ORLANDO, Florida (Reuters) - TRADING DAY

Making sense of the forces driving global markets

By Jamie McGeever, Markets Columnist 

The new trading month got off to a cautious start on Monday, with risk appetite sapped by the U.S.-China trade standoff and bubbling military tensions around the world, although a closely-watched tracking estimate of U.S. growth helped drive a late rally on Wall Street.

In my column today I look at how, despite the drop in profits in the first quarter, corporate America is well-prepared to face the economic storm that may be coming its way. Indeed, corporate America has rarely been in better shape. More on that below, but first, a roundup of the main market moves. 

If you have more time to read, here are a few articles I recommend to help you make sense of what happened in markets today.

1. ECB faces surging euro conundrum: Mike Dolan 2. Playing it smart: Five questions for the ECB 3. Weak dollar reprises its role as 'carry' trade funder 4. BOJ urged to keep or slow bond taper pace from fiscal2026 5. Trump tax bill poses limited benefits, higher costs forlower-income AmericansToday's Key Market Moves

* U.S. stocks rise, led by the energy sector and some BigTech names like Meta and AMD. The S&P 500 rises 0.4%, and theNasdaq gains 0.7%. * The dollar falls 0.6% on an index basis to a six-weeklow, losing ground against all its peers. Biggest winner is thekiwi dollar, up more than 1% to a 7-month high of $0.6039. * U.S. crude oil jumps as much as 4% intraday after OPEC+keeps its output increase unchanged. WTI nudges $64/bbl, Brentclimbs 2% above $65/bbl. * U.S. Treasuries fall across the board, most heavily at thelong end where yields rise 7 bps and steepen the curve. * Gold leaps 2.8% to $3,380/oz, boosted by tarifftensions, geopolitical concerns and the weaker dollar.Trade tension turns to tentative hope

The first trading day of June was sticky for stocks, bad for bonds and downbeat for the dollar, with tariff concerns once again top of investors' minds.

Wall Street got off to a tepid start, perhaps understandably given how well it performed the month before. According to Citi's Stuart Kaiser, U.S. stocks outperformed Treasuries in May by the widest margin since October 2022.

The S&P 500 rose 6.2% to break its first three-month losing streak in five years while the 10-year Treasury's total return was -1.57%, giving stocks their widest winning margin over bonds for a single month since October 2022.

But a sense of cautious optimism emerged as the session progressed, and the main indices rebounded. Two developments were worth noting.

First, the Atlanta Fed's GDPNow estimate of annualised GDP growth in the second quarter growth was raised to a punchy 4.6% from 3.8%, which is much higher than current consensus forecasts and would mark a significant recovery from the January-March contraction.

Second, the White House said President Donald Trump and China's Xi Jinping will likely speak this week, a sign of possible detente in the trade war between the two countries that's creating so much of the global economic and market uncertainty.

Meanwhile, the bond and currency market trends that have been established in recent weeks show no sign of reversing, and the first trading day of the month saw the dollar and Treasuries fall again, and yield curves continue to steepen.

Federal Reserve Governor Christopher Waller's remarks on Sunday that U.S. interest rates can still come down later this year were echoed by Chicago Fed President Austan Goolsbee on Monday. This weighed on the dollar and short-dated yields, but tariff and inflation worries lifted long-dated yields, and the 20- and 30-year yields are bumping up against 5.00% again.

The dollar's slide, economic uncertainty and heightened geopolitical tensions all put a strong bid under gold, which leaped nearly 3% to a three-week high. April's record peak of $3,500/oz is not too far away.

Tuesday's session will likely be dominated by tariff headlines again, while a speech from Bank of Japan Governor Kazuo Ueda and euro zone inflation figures for May are among the other events investors will be watching closely.

Corporate America is well prepared for the coming storm

Headwinds from tariffs, bond yields and 'stagflation' are gathering force, but corporate America could not be in better shape to face the economic storm that may be building.

    Data released last week showed that U.S. pre-tax corporate profits fell $118.1 billion, or 2.9%, in the first quarter, the fastest pace since 2020, suggesting companies are feeling the pinch from tariffs even before they've properly started to bite. After-tax profits fell 3.6%.

    But any sense of alarm should be mitigated by the fact that profits surged $205 billion, or 5.4%, the three months before. The decline in the January-March period was simply normalization on the back of a bumper quarter.

And on a year-on-year basis, profits were up more than 5%.

True, the next few quarters could get messy. If growth slows or inflation starts to rise, corporate margins could get squeezed, consumers may curb spending and companies could find themselves with limited pricing power.

But zoom out, and the bigger picture suggests corporate America has rarely been stronger.

    Depending on how you slice and dice the figures, corporate profits as a share of national output or income are still extraordinarily high. In some cases, they're close to the highest on record.

    Consider pre-tax profits with inventory valuation and capital consumption adjustments. These fell slightly to 13.0% of GDP in the first quarter of this year, on a seasonally-adjusted annual basis, but that was from a record 13.5% in the September-December period.

    After-tax profits dipped to 12% of GDP from 12.2% in the final quarter of last year. Again, that was a small decline, and it leaves after-tax profits still near the all-time peak of 12.8% of GDP recorded in the second quarter of 2021. The average over the past 75 years is less than 7.5% of GDP.

To paraphrase former British Prime Minister Harold Macmillan, corporate America has never had it so good. Which is just as well, because headwinds are gathering.

DOMESTIC VS 'ROW'

    One can debate how much any of the number of brewing risks will land on the real economy, but companies could certainly feel some pain if they end up facing the collective punch of tariffs, weakening consumer demand, diminishing pricing power and higher-for-longer interest rates.

    "An increasingly fragmented environment means diverging trends across economies. It's an environment ... that will constrain profits at home and around the world," says Gregory Daco, chief economist at EY-Parthenon.

Tariffs and protectionism will put the squeeze on global supply chains and overall trade. It will be interesting to observe how the divergence between domestically-generated profits and earnings accrued from the rest of the world (RoW) plays out in this environment.

Domestic profits account for the majority of total income, of course, but that share has exploded recently. Or looked at the other way, the share of profits from abroad has plunged. If Trump's trade war succeeds in prompting U.S. companies to bring more production back home, the 'RoW' footprint may shrink further.

In the fourth quarter of 2019, just before the pandemic, domestically-generated profits were around 75% of the $2.13 trillion total, on a seasonally-adjusted annual basis, and 'RoW' profits accounted for a quarter. In the first three months of this year, domestic profits accounted for 87.5% of the total, and the share of profits from abroad had halved to 12.5%.

Corporate profitability is being tested. The aggregate second quarter earnings growth forecast for S&P 500 companies stands at 5.5%, according to LSEG I/B/E/S, down from 10.2% two months ago. The 2025 calendar year earnings growth forecast has shrunk to 8.3% today from 14.0% at the start of the year.

The challenges are mounting, but corporate America can face them from a position of strength.

What could move markets tomorrow?

* South Korea presidential election * South Korea CPI inflation (May) * China Caixin manufacturing PMI (May) * Euro zone inflation (May, flash estimate) * U.S. durable goods orders (April) * U.S. JOLTS job openings (April) * Fed officials scheduled to speak include: Chicago FedPresident Austan Goolsbee, Dallas Fed President Lorie Logan, andFed Governor Lisa CookOpinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.