MICHAEL J. HALLORAN, CFA | Equity Strategist of Janney Montgomery Scott
Wyncote Wealth Management Group

Highlights for this week include: 

• The May retail sales and industrial production reports are consistent with a resilient consumer and  improving manufacturing conditions, and ultimately healthy economic growth.  

• The Federal Reserve kept interest rates steady at new Fed Chairman Warsh’s first meeting. They noted  solid economic growth despite uncertainty from the Middle East conflict. They further noted elevated  inflation and reiterated their commitment to deliver price stability. 

• We remain encouraged by underlying market dynamics, despite the recent volatility. While  acknowledging the risks posed by the fluid Iranian conflict, we continue to expect stocks to be  supported by further economic growth and robust profits.  

Better Than Expected Retail Sales Consistent with a Resilient Consumer and Healthy Economy 

Retail sales jumped 0.9% month/month in May and are up 6.9% versus a year ago. While May’s gain was  fueled by another large jump at gasoline stations (+3.4%), the increase in sales was broad-based, with nine  out of thirteen major sales categories rising for the month and up a solid 0.7% when stripping out gasoline  sales.  

After adjusting for inflation, overall sales rose a lower 0.4% m/m and 2.6% y/y. Despite the impact of  stubbornly high inflation on real consumer purchasing power, the U.S. consumer once again demonstrated  resiliency. We still see solid underpinnings for consumers, including a healthy labor market as demonstrated  by the recent employment reports, stock market gains, and higher-than-normal tax refunds. A durable  resolution to the Iranian conflict would also help reduce inflationary pressures and provide relief at the pump.  Lower oil prices are now suggesting we are past the worst of the conflict. 

Industrial Production Recovery Continues 

Industrial production (IP) posted a modest 0.1% gain in May after a rapid 0.9% gain in April. The largest  positive contribution came from a 1.3% jump in the mining sector, where gains were broad-based across oil  and gas and other mineral extraction. This increase is an encouraging sign that U.S. energy companies may  finally be ramping up output as supply disruptions continue in the Middle East.  

Meanwhile, the manufacturing sector was flat for the first time this year despite a 1.2% increase in the volatile  auto sector. Production in high-tech equipment, which has been a reliable tailwind recently due to  investment in AI as well as the reshoring of semiconductor production, increased 1.8% in May with previous  months’ activity revised higher. High-tech manufacturing is up 12.6% in the past year and up at an even  faster 19.8% annualized rate in the past six months, the fastest growth rates for any major category. Manufacturing of business equipment rose 0.6% in May and is up 5.7% in the past year, signaling a broader  reindustrialization.

After several years of sluggish activity, the industrial recovery is well underway. This is being supported by  strong fiscal support provided by last year’s passage of the One Big Beautiful Bill, the massive AI technology  buildout, and the lagged impact of previous Federal Reserve interest rate cuts. 

Federal Reserve models are now tracking 2.7-3.0% economic growth for the second quarter, while the Blue Chip consensus stands at 2.1% growth. This is after 1.6% growth in the first quarter that helped support  robust first-quarter profits.  

Federal Reserve Holds Interest Rates Steady at New Chairman Warsh’s First Meeting  

The Federal Reserve (Fed) held short-term interest rates steady at 3-1/2 to 3-3/4 percent at new Fed  Chairman Kevin Warsh’s first meeting. They noted that Economic activity is expanding at a solid pace despite  elevated uncertainty that owes, in part, to the conflict in the Middle East. Productivity growth and capital  investment are strong. Job gains have kept pace with the workforce, and the unemployment rate has  changed little. They further noted that inflation remains elevated relative to the Committee’s 2 percent goal,  in part reflecting supply shocks that have driven price increases in certain sectors, including energy. They reiterated their commitment to deliver price stability. 

Remaining Positive on the Market  

While stocks have been experiencing some volatility, we remain encouraged by underlying market dynamics.  Economically sensitive sectors like Financials and Industrials have recently been performing well while  defensive sectors like Consumer Staples, Health Care and Utilities have been underperforming. In a  confirming signal, corporate bonds are signaling a low probability of future defaults, which typically occur  during major economic slowdowns.  

While acknowledging the Iranian conflict continues to pose a risk for the economy and stocks, oil prices are  now signaling that we could be past the worst of this fluid situation. We continue to expect stocks to be  supported by further economic growth and robust profits.  

Disclaimer 

This report is provided for informational and educational purposes only and shall in no event be construed as an offer to sell or a  solicitation of an offer to buy any securities or a recommendation for any strategy or to buy, sell, or hold any product. Opinions  expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation,  or needs of individual investors. Employees of Janney Montgomery Scott LLC or its affiliates may, at times, release written or oral  commentary, technical analysis, or trading strategies that differ from the opinions expressed here. The information described herein  is taken from sources which we believe to be reliable, but the accuracy and completeness of such information is not guaranteed by  us. The opinions expressed herein may be given only such weight as opinions warrant. This Firm, its officers, directors, employees, or  members of their families may have positions in the securities mentioned and may make purchases or sales of such securities from  time to time in the open market or otherwise and may sell to or buy from customers such securities on a principal basis. This report  is the intellectual property of Janney Montgomery Scott LLC (Janney) and may not be reproduced, distributed, or published by any  person for any purpose without Janney’s prior written consent. This presentation has been prepared by Janney Investment Strategy  Group (ISG) and is to be used for informational purposes only. In no event should it be construed as a solicitation or offer to  purchase or sell a security. Past performance is no guarantee of future performance and future returns are not guaranteed. There  are risks associated with investing in stocks such as a loss of original capital or a decrease in the value of your investment. For  additional information or questions, please consult with your Financial Advisor.

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