Welcome to The Predictive Investor weekly update for May 11th, 2025!
All eyes are on the 200-day moving average, long considered a key indicator by traders for determining the overall market trend.
Overall the technicals on the S&P 500 look constructive. The index broke above the VWAP anchored to the February high, and successfully retested it this week, with the Advance-Decline line breaking out to a new high. Which means the bulls are back in control (for now).
What to watch: as the index approaches its 200-day moving average, the % of S&P stocks above their 200-day moving average is advancing toward its downtrend line. A breakout would be very bullish for the index.
Our rules-based strategy doesn’t trade headlines, but here’s what we’re watching – and why it matters.
Services are holding the line
Services continue to be the economy’s silver lining, with the ISM Services PMI coming in stronger than expected for April. (Read)
While manufacturing dipped into contraction territory earlier this year, the services economy – healthcare, travel, tech and business services – remains in expansion territory.
The services sector accounts for more than 70% of the economy, and most services businesses are less exposed to tariffs. As long as this sector holds, any resulting recession from trade policy is likely to be shallow.
Tariffs: a 10% baseline with carveouts
The Trump administration announced a trade deal with the UK, where UK imports will face a 10% tariff with carveouts for steel and aluminum imports.
Treasury Secretary Scott Bessent met with Chinese officials yesterday, and while no firm details have been released yet, we will likely end up with some version of baseline tariffs with carveouts for critical goods.
Markets don’t need perfection, just predictability. A structured tariff plan may be disruptive, but companies will adapt as they always do.
US outperformance backed by fundamentals
You’ve no doubt seen the “Sell America” headlines, as reports are surfacing that investors are reallocating capital out of the US and into Europe. Despite the macro noise, US companies have consistently been more profitable than European companies over the last 15 years.
US corporate profit margins remain strong on average, big tech continues to drive both earnings and innovation, and US companies have advantages that most global peers can’t match, including pricing power, cash on hand and access to deep capital markets.
While “Sell America” makes for a catchy headline, it ignores the fundamentals. The US remains the global leader in earnings quality, innovation and shareholder returns. We see no reason for that to change any time soon.
What to do if you’re worried about the market
Strong fundamentals aside, it’s clear we’re in an environment with increased macro disruption driving increased volatility in the markets. After the extreme volatility over the last month, it’s hard to believe the S&P 500 is down just 4.1% YTD.
If the drawdown in your portfolio over the last month made you uncomfortable, now’s the time to reassess.
Increasing allocation to cash, bonds, gold and real estate is one way to reduce portfolio volatility. Another option is to look at high growth dividend stocks.
Either way, don’t wait for another correction to optimize for your risk tolerance. Adjusting your asset allocation is a strategy, timing the market is not.
Defense spending to hit $1 trillion
Despite trying to slash government spending, Trump is asking for more than $1 trillion in defense spending for FY26, representing a 13% increase over 2025. (Read)
This is also coming at a time when the US is asking allies in Europe to contribute more funding to its own defense.
Unlike one-time stimulus, this appears to be a structural shift. Sustained public investment = long-term runway.
Look out for a new recommendation this week on how to play this trend with a new defense stock for our portfolio.