Curious conundrum: Why do equities stand tall amidst the specter of tariffs?
In an intriguing turn of events, stocks are soaring to unprecedented heights, with the S&P 500 and Nasdaq reaching new peaks, despite lingering tariff worries. This unexpected rally can be attributed to a shift in investor expectations regarding tariffs, as well as robust corporate earnings, positive economic indicators, and optimism about the Federal Reserve's handling of the economic landscape.
Reset of Tariff Expectations
Initial announcements of high tariffs were followed by actual tariffs that were comparatively lower, reassuring investors about the trade impact. For instance, Trump's trade deal with Japan imposed a 15% tariff, lower than the initially anticipated 25%.
Robust Corporate Earnings
Mega-cap technology firms have reported strong quarterly results, fueling optimism and driving stock gains. Companies such as Alphabet, Netflix, AT&T, Hasbro, and Delta Air Lines have beaten Wall Street expectations.
Positive Economic Indicators
Better inflation numbers and a strong employment report have eased concerns about an economic slowdown and interest rate hikes. The labor market has held up well, with employers continuing to hire at a solid clip and the unemployment rate remaining at a historically low rate of 4.1%.
Fed's Soft Landing Perception
Investors believe the Federal Reserve is successfully balancing inflation control with economic growth, supporting stock valuations. Trump's attacks against Federal Reserve Chair Jerome Powell pose an additional risk to the market.
Sector Divergence
While manufacturing faces challenges due to tariffs and weak demand, service sectors continue to grow, partially offsetting negative effects.
Despite these positive developments, most economists still expect the U.S. economy to grow at a slower pace in the second half of the year than in 2024, with a 33% chance of a recession seen in the next 12 months, according to the latest quarterly survey from The Wall Street Journal. The cost of imports will be higher, and prices that consumers pay will rise. Stocks are expensive and vulnerable to big falls if something unexpected happens.
- Investors, buoyed by the reset of tariff expectations, robust corporate earnings, and positive economic indicators, have been actively investing in the stock market, driven by optimism about the Federal Reserve's handling of the economic landscape and a soft landing perception.
- The finance news in recent times has been dominated by the soaring stock market, with sectors like technology and service showing significant growth, despite lingering tariff worries and the looming risk of potential recession, as predicted by most economists.
