The Week Ahead

The Week Ahead: What’s next for stocks?

• Trade talks and the US budget provide the political back drop this week
• The dollar remains under pressure
• All eyes will be focused on Q2 earnings
• Holiday shortened week, means Payrolls are released on Thursday

By Kathleen Brooks, research director at XTB

US stocks powered to record highs last week, on the back of a stunning rally since mid-April, which has added more than $10 trillion to the market cap of the S&P 500. The rally was unexpected for some, due to policy uncertainties, and elevated recession risks. The labour market is softening and inflation ticked higher in May. So, what is driving stocks higher and can it last?

Stocks have defied these fears, and although there are warnings about bubbles forming, futures markets predict another positive open for US and European stocks on Monday, due to progress with trade negotiations. Canada has dropped its 3% levy on the biggest US tech firms like Netflix, Amazon and Meta, to restart negotiations with its biggest trading partner. Added to this, Japan’s top trade negotiator has extended his stay in the US to advance discussions in the hope of signing a deal within days. The hope of rapid trade deals between the US and its main trading partners is acting as a positive tailwind to the market. Thus, momentum could be a big driver of markets in the coming days and weeks.

Earnings expectations

As we move into Q3, the focus will shift to the Q2 earnings season. Earnings estimates for the S&P 500 for Q2 is for growth of 5% YoY, which is the lowest since Q4 2023, according to FactSet. There have been large downward revisions to earnings estimates for this quarter, as analysts factored in global trade tensions and economic risks. Added to this, 11% of companies on the S&P 500 have issued negative EPS guidance for Q2.

Q2 earnings season will start in the next couple of weeks, and we will see if the bar has been lowered enough for companies to post positive earnings surprises, which will no doubt keep stock markets buoyant. Further out, analysts are more optimistic. Estimates are for S&P 500 companies to see a pickup in earnings in Q3.

Stock market rally: not just about tech

A temporary blip in earnings in Q2, if it happens, has not been enough to curtail the stock market rally. A feature of the recent stock market rally in the US is how broad-based it has been. The S&P 500, the equal-weighted S&P 500, the Russell 2000 and Nvidia have been moving in lockstep. The S&P 500 has risen by 10% in Q2, the Nasdaq by 17%, the Russell 2000 by 8% and the Russell 3000 by 10%. This suggests that the US stock market rally in 2025, although it was slow to get going, is broader based than the tech-fueled frenzy from 2024.

Dollar woes continue

Hopes that Trump’s tax cuts could be signed into law later this week are also fueling the rally, as the Budget Bill passed the Senate on Saturday. Interestingly, the Budget, which could add another $3.3 trillion to the US deficit over the next ten years, is not worrying the stock market, although it is weighing on the dollar. The dollar index has had its worst start to the year since 2005. The dollar is weaker again on Monday, and is the worst performing currency in the G10, as we wait to see if Trump can sign his Budget into law by the Independence Day holiday.

Technical signals for encouraging for the US stock market

The market breadth is also encouraging. 384 members of the S&P 500 rose last week, compared with 119 companies that declined, and only a small number of stocks are looking oversold on a technical basis. 50% of the S&P 500 are above their 200-day sma, which is a healthy number and suggests that there is room for other stocks to play catch up.

Crypto’s big influence on the S&P 500 rally

Although Nvidia is grabbing the limelight for rallying 15% in the past month, and is nearing a $4 trillion valuation, other stocks have outperformed Nvidia, and it is not even in the top 10 performers on the S&P 500 so far this quarter. The top performer is Coinbase, the crypto platform, which is benefitting from the surge higher in crypto currencies, including Bitcoin, which is a mere $3000 away from a record high. Coinbase is higher by 105% for Q2. The construction and engineering sector has also outperformed the semiconductor sector so far in Q2, and the entertainment and movies sector is also a top ten performer.

European stocks: why investors are cooling on defense names

There is also a shift going on in Europe. US stock indices outperformed their European peers in Q2, although on a currency adjusted basis, the surge in the euro and the pound vs. the USD boosted the currency adjusted returns on European indices. Over the last month, the outperformance of US indices compared to European indices has become more notable. European shares have been weighed down by a slowdown in the defense sector. Nvidia has outperformed Rheinmetall in the last few months, which has fallen 7%, while Nvidia has risen 15%. This leads to questions about whether the high valuations placed on some European defense stocks will weigh on the sector, and on European stocks more broadly as we move into Q3.

