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Bull markets are born on pessimism, grown on skepticism, mature on optimism and die on euphoria – John Templeton

The election of Donald Trump last November was at first met with euphoria by investors. Tax cuts, streamlined regulation, improved government efficiency. Many thought we were entering a New Era of prosperity. It felt like Morning in America again. But the Trump Trade has soured in recent weeks due to concerns about tariffs and foreign policy. Combined with a very expensive market and stubborn inflation (which I warned about in “Why The S&P Will Drop 25% In 2025” (December 10, 2024)), the market has turned south with a vengeance.

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It can’t be said too often that the Mag 7 comprise ~30% of the market cap of the S&P 500. When they were going up, they carried the market – and index investors – with them. But now that they appear to be rolling over, the reverse is true. In addition to the reversal in these leading stocks, defensive plays are getting a bid. Dividend stocks, Treasuries and Gold are all working well this year.

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Anything is possible in the market but it’s hard for me to see the stocks making a lot of progress given all these issues. Probabilities for a rate cut at the Fed’s May 7 meeting are inching up – but it’s not clear to me the Fed can move with inflation proving as sticky as it is. That makes this Wednesday’s February CPI Report the most important data point of the week IMO.

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