Wall Street Hits Record: What Lies Ahead

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    The recent months have seen a tumultuous series of events as a trade war unfolded, actual warfare erupted in the Middle East, and a string of verbal assaults were directed by the U.S. president towards the head of the Federal Reserve. Despite these turbulent times, the stock market remained resilient, culminating in the S&P 500 setting a new record on Friday by closing at an all-time high of 6,173. Investors who weathered the storm of volatility were duly rewarded, and Wall Street can now indulge in a momentary pause and a sigh of relief. However, the respite may be fleeting, as the temporary suspension of numerous tariffs ordered by President Donald Trump is set to expire in early July. Anticipated second-quarter earnings reports and forthcoming economic data could shed light on the repercussions of any enforced tariffs. Moreover, the Federal Reserve may encounter a challenging decision regarding interest rate adjustments.

    April 2 saw President Trump making an unexpected appearance in the Rose Garden, unveiling comprehensive tariffs on virtually all trading partners of the U.S., focusing predominantly on China. As a result, the duties on Chinese imports reached 145%, prompting Beijing to retaliate by escalating tariffs on American goods to 125%. This announcement caused a swift decline of about 12% in the S&P 500 over the ensuing four days, while the Dow Jones Industrial Average plummeted by nearly 4,600 points, equivalent to approximately 11%. Although Trump seemed indifferent to the stock market decline, the distress signals emanating from the bond and foreign exchange markets could not be ignored. A downturn in U.S. government bond prices sparked concerns about the U.S. Treasury market losing its standing as the world’s premier safe haven for cash. Concurrently, the depreciation of the U.S. dollar symbolized waning trust in the U.S. as a secure investment environment.

    On April 9, Trump utilized social media to declare a “90-day PAUSE” for most previously announced tariffs, excluding those directed at China. This directive triggered an impressive 9.5% surge in the S&P 500, marking one of its most stellar performances. Subsequent developments in May included a trade agreement with the United Kingdom and significant progress with China, as both nations agreed to temporarily retract most of their imposed tariffs, although specifics remained vague. A temporary fright in the markets ensued when Trump considered levying tariffs on the European Union, yet he opted to postpone until July 9 to allow for ongoing negotiations.

    A real conflict in the Middle East momentarily overshadowed the trade war’s headlines, with hostilities between Israel and Iran leading to an oil price spike that threatened inflation and potential global economic deceleration. A subsequent U.S. strike on Iranian nuclear sites culminated in a ceasefire, and oil prices plummeted, much to the relief of Wall Street, which continued its upward trajectory toward a new record.

    President Trump has expressed a desire for the Fed to reduce interest rates, whereas the Fed insists on assessing the tariff impact first. Trump has openly criticized Jerome Powell, the incumbent Fed chair, whose term concludes next year. Reportedly, Trump may announce his successor ahead of schedule as a strategy to undermine Powell, a scenario likely to provoke unease in the bond and foreign exchange markets and consequently on Wall Street.

    First-quarter robust profit reports tempered the tariff pressure, and companies will soon disclose results for the quarter ending June 30. Despite lowered expectations for earnings growth by Wall Street analysts for S&P 500 companies, they still project a respectable growth of 5%, as per FactSet. While the average quarterly profit growth over the past five years stands at 12.7%, some companies have retracted their profit forecasts amidst tariff-related uncertainties, complicating forecasting efforts.

    Reflecting the market’s sensitivity to trade dynamics, the S&P 500 dipped momentarily on Friday after Trump announced a pause in trade talks with Canada over its proposed technology firm tax, which Canada later revoked. Over the weekend, Trump made it clear he does not intend to extend the 90-day tariff pause beyond July 9, signaling countries to expect trade penalties unless agreements are reached with the United States. Nevertheless, Trump has been known to reverse his stance on tariffs, offering potential relief if negotiations achieve tangible progress with any of the involved nations.