Exuberant investors ignore turmoil at their own risk
Tariffs? War in the Middle East? Rising energy prices? Surging deficits? High interest rates? Weak dollar? Plunging CEO confidence? Climate change? Nope, nope, nope — the "Trump always chickens out" (TACO) trade is for everyone.
Why it matters: Investors are already ignoring a slew of headwinds.
Any of a number of risks could be the final straw that breaks the market's grind to the upside.
What they're saying: Lori Calvasina, head of U.S. equity strategy at RBC Capital Markets, writing in a client note Monday, observed that three main risks cloud the path forward for stocks:
Valuations could be compressed if national security concerns rise.
The sentiment recovery following April's brief bear market could be derailed.
Rising oil prices (if they turn around again) could weigh on U.S. equities.
The latest: Stocks rallied hard Monday after Iran conducted a performative retaliation, sending oil plunging more than 7%, and reinforcing investors' relentless optimism.
President Trump announced a ceasefire, though the coming days will be crucial.
Yes, but: Markets are already priced for "multiple best case scenarios," according to a note from David Bahnsen, chief investment officer with The Bahnsen Group.
This year alone, investors have traded on hopes of tariff deals, rate cuts from the Federal Reserve, and continued outperformance of AI names, pushing the broader market to trade at 23 times forward earnings, a historically rich valuation.
That leaves "plenty of risk for short-term volatility," according to Bahnsen.
Zoom in: JPMorgan's David Kelly warns that while the threat of war remains unpredictable, investors would be wise to continue to focus on the known unknowns, including the risk that tariffs drive inflation higher, keeping interest rates elevated.
Zoom out: A fresh lift in oil prices could add fuel to the inflation expectations fire, which could make it even less likely that the Fed lowers rates.
That could be a bearish signal for investors already eager for cuts, with Bahnsen arguing lower rates are needed for the Fed to be "ahead of the curve."
What we're watching: Stocks are up 0.5% since President Trump's inauguration, after the S&P 500 rebounded from its post-Liberation Day lows with the fastest snapback since 1982.
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