The Bull Market Endures Trump’s Tariff Challenges: Are Investors Safe?

For several tense days last month, it seemed as if the impressive bull market for U.S. stocks, which boasted a robust 2.5-year run, was facing an imminent end. The surprise announcement of President Donald Trump’s “liberation day” tariffs rattled investors, leading economists and Wall Street analysts to quickly raise their recession forecasts while lowering their year-end targets for the S&P 500 (SPX).

As the dust settled, the market entered a new phase. A trade detente with China, entailing a 90-day pause on some of the administration’s most punitive tariffs, quickly propelled major U.S. equity indexes higher. By the end of that pivotal trading day, the S&P 500 had increased more than 3%, exiting a period below its 200-day moving average, marking its longest stretch outside that threshold since 2022.

A Reversal from Recent Lows

Just a little over a month prior, the S&P 500 reached its lowest close in nearly a year, enduring a nearly 19% drop from its February high and teetering on the edge of bear market territory. Other equity indexes, like the Nasdaq Composite (COMP) and Russell 2000 (RUT), faced even greater challenges, with both slipping into bear market territory. Fortunately, the tech-heavy Nasdaq exited bear territory, reflecting more than a 20% rise from its lows.

According to experts, barring unforeseen developments on the trade front, it is improbable that stocks will revert to their April lows soon. However, it is equally unlikely that the market will return to its record highs in the near future, given the looming risks highlighted by Wall Street professionals.

Signs of Caution Amidst Optimism

“There are reasons for optimism,” commented Ross Mayfield, an investment strategist for Baird Private Wealth Management, during an interview with MarketWatch. “But there are still plenty of headwinds. Even with this massive de-escalation, you still have an average tariff rate north of anything seen over the past 75 years.”

Though the tariff rates may have been mitigated from their worst-case scenarios, they remain notably high historically. Jonathan Pingle, chief U.S. economist at UBS Investment Bank, anticipates the 90-day tariff pause will reduce the aggregate effective U.S. tariff rate to approximately 15%, down from 24% had the tariffs remained in place. While this is an improvement, it still places an unwelcome burden on consumption.

The Consumer’s Strain

This tax on consumption arrives amid signs of diminishing strength among American consumers. Garrett Melson, a portfolio strategist at Natixis Investment Managers Solutions, pointed to recent corporate earnings reports and economic data that illustrate a growing reluctance to spend. For example, noteworthy earnings results from establishments like McDonald’s Corp. (MCD) indicated increasing frugality among cash-strapped consumers, which is part of the reason consumer-discretionary stocks have become the worst-performing sector in the S&P 500 this year.

Furthermore, small-cap stocks, typically more reliant on domestic markets, have also been underperforming. Compounding these issues, signals regarding the labor market are increasingly worrisome. A decline in job openings and a hesitancy to hire suggest that consumers may have even less financial flexibility going forward. Despite April’s stronger-than-expected job growth, Melson is concerned that future revisions could tell a different story.

High Valuations Amidst Economic Risks

If tariffs substantially impact economic growth and corporate earnings, markets may struggle to maintain their valuation levels. On the day in question, the S&P 500 traded at a price-to-earnings ratio of 20.5, which is significantly elevated compared to historical norms. This valuation remains a red flag, especially as the overall outlook for corporate earnings has become increasingly pessimistic since the year began.

Callie Cox, chief market strategist at Ritholtz Wealth Management, expressed concern: “Markets ultimately follow earnings and the economy, yet the prospects for earnings and the economy haven’t improved much,” adding that “relief rallies may not amount to much if the foundation is crumbling.”

Bond Market Challenging Stocks

The bond market’s dynamics may further complicate stock performance. For instance, rising Treasury yields reached noteworthy highs on the referenced day. According to Mayfield, as the 10-year yield approaches the 5% mark, the resultant rise in borrowing costs may start to weigh heavily on equities.

On that encouraging trading day, U.S. stocks closed higher overall. The Nasdaq Composite gained 4.4%, closing at 18,708.34, while the Dow Jones Industrial Average (DJIA) climbed 1,160.72 points, or 2.8%, to settle at 42,410.10. Both the blue-chip index and the Russell 2000 managed to recover fully from their losses post-“liberation day,” but the road ahead remains uncertain.

Conclusion

In conclusion, while the bull market appears to have weathered the storm of Trump’s tariff policies for the moment, investors are cautioned against complacency. Economic indicators suggest a turbulent path ahead, fluctuating between optimism on trade and emerging economic weaknesses, particularly among consumers. Investors should remain vigilant as they navigate this complex and evolving market landscape.