....Q4 2019 was exactly like that after the US-China trade war seemingly over.
....it is not unimaginable that S&P500 can be driven higher by the resilience of Mag7 stocks (despite at high valuations) (we should know with NVIDIA soon) but as I said before, major indices don't matter (unless you hold CBA) the outlook for the stocks you hold only matters. And outlook has darkened for most stocks. This ‘most hated’ rally just keeps running. But bulls ignore two risks
The bullish are back in control, and are largely ignoring Donald Trump. But they’ve pushed Wall Street to levels that leaves zero room for error.
Updated May 28, 2025 – 9.13am,first published at 8.55am
If it wasn’t clear that the bulls reckon they’ve got Donald Trump all figured out, then it should be after the latest leg of Wall Street’s impressive rally played out on Tuesday night.
Having correctly dismissed Trump’s threat of new tariffs on the European Union on Friday night, equity market investors came into Tuesday night’s session with a spring in their step after talks between the White House and European officials led to the deadline for a deal being pushed out again.
The S&P 500 surged 2.1 per cent higher.
It’s back into positive territory for the year, and just 3.6 per cent off the all-time high recorded on February 19. The market’s belief in the TACO theory – “Trump always chickens out” – grows stronger than ever.
More good news for Wall Street came from across the Pacific Ocean, where rumours went around the Japanese government bond market that officials are considering reducing the amount of bond issuance after the yields hit all-time highs last week. That helped push US bond yields lower. As readers will recall, the great fear was that rising Japanese bond yields would pull Japanese capital out of the US bond market, pushing bond prices further down and yields up.
The final cherry on top was a better reading on US consumer confidence. The latest survey, taken after America and China announced their tariff pause, means confidence has bounced off the post-World War II lows we saw last month.
Happy days? Well, not quite. The perpetually bullish strategist Tom Lee of Fundstrat reckons this “still remains the most hated V-shaped stock rally” he’s seen because most investors remain deeply sceptical that the tariff dramas have really ended.
Lee reckons these fears are overdone. Trump’s bark is clearly worse than his bite, hedge funds have largely sat out the rally so far and can yet come back into the market, there is $US7 trillion in cash sitting on the sidelines of the market, and there is now better visibility on the White House’s plans around tax cuts and deregulation.
Fundstrat is holding firm on its target for the S&P 500 to hit 6600 points by the end of the year, which implies a gain of about 12 per cent from current levels. It’s an impressively bullish reading, but there would appear to be one big problem with it: there’s little room for anything to go wrong.
The rally has pushed the equity risk premium on Wall Street – the difference between the market’s earnings yield and the risk-free (ahem!) 10-year bond yield – back to around 2.5 per cent, which is in the 95 percentile in history. Investors are still expecting S&P 500 earnings will grow by between 9 per cent and 10 per cent in 2025, and between 13 per cent and 14 per cent across 2026 and 2027. That suggests that returns on equity and profit margins, already at historically high levels, will actually improve from here.
But investors should surely ask themselves how likely it is that US companies can continue to deliver the greatest returns in history and the fastest margins they’ve ever seen, in an environment where tariffs will be higher than they’ve been in a century – even allowing for TACO.
At some point, the damage caused by his tariff drama will show up in the hard economic data, probably in the form of slower growth. Indeed, a new forecast from Goldman Sachs released Tuesday night that suggested the inflation hit from tariffs in the US would be less bad than expected was predicated on the idea that the economy is going to be softer than expected.
Given how little risk is priced into equities right now, stocks are surely vulnerable to an economic slowdown that will be made in the US, but transmitted around the world. That’s the first risk bulls are ignoring. The second, of course, is Trump’s policy agenda, which remains as chaotic as ever. Again, bulls are clearly happy, and probably pretty smart, to look past Cyclone Trump given the tariff backtracking we’ve seen.
But what’s implied in market pricing right now – huge earnings growth, historically high returns and record margins – seems at odds with the sheer uncertainty Trump has created.
