AI Podcast: Market Optimism Amid Trade Tensions

MP3 Download

Audio Generated by Kozy Space

Despite the looming end of President Trump's tariff suspension period on July 9th and limited progress in trade negotiations, the stock market appears to remain optimistic. Major indices are hovering near record highs, while volatility is notably low.

This calm is partly driven by expectations that President Trump will extend the tariff deadline, a pattern seen in the past. Analysts have dubbed this strategy "TACO," or "Trump Always Chickens Out." However, Wall Street professionals believe other factors are at play, including a relatively healthy economy and US corporate confidence in current trade policies.

"Part of the market’s focus is still on July 9, but there’s also a lot of other stuff getting focused on now," said Michael Kantrowitz, chief investment strategist at Piper Sandler & Co. "Investors are getting less worried again. As long as you don’t have interest rates, inflation or unemployment spiking, the stock market is going to continue to grind higher."

Recent Market Performance

The S&P 500 just finished its best quarter since December 2023, surpassing the 6200 mark before slightly retreating on Tuesday. The tech-heavy Nasdaq 100 posted its best quarterly performance since March 2023. Both indices had recorded losses in the first quarter.

Increased Risk and Opportunity

Traders have increased their exposure to the riskiest sectors of the market, and institutional investors, who had been hesitant to participate in the rally since April, are gradually entering. Options data suggests that Wall Street doesn't anticipate significant volatility in the near term.

"Some form of a trade deal probably gets done, and beneath that, earnings expectations have stabilized after the washout in April. What started as a relief rally is now starting to turn into something real, and that's what's drawing those investors in," said Steven Chiavarone, senior portfolio manager and equity strategist at Federated Hermes.

The Role of Retail and Institutional Investors

The S&P 500 has risen more than 10% since its low on April 8, prior to the tariff suspension. Retail investors have been the primary driver of this rally, but as the rally continues, institutions are also beginning to enter.

According to data compiled by Deutsche Bank’s Parag Thatte, systematic strategy funds increased their risk exposure in stocks last week, although they remain under-allocated, with most sectors below their historical averages.

Michael Kantrowitz’s assessments of high-yield credit spreads from Piper Sandler suggest that the market has absorbed 84% of macroeconomic risk, leaving room for further stock market gains, even though the S&P 500’s market capitalization has increased by more than $10 trillion since early April. This optimism disregards the wars in the Middle East, uncertainty about macroeconomic prospects, and a lack of clarity on trade issues.

Factors Supporting the Market

"We're quite bullish on June, and it has nothing to do with Trump -- it's just because there are some other very positive things that are happening," said Alexander Altmann, global head of equity tactics strategy at Barclays. Altmann cited easing bank regulations, continued heavy spending by large tech companies on AI, and Trump's proposed $3.3 trillion tax and spending package as factors supporting the economy.

The Senate passed the bill by a 51-50 vote on Tuesday, with Vice President J.D. Vance casting the deciding vote, but it is likely to face resistance in the House.

Potential Risks

Of course, this doesn't mean the risks have disappeared. Even if Trump extends the tariff suspension, other taxes could increase expenses for companies or consumers – or both.

"We’re eventually going to face higher tariff rates, and we are going to absorb those costs at some point in the future," Altmann said. "It’s hard to look and trade more than four weeks out in this market right now, and it’s hard to have a strong view about events that may or may not happen six months from now."

As it stands, exporting countries that have not reached bilateral agreements by July 9 will face the tariffs proposed by Trump on April 2, which are far higher than the current 10% baseline rate applied to most countries.

Limited Agreements

The UK has locked in a deal to lower some of the proposed levies, but retained reciprocal rates, plus a 25% duty on steel. In addition, Trump has threatened additional tariffs on Japan.

"We don’t have any major trade deals -- we have some memorandums of understanding, we have some consensus to move forward, but we don’t have anything concrete," said Kate Moore, chief investment officer at the wealth division of Citi Group. "Honestly, I’m surprised the market seems so unconcerned about that. It’s also one of the reasons this market doesn’t feel fundamentally driven, even though we’ve seen a lot of strength in tech and AI."

Positive Outlook

Meanwhile, JPMorgan’s trading desk says the current setup is bullish and expects a string of historic highs in US equities with positive earnings momentum and the prospect of trade deals being announced. Andrew Tyler, the bank’s global head of market intelligence, is watching the June nonfarm payrolls report due Thursday. As long as that figure stays above 100,000, he expects the stock market to continue setting new records.

"For the time being, the market will look through those potential events," Tyler wrote in a note to clients on Monday, referring to trade turbulence. "Moreover, we think the July 9 trade negotiation deadline gets pushed out to avoid any market volatility."

---

Note: This analysis provides a perspective on the current state of the financial markets and does not constitute investment advice. Investors should conduct their own research and consult with a financial advisor before making any investment decisions.