UK stocks back in focus

In the UK, Rolls Royce is still riding high, and is up 12% in the past month. This is because RR is more diversified than other European defense stocks. UK stocks could be having a moment, due to a multi-year valuation gap that is finally starting to interest investors, and because the UK has already sealed a trade deal with the US. Bloomberg’s ETF flow data shows a clear preference for UK equities within flows to Europe. In June, there was a net reduction in ETF flows to French ETFs, inflows into German ETFs have slowed sharply, while inflows into UK ETFs have reached their highest level so far in 2025. If this continues, then we could see UK equities outperform their European counterparts over the coning weeks, especially if the EU and the US experience trade tensions as we lead up to the deadline to agree reciprocal tariffs with the US.  

Tarriff risks come back into focus

Overall, the focus is likely to shift as we move into July. Falling volumes will become apparent in the coming week, as US markets are closed on Friday for the 4^th July holiday. Tariffs will come back into play. The US and China have made a trade deal, but the EU and the US have still not announced what a deal will look like. Trade talks with Canada are set to resume, after Canada pulled its digital sales tax that was due to come into effect today.

What next for the beleaguered dollar?

The dollar will also be in focus after it suffered more losses last week, even though it managed to claw back gains vs. some G10 currencies on Friday. The dollar index fell to its lowest level since 2022 last week, and momentum is firmly to the downside for the greenback. It is the weakest currency so far in 2025 vs. all the major currencies, and it is also weak vs. a large number of emerging market currencies. It is only making gains vs, the Argentine peso, the Turkish lira and is mostly flat vs the Hong Kong dollar.

The main story over the weekend, that the US Senate passed a vote to advance President Trump’s tax and spending mega bill, may not boost the dollar and could add as another downside pressure in the coming days.

Will the US Budget Bill spook the Treasury market and global bonds?

The Senate Budget bill could increase US government deficits by $3.3 trillion. Thus, it is worth watching US Treasuries and global bond markets at the start of this week. Treasuries fell and yields rose across the curve on Friday. The rise in yields in the US was copied across Europe, suggesting that Western sovereign bonds are moving in a unified group, and there are few safe havens.  In the past month there has been a large increase in Treasury prices/ decrease in yields, some of this may be unwound as the realities of the US budget and what it means for the US deficit in the coming years hits the bond market.

Data watch: NFPs, PMIs and Eurozone inflation

Ahead this week, the focus will not only be on the passage of the US Budget Bill and ongoing US trade negotiations, but also on some key economic data. Central banks are set to ease monetary policy in the coming months; however, they have said that they remain resolutely data dependent. This week’s key economic releases, including global PMIs for June, US non-farm payrolls and the latest reading of Eurozone inflation will be critical for central bank policy makers.

US non-farm payrolls will be released a day earlier this month due to the Independence Day holiday on Friday. The Fed remains firmly in data-watch mode, and they have raised concerns about inflation feeding through from the effect of tariffs. However, there are some early signs that the US labour market may be softening. Initial jobless claims are slowly ticking higher, and a weak NFP number this week could tip the balance in favour of an early rate cut from the Fed. The market is still expecting a September rate cut, but there are some FOMC members who have been calling for a July cut. A collapse in job creation, could seal the deal on a summer rate cut.

A slowing jobs market could bring forward hopes of a summer rate cut

The market expects 110k jobs to have been created for June, which will be the lowest level since February. NFP figures are prone to revisions, so investors need to be wary about over-reacting to this data, since it may be revised in the future. However, a reading of 110k or below would be a sign that the US labour market is slowing sharply.  Combined with last week’s downwardly revised Q1 GDP figure, it would suggest that the US economy is slowing sharply. Wage data is also worth watching, it is expected to show a solid 3.9% annual growth rate in average hourly wages, and the unemployment rate is expected to tick higher to 4.3% from 4.2%.

The biggest market reaction would come from a higher-than-expected reading for the unemployment rate, and a weak reading for NFPs. If this happens then we could see another leg lower for the dollar, but stocks may get a boost as this could lead to a surge in wagers that the Fed will cut rates in July, rather than wait for September to cut rates.

PMIs and Eurozone inflation may not derail the euro rally  

The PMI data this week is expected to show that growth in Europe and the UK is showing tentative signs of picking up, however, survey data could be unreliable. If trade deals are not signed between the US and the Eurozone  in the coming days then PMI data for July could fall through the floor.

Eurozone inflation data is also released this week. Core CPI is expected to remain steady at 2.3%, while headline CPI is expected to edge up a notch to 2% from 1.9%. The June inflation print is not expected to shift the dial for ECB rate cuts, and we do not think that this week’s data will get in the way of euro strength.