Six months into Donald Trump's second presidential term, the S&P 500, Nasdaq and Dow Jones are breaking records as if all the old threats — trade wars, inflation, and geopolitical tensions — have magically evaporated, and the economy is thriving like never before. Unfortunately, that has not exactly been the case.
Progress on the trade front has mainly been superficial, limited to public gestures rather than substantive breakthroughs. For example, the EU, rather than moving toward an agreement with the U.S., has focused on contingency plans, showing deep skepticism about a deal materializing.
Worse still, last week Trump announced plans to send letters to over 150 countries that had previously avoided the trade war with the U.S., warning them of possible new tariffs of 10% or even 15%. This brings us to the second unresolved challenge: rising prices fueled by protectionist U.S. policies.
While businesses have mostly absorbed these higher import costs, the Fed's July Beige Book warns that this will not last forever. Consumer prices could start rising as early as late summer and accelerate rapidly unless there is positive news on trade agreements, which have been scarce.
Against this backdrop, it is clear why the Fed is delaying the resumption of rate cuts. However, investors don't seem too worried, judging by the continued rise in the S&P 500, Bitcoin and Ethereum prices rally, etc. Even if rates are not lowered in July, many expect a cut in September, so the wait does not seem too long.
There has been somewhat more visible movement on the geopolitical front, but the underlying problems persist. Iran has still not joined the nuclear deal, the Israeli operation in Palestine continues, and the primary headache for Europe — the Russia-Ukraine conflict — remains unresolved despite multiple rounds of talks.
In short, the picture hasn’t changed much over the past six months. So, the current optimism mainly hinges on the hope that most of the mentioned challenges will be resolved soon. It also helps that Trump keeps backing down on his threats, which adds a bit of FOMO (fear of missing out) to the mix.
The U.S. economic situation has not deteriorated sharply, helping bullish sentiment. For example, U.S. retail sales rose 0.6% month-on-month in June, and major U.S. companies have posted quarterly profits that once again exceeded analysts' pessimistic expectations.
As for how long the market can remain oblivious to reality, probably until some unexpected adverse event forces a rethink. One possible trigger could be Tesla's quarterly report on Wednesday, which analysts expect to disappoint due to tariffs and weaker-than-expected deliveries.
