Wall Street Tempers Market Rally with Cautious Optimism
Upon taking office, President Trump quickly unleashed a global salvo of tariffs against most of America’s trading partners. This sudden flurry created a tremendous challenge for Wall Street.
In the first few months of the year, the major U.S. stock market indexes were trading at or near their all-time highs. But as the tariff wars continued to escalate, the stock market was quick to react. By April 8, the Dow Jones Industrial Average (DJIA) had fallen more than 16% while the S&P 500 declined by 19%. The tech-heavy NASDAQ fared the worst. In just a few short months, the NASDAQ had lost nearly 24% of its value.
But to the surprise of many, the stock market has come roaring back. Not only have the three major indexes recaptured their earlier losses, they’ve all gone on to set new all-time record highs. Since April 8, the DJIA has risen 17.2% and is up 3.7% this year. Likewise, the S&P 500 has risen 27.2% and is up 7.8% for the year. Finally, the NASDAQ has risen 38.3% and is up 9.4% for the year. So, what’s behind this massive rebound in the stock market?
For many on Wall Street, their initial assessment of Trump’s tariffs was downright bleak. Many assumed that inflation, which was at 3% in January, would quickly surge to 4%, 5% or perhaps even 6%. As inflation started to soar, they argued, consumer and business spending would inherently plummet. This collapse in spending would then negatively impact corporate earnings and lead to mass employee layoffs. An economic recession would soon follow, or so the theory went.
However, so far, at least, none of that has come to pass. Instead of rising, inflation has actually declined from 3% in January to its current rate of 2.7%. Over the past five months, consumer prices have risen at an annual rate of just 1.8%.
Meanwhile, both consumer and business spending have proven to be quite resilient. After declining at an annual rate of 0.5% in the first quarter, economic growth surged higher in the second quarter to 3%, quashing many forecasts of a pending recession. This resiliency has also driven robust corporate earnings.
Wall Street is currently in the middle of its latest earnings season where companies are reporting their financial results for the April-June second quarter. So far, 297 of the 500 companies in the S&P 500 have reported their earnings and revenues. Of those that have announced their results, 81% have reported earnings that beat Wall Street’s forecast. Likewise, 78% have reported revenues that were better than expected.
On the trade front, Trump has signed new agreements with the European Union, United Kingdom, Japan and other nations such as South Korea, Indonesia, the Philippines and Vietnam. He’s also signed a preliminary deal with China.
Even with all this positive news, Wall Street still has its share of apprehensions. Despite economic growth surging to 3% in the second quarter, the rate of growth in the first six months of the year is a more modest pace of 1.2%. This is below the historical average growth rate of around 2%.
The labor market, though still fairly strong, has also been gradually weakening. Since January, the national unemployment rate has ebbed higher from 4% to 4.2%. The pace of new job growth has likewise been slowing. In 2024, the economy averaged around 168,000 new jobs each month. This year, that monthly pace has dropped to 85,000.
There are also the ongoing tariff wars. Yes, many new agreements have been struck with some of America’s largest trading partners. However, many trade disputes remain unresolved, specifically with Canada and Mexico.
Finally, despite clear evidence of declining inflation, the Federal Reserve remains hesitant to further lower interest rates. Higher interest rates act as a tremendous weight on consumers, business and, ultimately, the broader U.S. economy.
Given the precipitous decline at the start of the year, the last four months have been a welcomed boon for stock market investors. But Wall Street still has a list of concerns over the outlook of the economy. And those concerns could give investors a bumpy ride in the second half of the year.
Mark M. Grywacheski, Investment Advisor
Quad Cities Investment Group is a Registered Investment Adviser.
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