Stock markets are shrugging off big macroeconomic risks.Angela Weiss/AFP/Getty Images
Stock markets are at records despite macroeconomic risks.
Investors are cautious about President Donald Trump’s tariff threats and global economic issues.
Momentum and AI hype drive tech gains, while Fed rate cuts support stock growth.
Stock markets are shrugging off major risks and smashing records — so much so that even seasoned investors are scratching their heads.
On Friday, the S&P 500 and Nasdaq 100 closed little changed after notching record highs on Thursday. Both indexes are hovering near the all-time highs they reached earlier this month, continuing a rebound after the post-“Liberation Day” sell-off.
That rebound has stunned analysts, given the pile-up of macro risks, particularly President Donald Trump’s ongoing threats to impose steep tariffs on key trading partners. Yet investors keep piling in — even if many are doing so with one eye on the exit.
“In many ways, this is a rally that really no one’s had much conviction in it,” Andrew Pease, the Asia Pacific head of investments for Russell Investments, told Business Insider.
He said the firm’s analysis shows investors are neutral, not euphoric.
“Everyone’s very wary about this particular rally,” Pease said.
Wall Street veterans have spent months warning that investors may be underestimating the risks.
“Unfortunately, I think there is complacency in the markets,” JPMorgan Chase’s CEO, Jamie Dimon, said earlier in July, referring to tariffs.
Those concerns may soon be put to the test. Trump’s proposed levies on trading partners — ranging from 10% to 70% — threaten to disrupt supply chains, fuel inflation, and slow global growth.
“I think the market is too complacent about the damage of such high tariffs on both the US and the global economy,” said Zhiwei Zhang, chief economist at Pinpoint Asset Management.
It’s not just tariffs that suggest trouble could be brewing. China’s economic slowdown, Middle East tensions, and softening US data all suggest trouble could be brewing.
So why are stocks still surging?
Despite inflationary concerns tied to Trump’s tariff threats, the US economy remains on solid footing. As BI’s Jennifer Sor recently reported, recession fears are fading.
Big banks kicked off earnings season on a strong note last week.
The consumer “basically seems to be fine,” JPMorgan’s chief financial officer, Jeremy Barnum, said on an earnings call on July 15.
That’s despite some cracks in the data. US GDP contracted 0.5% in the third quarter, and consumer spending growth slowed to 0.5% in Q1 — down sharply from 4% in Q4 2024.
But retail sales rose 0.6% in June from May and the job market remains robust. The US added 147,000 jobs in June, well above expectations, while unemployment dipped to 4.1% from 4.2%.
American consumers are, as top CEOs said recently, “a little numb” to tariffs and “very resilient,” even as inflation ticks up.
Some investors are leaning on the “TACO trade” — short for “Trump Always Chickens Out.”
Markets are increasingly assuming that Trump’s tariff threats are more talk than action.
“Finally, the market is not wrong in pricing in a good chance that Trump will not follow through with his latest tariff threats, instead settling for some deal by 1 August,” wrote Davide Oneglia, the director of European and global macro at Global Data.TS Lombard, on July 16, referring to the trade deadline.
Daniela Sabin Hathorn, senior market analyst at Capital.com, agreed: “The prevailing view among investors seems to be that these tariff threats are more bark than bite — a negotiating tactic rather than a firm policy stance.”
That’s created what analysts call “asymmetry:” Markets could keep rising if talks go well, but they are vulnerable to sharp corrections if discussions break down.
Even as risks loom, traders don’t want to miss out. That’s fueling what analysts describe as a combination of FOMO, or fear of missing out, and MOMO, or momentum-based trading.
Retail traders have been jumping back in, chasing gains as indexes push higher, even if they missed the earlier run-up.
“MOMO and FOMO” are likely to dominate until proven otherwise,” wrote Steve Sosnick, the chief strategist at Interactive Brokers, in a June 30 note.
“Newton’s First Law applies: A body (market) that is in motion will stay in motion until acted upon by an external source,” he added.
Sosnick said that implied volatility remains low, even as risks mount, suggesting investors are choosing to look past potential trouble.
Pease at Russell Investments agreed that momentum could unravel quickly — but only if there’s a clear macro shock.
The Federal Reserve has signaled it could cut rates another two times this year — a boon for stocks.
Lower rates reduce bond yields, making equities more attractive. They also encourage borrowing and investment.
But rising inflation could complicate that path. In June, US inflation climbed 2.7% from a year ago, up from 2.4% in May.
Dimon warned that the Fed might still hike if inflation proves sticky. He sees a 40% to 50% chance of another increase this cycle.
AI hype continues to drive the market, especially Big Tech.
“AI is still the dominant theme, particularly as the Big Tech companies are giving solid earnings guidance and other companies are joining in as well, then that’s the world in which you could see that this rally has further to go,” Pease said, while cautioning that gains could become overdone.
Bank of America’s latest global fund manager survey, published July 15, shows 40% of respondents already see productivity gains from AI adoption. Another 21% expect gains within the next year.
Despite the optimism, there’s unease under the surface.
Summer trading is thinner, meaning volatility can spike quickly. Last year’s yen carry trade unwind is a fresh reminder that things can turn fast.
Trump’s tariff threats are still on the table, but Oneglia thinks markets are right to be relatively unfazed.
“Negotiations have not broken down and the market is acting rationally — at least on this,” Oneglia wrote.
Still, others are more cautious.
“Ultimately, markets are at a crossroads,” wrote Capital.com’s Hathorn.
“The rally, particularly in US equities, has been driven by optimism and underpinned by assumptions about political behavior.”
Until August, market asymmetry remains, so there’s “room to rise on good news, but the potential for a swift and severe correction if trade tensions escalate,” Hathorn added.
