Policies that facilitate global trade have enabled countries to focus on their strengths and trade with others that can produce certain goods and services more efficiently. It’s a basic economic concept called “comparative advantage,” and it explains why international trade is a win-win.
“U.S. companies have clearly benefited from globalization,” Societe Generale analysts wrote. “The S&P 500 (ex-Financials) has benefited on the cost front too, with its cost of goods sold as a % of sales having dropped by 700bps since China joined the WTO.”
This chart from Societe Generale is striking. The cost of goods, as a percentage of sales, has been falling for years, helping explain why profit margins have been expanding.
Costs of goods sold have been falling as a percentage of S&P 500 sales. (Source: Societe Generale)
Some of this chart can be explained by technology companies, which boast relatively high margins, accounting for a larger share of the S&P.
But as the analysts observed, eight of 11 sectors experienced gross margin expansion since China joined the WTO.
Most sectors have benefited from globalization. (Source: Societe Generale)
This trend could be blunted or potentially reversed depending on how aggressive any new protectionist trade policies are. That’s assuming all other things are held constant.
It’s worth mentioning that Corporate America continues to be very good at figuring out how to maintain profitability and profit growth despite emerging challenges. So it’s possible that many companies will find creative ways to navigate Washington’s tariff roller coaster.
That said, it’s hard to see how new tariffs or any other policy that disincentivizes globalization wouldn’t eventually lead to higher cost inflation, lower economic activity, or some combination of both.
To that end, Q2 earnings season will be informative as Corporate America updates us on how the uncertain trade policy outlook is affecting business conditions.
There were several notable data points and macroeconomic developments since our last review:
🛍️ Consumer spending ticks lower. According to BEA data, personal consumption expenditures declined 0.1% month over month in May to an annual rate of $20.59 trillion.
💳 Card spending data is mixed. From JPMorgan: “As of 17 Jun 2025, our Chase Consumer Card spending data (unadjusted) was 1.2% above the same day last year. Based on the Chase Consumer Card data through 17 Jun 2025, our estimate of the US Census June control measure of retail sales m/m is 0.41%.”
(Source: JPMorgan)
From BofA: “Total card spending per HH was down 0.5% y/y in the week ending Jun 21, according to BAC aggregated credit & debit card data. Relative to last week, in our categories, department stores, entertainment & transit saw the biggest decline in y/y spending. Meanwhile, lodging, airlines and home improvement saw the biggest increase relative to last week.”
🎈 Inflation remains cool. The personal consumption expenditures (PCE) price index in May was up 2.3% from a year ago. The core PCE price index — the Federal Reserve’s preferred measure of inflation — was up 2.7% during the month, up from April’s 2.6% rate. While it’s above the Fed’s 2% target, it remains near its lowest level since March 2021.
On a month-over-month basis, the core PCE price index was up 0.1%. If you annualized the rolling three-month and six-month figures, the core PCE price index was up 1.7% and 2.9%, respectively.
⛽️ Gas prices tick higher. From AAA: “U.S. airstrikes over the weekend caused petroleum futures to spike Sunday evening, with oil creeping up to $78/bbl. That quickly dissipated by Monday, and as of this morning, oil prices are back to what they were pre-conflict. With Independence Day around the corner, and 61.6 million holiday travelers preparing to hit the road next week, gas prices may increase slightly. The national average for a gallon of regular gasoline is $3.22, two cents higher than last week and 27 cents cheaper than this time last year.”
🏭 Business investment activity improves. Orders for nondefense capital goods excluding aircraft — a.k.a. core capex or business investment — increased 1.7% to $76.0 billion in May.
👎 CEOs are concerned. From the Business Roundtable’s Q2 CEO Economic Outlook Survey: “The overall Index dropped by 15 points from last quarter to 69, well below its historic average of 83. The decline is the result of decreases in all three subindices, driven by a downward shift in CEO plans and expectations, most notably in the employment subindex.”
👎 CFOs are concerned. From the Richmond Fed’s Q2 CFO survey: “Financial decision-makers’ outlooks deteriorated in the second quarter of 2025, amid record concern about the impact of trade policy. Forty percent of respondents indicated tariffs and trade policy were a pressing concern for their firm this quarter, a record share of respondents citing the same concern going back to the second quarter of 2020.”
👎 Consumer vibes deteriorate. The Conference Board’s Consumer Confidence Index ticked 5.4 points lower in June. From the firm’s Stephanie Guichard: “The decline was broad-based across components, with consumers’ assessments of the present situation and their expectations for the future both contributing to the deterioration. Consumers were less positive about current business conditions than May. Their appraisal of current job availability weakened for the sixth consecutive month but remained in positive territory, in line with the still-solid labor market. The three components of the Expectations Index—business conditions, employment prospects, and future income—all weakened. Consumers were more pessimistic about business conditions and job availability over the next six months, and optimism about future income prospects eroded slightly.”
