 |
| Getty Images / Scott Olson |
The mood on Wall Street has undergone a remarkable transformation over the past several months. Not long ago, market sentiment was dominated by widespread fears of stagflation and an impending economic downturn. Investors braced for the worst as the U.S. economy appeared to be grappling with the toxic combination of high inflation and sluggish growth conditions that economists consider more damaging than a traditional recession. But fast-forward to the present, and the stock market is not only shrugging off these concerns it’s rallying toward new highs amid a surge in investor enthusiasm.
This dramatic turnaround comes at a time when the United States is still operating under one of the most significant shifts in trade policy in decades. Former President Donald Trump’s sweeping tariff regime remains largely intact, with the average U.S. tariff rate standing at 18.2%, the highest since 1934, according to the Yale Budget Lab. Just months ago, such a backdrop would have been expected to crush investor confidence. Yet instead, the market has staged a resilient comeback, confounding expectations and redefining the narrative.
What explains this reversal? According to market strategists and analysts, two key factors have contributed to the recent optimism: the surprisingly muted economic impact of tariffs and the undeniable strength of the U.S. economy. Together, these dynamics have helped investors reframe their expectations, sparking a new wave of bullish sentiment even as some caution that the current level of euphoria may be overextended.
Tariffs Have Proven Less Destructive Than Anticipated
 |
| All three major indexes are up since Trump first implemented tariffs on April 2. Anna Moneymaker/Getty Images |
The initial reaction to Trump’s trade measures was one of alarm, with many experts warning that widespread tariffs could trigger global retaliation, depress corporate earnings, and usher in a period of inflationary stagnation. Yet, as Doug Peta, chief U.S. investment strategist at BCA Research, pointed out in an interview with Truth Sider, the reality has been far less dire than feared. “If you’d told me six months ago that we were going to have 15% across-the-board tariffs, I would have thought the S&P 500 would be significantly lower than where it is now,” he said. “But instead, it’s setting new highs.”
Peta suggests that part of the market’s resilience stems from the way the administration has communicated and implemented its trade policy. Initial threats of extreme tariffs some as high as 50% or more were later walked back in favor of more moderate rates. This strategy, he argues, may have inadvertently calmed markets. “If you promise something disastrous and then deliver something merely bad, it can feel like a win,” he said.
Moreover, the market appears to have embraced the so-called “TACO Trade,” shorthand for the belief that “Trump Always Chickens Out.” Even when the former president ratchets up his rhetoric, as he did recently in letters posted to Truth Social, investors have grown accustomed to expecting softer follow-through. This sentiment, paired with ongoing trade deals that ease some tensions, has reassured market participants.
Paul Hickey, co-founder of Bespoke Investment Group, echoed this assessment, noting that the fear surrounding Trump’s tariff announcements may have led to an overreaction, setting the stage for a robust rebound. “Markets don’t rally 20% in a short period for no reason,” Hickey said. “There’s always either a major catalyst or an overreaction that needs correcting.”
The Economy Defies the Doom-and-Gloom Narrative
The second and perhaps more powerful driver of the bull market surge is the continued strength of the U.S. economy. Despite predictions that the economy would falter under the weight of higher prices and trade restrictions, GDP growth has resumed, with the latest data confirming that the economy expanded in the second quarter of 2025.
This rebound has prompted a number of major institutions, including Goldman Sachs and Bank of America, to revise their forecasts upward. In a recent Bank of America survey, 65% of global fund managers said they now expect a “soft landing,” or a scenario in which inflation cools without triggering a recession. That’s a sharp contrast to the mood just a few months ago, when stagflation fears dominated investor sentiment.
Adding to the upbeat tone is a renewed wave of retail investor enthusiasm, with meme stocks surging and speculative trading making a comeback. This return of “animal spirits” suggests that retail traders are once again willing to take risks a hallmark of bull market behavior.
Inflation, meanwhile, remains relatively contained. Although price pressures have ticked up slightly in recent months, they remain close to the Federal Reserve’s 2% target. That’s alleviating concerns that persistent inflation could derail the recovery.
Corporate earnings are also providing a strong foundation for the rally. So far this quarter, 80% of S&P 500 companies have reported earnings that exceeded Wall Street’s expectations, according to FactSet. “People were bracing for grim earnings calls and weak economic commentary,” Hickey said. “But that didn’t materialize. Instead, companies are delivering solid results.”
Is the Optimism Overdone?
 |
| AP Photo/Richard Drew, File |
Despite the encouraging data, some experts warn that markets may be getting ahead of themselves. The long-term impact of tariffs, in particular, remains unclear. “Right now, most investors are just waiting for the effects of tariffs to fully play out,” said Parag Thatte, director of global asset allocation at Deutsche Bank.
Doug Peta of BCA Research also sounded a note of caution. While the recent trade deals have helped ease tensions, he’s skeptical that they’re enough to offset the drag that tariffs could have on economic growth over time. “Some of this optimism is premature,” he said.
Wall Street strategists have begun flagging the possibility of a near-term pullback, even as indexes continue to hit new records. Firms like Evercore ISI, Stifel, Pimco, and HSBC have all pointed to elevated valuations and the potential for a correction as investor enthusiasm reaches a fever pitch.
Seasonal trends could also put a damper on the rally. Historically, the period from late July through September has been one of the weakest stretches for equities. “The pendulum has really swung toward optimism,” Hickey observed. “It wouldn’t surprise us to see the rally take a breather in the short term.”
The stock market’s rapid shift from recession panic to bull market exuberance reflects just how fast investor sentiment can change in today’s environment. Driven by moderating inflation, robust earnings, and a resilient economy, Wall Street appears to have embraced a more hopeful narrative. But with lingering risks from tariffs and the possibility of market overheating, a dose of caution may still be warranted.
Whether the rally continues or stalls will likely depend on how well the economy holds up under the current trade regime and whether corporate earnings can continue to beat expectations. For now, the market is betting on strength, but history suggests that optimism, while powerful, is rarely without consequence.
Source:
www.businessinsider.com
