Stocks staged a historic comeback from their April lows, with the S&P 500 (^GSPC) and Nasdaq Composite (^IXIC) closing out the first half of the year on a high note. Both indexes notched multiple record highs this week after the S&P 500 secured its first all-time high since February on June 27.
The phrase captures a belief among some investors that the president often talks tough on tariffs but rarely follows through. That assumption has helped fuel a tailwind for markets in recent months as traders increasingly bet on last-minute policy pivots.
Trade deal frameworks with China and the UK are reportedly now on the table ahead of Trump’s self-imposed July 9 deadline. This has led investors to price in a “Goldilocks scenario” for stocks, with sustained earnings growth, little effects from tariffs, and rate cuts from the Federal Reserve.
But Wall Street pros are signaling caution as they assess the path forward, which still includes many unknowns.
“Just as Goldilocks awoke from her sleep to confront three bears, there are several areas where this optimism is likely to be challenged,” JPMorgan’s economics and policy team, led by Bruce Kasman, wrote in a recent client note.
Kasman cautioned investors not to “get carried away by inflation momentum,” warning that tariffs are still set to rise despite ongoing trade negotiations. This will add pressure to a US economy already grappling with softer consumer demand and signs of stalling global factory activity.
“The economy is entering the second half of the year on wobbly footing,” Comerica Bank chief economist Bill Adams added.
The uncertainty has been exacerbated by mixed economic signals, including a downward revision to first-quarter GDP growth, a slight uptick in PCE inflation, and continued claims reaching their highest level since 2021, indicating some labor market softness.
“There are some yellow flags in the economy but no clear red flags yet,” Aditya Bhave, senior US economist at Bank of America, said on a call with reporters. “We’re at a fork in the road,” he said. “If something is going to break, it’s going to break soon.”
President Trump speaks to the media before walking across the South Lawn of the White House to board Marine One en route to Joint Base Andrews, Md., and on to Florida on July 1. (AP Photo/Mark Schiefelbein) ·ASSOCIATED PRESS
But markets have mostly shrugged off those fears in favor of more optimistic indicators.
The latest data released on Thursday, for example, showed strong nonfarm payroll gains in the month of June and a surprise downtick in the unemployment rate. Earlier data in the week showed job openings unexpectedly rose in May to hit the highest level since November 2024. Additionally, economists have said easing inflation in areas like housing and energy may help offset tariff-related price increases.
“If the Fed cuts in the second half of 2025, it is more likely because inflation is lower than expected than because the unemployment rate rises more than expected,” Adams said.
The timing of Fed rate cuts remains one of the most hotly debated topics heading into the second half of the year as President Trump continues to pressure the central bank to slash interest rates.
“We still think cuts in the next two meetings are unlikely,” Morgan Stanley economists wrote in a note this week. It’s a reality markets are beginning to digest, with futures now recalibrating the chances of a Fed rate cut following June’s strong jobs numbers.
As of Thursday afternoon, markets are pricing in a roughly 67% chance the Fed cuts by the end of its September meeting, down from a 93% chance seen one week prior, per the CME FedWatch Tool.
Morgan Stanley sees the Fed delivering seven rate cuts in 2026, helped by the expected arrival of a more dovish Fed chair following Jerome Powell’s departure early next year.
JPMorgan echoed that caution, saying the Fed is unlikely to ease unless private payroll growth dips “well below 100,000” in the next two reports — a risk that at least did not materialize in June with 147,000 jobs added.
To that point, Powell has consistently emphasized the central bank’s ability to remain patient as it assesses the economic fallout from rising tariffs.
“The size of the impact with this type of shock that we haven’t had probably in close to 100 years is very hard to have certainty on,” Claudio Irigoyen, head of global economics at Bank of America, said on a midyear outlook call with reporters on Tuesday.
He added that “uncertainty is worse than bad news,” explaining that businesses “cannot commit to long-term investment when the rules of the game are not clear.”
Allie Canal is a Senior Reporter at Yahoo Finance. Follow her on X @allie_canal, LinkedIn, and email her at alexandra.canal@yahoofinance.com.