👎 Consumers feel worse about the labor market. From The Conference Board’s June Consumer Confidence survey: “Consumers’ views of the labor market cooled somewhat in June. 29.2% of consumers said jobs were ‘plentiful,’ down from 31.1% in May. 18.1% of consumers said jobs were ‘hard to get,’ down slightly from 18.4%.”
Many economists monitor the spread between these two percentages (a.k.a., the labor market differential), and it’s been reflecting a cooling labor market.
💼 New unemployment claims tick lower. Initial claims for unemployment benefits declined to 236,000 during the week ending June 21, down from 246,000 the week prior. This remains at a level historically associated with economic growth.
🏠 Mortgage rates tick lower. According to Freddie Mac, the average 30-year fixed-rate mortgage declined to 6.77%, down from 6.81% last week. From Freddie Mac: “Borrowers should find comfort in the stability of mortgage rates, which have only fluctuated within a narrow 15-basis point range since mid-April. Although recent data show that home sales remain low, the resulting available inventory provides homebuyers with a wider range of options to consider when entering the market.”
🏚 Home sales tick higher. Sales of previously owned homes increased by 0.8% in May to an annualized rate of 4.03 million units. From NAR chief economist Lawrence Yun: “The relatively subdued sales are largely due to persistently high mortgage rates. Lower interest rates will attract more buyers and sellers to the housing market. Increasing participation in the housing market will increase the mobility of the workforce and drive economic growth. If mortgage rates decrease in the second half of this year, expect home sales across the country to increase due to strong income growth, healthy inventory, and a record-high number of jobs.”
Prices for previously owned homes increased from last month’s levels and year ago levels. From the NAR: “The median existing-home sales price for all housing types in May was $422,800, up 1.3% from one year ago ($417,200) – a record high for the month of May, and the 23rd consecutive month of year-over-year price increases.”
🏠 Home prices cool. According to the S&P CoreLogic Case-Shiller index, home prices were up 2.7% year-over-year in April but declined 0.4% month-over-month. From S&P Dow Jones Indices’ Nicholas Godec: “The housing market continued its gradual deceleration in April, with annual price gains slowing to their most modest pace in nearly two years. What’s particularly striking is how this cycle has reshuffled regional leadership—markets that were pandemic darlings are now lagging, while historically steady performers in the Midwest and Northeast are setting the pace. This rotation signals a maturing market that’s increasingly driven by fundamentals rather than speculative fervor.”
🏢 Offices remain relatively empty. From Kastle Systems: “Peak day office occupancy was 64.2% on Tuesday last week, up nearly a full point from the previous week. However, occupancy in all tracked cities was down on the prior Thursday and Friday, leading up to political protests over the weekend across the country. Washington, D.C. experienced the largest decline, falling 6.7 points to 52.6% on Thursday and 8.7 points to 27.1% on Friday. The average low was on Friday at 34.2%, down a full point from the previous week.”
👎 Activity survey deteriorates. From S&P Global’s June U.S. PMI: “The June flash PMI data indicated that the US economy continued to grow at the end of the second quarter, but that the outlook remains uncertain while inflationary pressures have risen sharply in the past two months. Although business activity and new orders have continued to grow in June, growth has weakened amid falling exports of both goods and services. Furthermore, while domestic demand has strengthened, notably in manufacturing, to encourage higher employment, this in part reflects a boost from stock building, in turn often linked to concerns over higher prices and supply issues resulting from tariffs. Such a boost is likely to unwind in the coming months.”
🇺🇸 Most U.S. states are still growing. From the Philly Fed’s May State Coincident Indexes report: “Over the past three months, the indexes increased in 42 states, decreased in six states, and remained stable in two, for a three-month diffusion index of 72. Additionally, in the past month, the indexes increased in 38 states, decreased in eight states, and remained stable in four, for a one-month diffusion index of 60.”
🚨 The Trump administration’s pursuit of tariffs threatens to disrupt global trade, with significant implications for the U.S. economy, corporate earnings, and the stock market. Until we get more clarity, here’s where things stand:
Actions speak louder than words: We are in an odd period, given that the hard economic data decoupled from the soft sentiment-oriented data. Consumer and business sentiment has been relatively poor, even as tangible consumer and business activity continues to grow and trend at record levels. From an investor’s perspective, what matters is that the hard economic data continues to hold up.
Think long-term: For now, there’s no reason to believe there’ll be a challenge that the economy and the markets won’t be able to overcome over time. The long game remains undefeated, and it’s a streak that long-term investors can expect to continue.
