Mid-week market update: The S&P 500 were consolidating its gains after the upside price gap in reaction to the Sino-American interim trade agreement. You can tell a lot about the psychology of a market by the way it reacts to gaps. So far, the gap hasn’t been filled – and some gaps are never filled, which is a bullish development.
Beneath the surface, however, risks are rising, especially in the form of the ascendance of the “Sell America trade”.
Sell America
The Sell America trade has been strong ever since news of Moody’s downgrade of U.S. Treasury debt hit the tape. Foreign developed market stocks, as measured by MSCI EAFE, has outperformed the S&P 500; The price of foreign sovereign debt has outpaced their duration-equivalent Treasuries; and the USD has been weak.
Much of this reaction is attributable to fears of American policy to weaken the USD as G-7 finance ministers meet in Banff, Canada this week.
Pushing back against Sell America
However, some prominent analysts have pushed back against the Sell America narrative. Most recently, Morgan Stanley turned bullish in U.S. assets, except for the USD. The firm expects the U.S. stocks to get a boost from easing inflation and further interest rate cuts. It now expects the S&P 500 to reach 6,500 in Q2 2026, instead of the end of 2025.
Bloomberg pointed out that tech-heavy sectors are still leading 2025 earnings estimates and are among those that have seen least damage and even upgrades since the Q1 earnings season began.
In addition, Ed Yardeni observed that Asian institutions that are large holders of Treasury paper greeted the Moody’s downgrade with a yawn, as it contains no new information.
Yardeni suggested that, aside from this jump in 30-year yields, the Moody’s downgrade did not seem to trigger global investors to “sell America”.Notably, a warning from Moody’s around the impact of a $36.2 trillion U.S. debt pile was “news to exactly no one” in Asia, nor was the ratings agency’s flagging of elevated U.S. interest payment ratios, Yardeni said.
“The Moody’s call is backwards-looking,” Yardeni argued, adding that a “feel-good effect” over indications that Trump’s tariff push will not be as aggressive as initially feared has helped to “drown out” worries over an ongoing budget bill debate in Washington.
The Tactical View
Still the tactical view of the Sell America trade is still negative. The markets adopted a risk-off tone after the weak 20-year Treasury auction today. Both the S&P 500 (SPY) and long Treasury ETF (TLT) skidded badly in the wake of the auction.
Breadth has also been weak in the latest rebound. The market was led mainly by the Magnificent Seven as the equal-weighted S&P 500 lagged.
These conditions leave the stock market vulnerable to a setback. I continue to believe that the S&P 500 is in a wide trading range. The upper bound is at or near the all-time high. The lower bound is the April low, though it will take a severe case of negative news to get there.
SPY 565 still is the key level to watch.