U.S. stock markets concluded the holiday-shortened week with notable declines, as escalating trade tensions and economic uncertainties weighed heavily on investor sentiment. The S&P 500 and Nasdaq Composite each fell by approximately 1.5%, while the Dow Jones Industrial Average dropped 2.7%. These losses were primarily driven by significant declines in major technology stocks, particularly Nvidia, which saw an 8.5% decrease following new U.S. restrictions on AI chip exports to China. In contrast, small-cap stocks, represented by the Russell 2000, outperformed with a modest gain of 1%. Perhaps the good news was that the bond market last week functioned in a more orderly manner. As stocks fell, government bond yields moved lower, with the 10-year Treasury yield lower by about 0.16% this week alone, moving prices higher. The U.S. Agg bond index climbed about 1% for the week, providing some diversification benefit for balanced investors.

Economic indicators painted a concerning picture. The University of Michigan's consumer sentiment index dropped to 50.8 in April, marking the second-lowest level on record, as 12-month inflation expectations surged to 6.7%, the highest since 1981. A Reuters poll indicated that the probability of a U.S. recession within the next year has risen to 45%, up from 25% in March, due to aggressive tariff policies and rising geopolitical tensions. While growing recession fears have increased calls to lower rates, expectations for a near-term inflationary shock from tariffs have constrained the Federal Reserve's ability to cut interest rates, with most economists now predicting just two rate cuts by year-end.

Additionally, the U.S. dollar’s status as the world’s chief reserve currency came under renewed pressure last week amid concerns of eroding independence for the Federal Reserve. The U.S. dollar’s value relative to a basket of other major currencies fell for the sixth week out of the past seven, and the dollar slipped on Thursday to a three-year low, more than 8% below its year-end 2024 level. President Donald Trump admonished Federal Reserve Chair Jerome Powell on Thursday for not cutting interest rates and said he could fire him if he wanted to, renewing a threat from his first term that could cause a major legal showdown over the issue of the central bank’s long-standing political independence. However, several of the president’s advisors have cautioned against such a move, and it would likely face significant pushback. The loss of independence for the central bank could actually have the opposite effect of easing financial conditions by pushing long-term interest rates higher as it undermines the credibility of a major U.S. institution and the presence of checks and balances in the U.S. among international counterparts.

Looking ahead, the week ahead is set to be pivotal, with several major companies reporting earnings. Tesla and Alphabet (Google) are among the most anticipated, as investors seek insights into how these tech giants are navigating the current economic landscape. Intel's new CEO, Lip-Bu Tan, will also make his earnings debut, with analysts expecting $12.3 billion in revenue and an adjusted net income of $41.6 million.

On the economic front, key data releases this week will provide further insights into the U.S. economy's trajectory. The Conference Board is set to release its consumer confidence index, with expectations of a slight increase to 101.8, indicating cautious optimism. Additionally, the Commerce Department will provide an updated estimate of second-quarter U.S. economic growth, predicted at a 2.8% annual pace, and the latest assessment of consumer spending and inflation, with analysts forecasting a 2.5% year-over-year inflation rate. These reports will be critical in assessing the economy's trajectory amid ongoing trade tensions and market volatility.

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