader of U.S. fiscal policy was stalking the leader of U.S. monetary policy (bad look). This toxic combo was suggesting that foreign investors were selling their loans to the U.S. government and picking up their proverbial marbles to leave the U.S. and go back to their home countries. But since last Monday, we’ve seen U.S. Treasury yields falling (Treasury prices rallying strongly) at the same time that the U.S. dollar is clawing its way back. Capital flight, interrupted, at least for now. All of these signs are positive for capital markets as the new trading week gets underway. But what about the notion that investors are left feeling inexorably burned by the recent tariff fiasco and may place a more permanent ban on U.S. investment in favor of overseas markets. Undoubtedly, an attractive relative value opportunity exists outside of the U.S., so perhaps this long anticipated geographic rotation may continue to get its day as it has for the year-to-date so far. With that said, real talk. Investors on this planet can talk all day long about how they’ve had enough of the U.S. and its policy shenanigans. But here’s the reality. Sure, you as a foreign investor or maybe even a U.S. investor may be pissed about the recent tariff announcements and are waving your hands about the miscalculations and the travesty, but where are you going to go in aggregate as an alternative. The Euro Zone? Eight words – one shared monetary policy, twenty different fiscal policies. And no, the European Monetary Union is not like the United States of America where fifty separate states share the same monetary policy, as the big fiscal policy dogs stateside reside in Washington DC. Japan? The yen is a safe haven currency, but one word – demographics. Once the second largest economy in the world (when entering my first year at Dickinson College in the fall of 1992, my freshman seminar was titled “There’s a Japanese In Your Future” – great class, great professor, but turns out not so much), it is increasingly descending down the ranks having been surpassed by Germany and now India in recent years to become the fifth largest economy in the world and falling. Switzerland? The classic global safe haven story indeed, but their economy is about the size of North Carolina’s, and it’s not like they haven’t had their own challenges in recent years (remember one of their two major banks in Credit Suisse needing to be acquired by their other major bank in UBS from just over two years ago?). UK? Once the richest country in the world indeed, but Pax Britannica is well over a century ago for a reason (the U.S. is also its own country about to celebrate its semiquincentennial (250 years) in 2026 for a reason too). India? Too much red tape. China? C’mon. Put simply, investors may want to bolt from the U.S., but where are you gonna go? Sure, the bon vivant may be pulling up stakes and buying a chalet in Andermatt on a micro level, but there’s nowhere else in the world for the global elite to go on a macro level that has the same size, quality, and liquidity still on offer from the United States of America. Does this mean that U.S. stocks are going to continue to crush the rest of the world on a total return basis? Maybe, maybe not, as a period of non-U.S. relative outperformance is long overdue. But it also doesn’t mean that it’s all going to go to hell for U.S. markets either. I’ll close with two more positive notes for capital markets to put icing on the cake and a cherry on top. First, inflation expectations remain fully in check despite the recent market bounce. The 5-Year Breakeven Inflation Rate, which measures average expected inflation for the next five years, remains subdued at 2.32%. While this may be signaling greater concerns about a disinflationary economic recession looming in the second half of 2025, I counter this notion with corporate earnings and guidance that are still telling a decidedly different and far more optimistic story through the rest of 2025 and into 2026 so far this earnings season. Next, investor risk appetite appears to be on the mend. This is evidenced by CCC and lower spreads, which took a drop lower toward the end of last week and are now 150 bps below their April 7 highs. No shortage of downside risks remain for capital markets as we enter the new trading week, and extended bouts of volatility should continue to be expected. But the good news is that a variety of economic and market indicators are signaling a decidedly positive tone that the trade war impact on financial markets may be over and that further upside lies ahead. Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.Investment advice offered through Great Valley Advisor Group (GVA), a Registered Investment Advisor. I am solely an investment advisor representative of Great Valley Advisor Group, and not affiliated with LPL Financial. Any opinions or views expressed by me are not those of LPL Financial. This is not intended to be used as tax or legal advice. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. Please consult a tax or legal professional for specific information and advice. LPL Compliance Tracking #731311.