Well that didn’t last long.
Stocks have posted a dizzying climb higher after a quick swoon. Nervous investors have become arguably even more queasy, with many questioning whether the bull market has resumed raging on or if it’s a bear-market rally in hiding.
The S&P 500 is now up 1.3% this year, clawing back from its 15% losses for the year in just five weeks. The last time it did that was in the fall of 1982 when higher interest rates under then-Federal Reserve Chair Paul Volcker added pressure on stocks before he ultimately signaled paring back policy, according to Fundstrat’s data team.
The rally comes even though there is no long-term resolution for trade policy. Just a single post on X is all it could take to send markets in a downward spiral again. That can only mean one thing: Investors have realized that derailing the bull market takes guts that even the commander-in-chief doesn’t have.
Now those who were sitting on the sidelines look downright silly trying to decide whether they should get back in the game. To be fair, their hesitation is somewhat justified. It’s almost as if there was no shocking tariffs announcement by President Donald Trump in early April, as if all the sassy remarks made about the Federal Reserve Chair Jerome Powell never happened, and as if decades of American exceptionalism are far from threatened.
All anyone can focus on is that the U.S. and China agreed to slash steep tariffs for 90 days. Deals with other countries seem to matter less.
That’s why bets on a recession this year have declined and Wall Street strategists have raised their year-end price targets on the S&P 500 after cutting them just a few weeks ago. The index is off 3% from all-time highs. The Nasdaq Composite, meanwhile, is down 0.5% this year.
Much of what has risen is precisely what led the market lower earlier this year. Tech titans have surged, with Nvidia shares up 41% since the April 8 low. Apple has added 23%, and Tesla has jumped 58%. Small-caps have rebounded, up for six straight weeks. Bitcoin is over $100,000 again.
Shares of retailers have been big beneficiaries from the tariffs reprieve as many of them source their inventory from China for its cheap costs. RH shares have added 41% over that same time period, Floor and Decor has jumped 14%, and Wayfair has increased 64%, with the move looking reminiscent of meme stocks.
There’s hope that the rally could extend. Technical indicators show that many stocks are participating in the rally. The NYSE advance-decline line, which tracks the number of stocks rising minus the number falling each day, hit a new high this week. Investors typically like that, because it reaffirms gains if a greater number of components are rising.
But it’s too early to conflate that with the market being all in the clear.
The most prominent example for that comes from the bond market, which some consider to be the true predictor of where not just interest rates are heading, but also stocks. “Bonds lead stocks,” as Fundstrat Head of Research Tom Lee likes to remind us.
Yields on the 10-year Treasury bond this week jumped to over 4.4%, partly due to Trump’s tax and spending bill threatening to grow the budget deficit even bigger. They weren’t even that high in the aftermath of Liberation Day, climbing to 4.494% on April 11. The climb was why Trump was forced to pare back his broad-ranging tariffs policy.
Speculators are betting yields stay higher for longer. They are net short the 10-year Treasury futures, reflecting bets that prices would fall and yields would rise, according to CFTC data compiled by our data team. The 10-year yield is particularly sensitive to long-term growth expectations.
It would be concerning to see yields climbing during a time when inflation data hasn’t looked this good in years and the jobs market remains resilient. The headline consumer-price index in April rose 2.3% from a year ago, coming in at the lowest level since 2021. A measure of wholesale inflation fell last month, too, by the most in five years. And the latest jobs report showed that the U.S. economy is still steadily adding jobs.
In turn, the Fed has been forced to remain in a wait-and-see mode on rates because they don’t know yet if tariffs will show up in concrete data in a way that threatens or undoes the progress made on inflation and strength maintained in the job market.
Chair Powell reiterated this week that “we may be entering a period of more frequent, and potentially more persistent, supply shocks—a difficult challenge for the economy and for central banks.” He said this week that the central bank is planning to make changes to its overarching policy-setting framework.
Another haven, too, is sparking worries among investors. The FT reported: “BofA survey respondents also had the most negative collective view of the dollar since 2006. That was backed up by Commodity Futures Trading Commission data, which showed that asset managers last week had the biggest bullish bets on the euro since September 2024.”
And despite the recent rout, U.S. stocks still look expensive compared to foreign peers.
Bears are still roaming proud, too. The American Association of Individual Investors data for the week ending May 14 show that there have been more bears than bulls for 15 straight weeks, the longest running streak since June 2023.
Ryan Detrick, chief market strategist at Carson Group, put it succinctly: “Will AAII get even more bearish? Sure seems like a lot of anger at this move higher.”
Investors have been plenty angry throughout the 2023 and 2024 bull market. So their anger here doesn’t really matter.
Maybe Trump will take back the reins from Treasury Secretary Scott Bessent, wreaking havoc again, and these bears will be proven right. But if Bessent continues to lead the tariffs policy and investors are able to work their way through a rolling recession, then the anger will fail to dissipate into losses.
In that scenario, retail investors, who heavily bought the dip, while institutional investors sold, would stand to win even bigger.
Conclusion
Trump came into the office with much fanfare, proclaiming he will be for Main Street, not Wall Street. As the April mayhem showed, he was for neither, pushing investors to sour on the greatest investment trade — American exceptionalism. While foreign indices still have a leg up on American ones, it’s clear that the U.S. stock market is up for the challenge. Corporate earnings are strong, and there’s potential tax cuts on the table. Still the question remains: Can the economy survive another year of higher interest rates? As long as the consumer doesn’t give up, it’s hard to make the case that investors should. Trump says, “You better go out and buy stock now.”
