Wall Street has faith in Trump. It could all end in tears
The S&P 500 stock index has surged nearly 25pc from the nadir it reached in the days after the US president announced his ' liberation day ' tariffs on April 2.
The benchmark completed its best quarter since December 2023 on Monday as it reached a new high, even as Trump threatens to impose fresh tariffs within weeks.
This will please a president who has long viewed the stock market as an unofficial straw poll on his performance. But is such a full-throated endorsement of Trump's economic plans justified? Not everyone is convinced.
'[Stocks] are at an all time high and the risks are still there,' points out Luca Paolini, the chief strategist at Pictet Asset Management. 'It is not as bad as it was but it is not as good as it was a year ago.
'Our view is that it's going to get weaker and that's why we don't buy into the strength of the market.'
Stocks have surged even as official data, published last week, confirmed that the US economy shrank by half a percentage point at the start of the year.
'The US economy is somewhat slowing and when you have those types of stock valuations, there's not much room for deception,' says Kevin Thozet, a member of the investment committee at European asset manager Carmignac.
Stock prices on the S&P 500 are trading at about 22 times earnings, which assumes that companies will experience astonishing growth in profits in coming years.
'This recovery is driven entirely by soaring valuations rather than earnings upgrades, signalling underlying fragility,' Susana Cruz and Joachim Klement, analysts at stockbroker Panmure Liberum, have warned. The current stock market rally is 'built on shaky ground, given the deep economic uncertainty'.
There are some good reasons for stocks to have roared back since Trump announced his 'liberation day' tariffs.
'Markets are always navigating a very uncertain environment. The question is, 'Is it worse or better than a few months ago?' And I think the market, correctly so, came to the conclusion that it's probably better,' says Paolini.
'The trade war that was supposed to be terrible for the global economy. It doesn't look like it is going to be that bad because there are going to be deals between the US-UK, US-India, Vietnam, probably Europe and Japan.
'So yes, there will be higher tariffs, but we are probably going to avoid a devastating trade war of everyone against everyone else.'
Rory McPherson, the chief investment officer at Wren Sterling, says: 'Corporate earnings have been really strong. The earnings for the rest of the year have not been downgraded by anything like what they were downgraded in previous crises.
'Yes, they have been downgraded and the downgrade for the year is almost 4pc but that's not too far out of whack.'
However, Paolini warns that the surge in stocks means there is 'very limited upside from here because equities are very, very expensive'.
The big question hanging over the stock market is the future of so-called US exceptionalism – the previously self-reinforcing theory that America is unique and distinct from other nations.
This belief has long helped to prop up stock markets, with investors betting that American businesses will pull through even the most difficult patches.
But there are signs that this faith is being shaken. The dollar has suffered its worst first half of the year since 1973 and concerns about Trump's plans to borrow hundreds of billions have seen borrowing costs jump, prompting jokes that the president could become 'Donald Truss'.
'If I'm looking further out I think Trump's policies would lead to a lower US dollar and higher interest rates,' says Thozet of Carmignac.
'The Trump administration wants to have more manufacturing, more stuff made in the US and this comes with a lower dollar policy. And there's a risk that these higher interest rates deflates the elevated prices on US equities.'
The man who could make or break the Wall Street rally is Jerome Powell, the chairman of the Federal Reserve. Lower interest rates would spur economic activity and help boost corporate profits.
Traders are currently pricing in two cuts before the end of 2025 and a 53pc chance of a third, anticipating that policymakers will react to a slowdown in the American jobs market, which added 139,000 jobs in May, down from 147,000 in April.
However, Powell warned on Tuesday at the ECB Forum in Sintra that policymakers had kept rates 'on hold when we saw the size of the tariffs'.
He also warned that the 'US federal fiscal path is not a sustainable one' as the Senate edged closer to approving Mr Trump's ' One Big Beautiful Bill ', which would cut taxes and add an estimated $3.3 trillion (£2.4 trillion) to the American government deficit over the next 10 years. Those comments will infuriate Mr Trump, who has repeatedly pressured 'Too Late' Powell to cut rates.
As the melodrama plays out, Wall Street waits.
'It is not blind hope,' insists McPherson. 'The US has a lot more upside from here.'
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