S&P 500 Shows Recovery Amid Ongoing Economic Concerns
The S&P 500 has bounced back significantly, recovering nearly all its losses since hitting a record high in February. However, lingering economic and geopolitical worries still pose risks to the market as we move deeper into the year. One pivotal issue might arise around early July when various tariffs announced by President Trump are temporarily suspended. The deadline for this temporary measure is July 9, and it’s possible that a small agreement may provoke the Trump administration to either extend these suspensions or decide on unilateral tariff enforcement.
TIAA Wealth Management pointed out that “US trade policy and rhetoric can shift rapidly.” They expressed concerns about the uncertainty surrounding new product-specific tariffs, which could increase effective tariffs to over 10% of total imports. This unpredictability, along with potential reimposed tariffs and the broad discretion held by President Trump, means that the true impact on purchasing power is still to be determined.
Another significant market risk tied to tariffs is inflation. This week, Federal Reserve Chairman Jerome Powell informed Congress that the Fed is keeping a close eye on possible price hikes due to these tariffs. “The impact of tariffs depends, among other things, on the ultimate level,” said Powell. Oil prices also represent a variable in inflation, especially given recent instability from tensions involving Iran, Israel, and the US. As tensions re-escalate, Iran has threatened to obstruct the Strait of Hormuz, which is crucial for transporting about 20% of the world’s crude oil.
Furthermore, the Fed’s decisions on interest rate cuts will influence the Treasury market, alongside ongoing taxation and spending bills being discussed in Congress. The risk of high deficit spending paired with the Fed’s holdings could lead to significant downturns in both the bond and stock markets. A recent survey by Natixis indicated that disruptions in the Treasury market are viewed as a primary risk among investment managers.
Additionally, the overall health of the US economy presents another layer of risk for investors. Recent weak signals in the housing sector could ripple through to other economic areas. JPMorgan’s global research team projects a 40% chance of recession based on the outlook for the latter half of the year. Given the deteriorating macroeconomic environment, they foresee low performance in risk assets, stating that while relative valuations and growth shocks are concerning, they might be somewhat balanced out.
On Wall Street, awareness of these risks isn’t lost among professionals. Raymond James strategist Tavis McCourt noted in a client memo that the US dollar is continuing to weaken, particularly due to rising yields. He remarked, “We all know what the trade in pain will turn out,” also hinting at the potential implications of upcoming events, such as the US’s military actions against Iran.
