Stock Market Bull Charges On, Question Is When It Meets the Bear

(Bloomberg) — The stock market is on a heater. After rising for nine straight sessions and gaining 10% in that time, the S&P 500 Index closed out the week on its longest winning streak in more than 20 years, recouping all of its losses since April 2, when President Donald Trump launched his global trade war.

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The question is why. And the answer appears to be, with so much of Wall Street’s institutional money staying on the sidelines, bullish individual investors are driving the gains. History says there’s little sense in fighting this enthusiasm. To paraphrase the famous statement from former Citigroup CEO Chuck Prince in 2007 right before the global financial crisis hit, for now the music is still playing, so you have to dance.

“There are so many smart people in our industry that just don’t get the simplicity of how this market works over longer periods of time, and I think it actually creates an opportunity,” said David Wagner, portfolio manager at Aptus Capital Advisors LLC. “Am I siding with the retail investors here right now? I might be.”

The fundamentals behind the enthusiasm, however, are less than promising.

Economic data has been uneven, as the impact of Trump’s sweeping tariffs is only starting to hit. This week, the US Bureau of Economic Analysis reported that inflation-adjusted gross domestic product contracted in the first quarter for the first time since 2022, while figures from the Bureau of Labor Statistics indicated that jobs growth was robust in April, although the labor market is showing signs of cooling. And the so-called soft data, which measures how consumers and households are feeling, also has been concerning.

Earnings have been solid, but far from great. For the most part, companies are reluctant to give hard outlooks for the rest of the year with so much uncertainty in the global economy. Big tech stalwarts Microsoft Corp. and Meta Platforms Inc. put up strong numbers this week, but Amazon.com Inc. and Apple Inc. indicated that trade pressures are starting to hit. And although the Trump administration has talked about upcoming tariff agreements with some trade partners, the reality is nothing has happened and any concrete deals with terms nailed down are a ways off.

‘New And Crazy’

“I think every day stays new and crazy until we start seeing if the soft data leaks into the hard data,” said Brent Schutte, chief investment officer at Northwestern Mutual Wealth Management Company. “Absent that, I think you continue to trade off of the back and forth of what’s happening on the trade negotiation front, which I think is going to be ever-present in the future.”

It’s a view that’s starting to catch on. Earlier this week, the trading desk at JPMorgan Chase & Co. said it had turned tactically bullish on US equities on expectations that low positioning and light volume following the early April rout, as well as optimism that Trump will soon announce something involving progress in trade talks, are catalysts for more upside in the S&P 500. However, the bank added that this momentum could fade quickly once tariffs begin to drag on the economy.

“Overall, the de-escalation trade has room to run,” head of global market intelligence Andrew Tyler told clients, while stressing that “this is not an all clear for markets.”

The latest rebound is largely being driven by the same retail trading cohort that has bought the dips in most of the recent bull markets. Mom-and-pop investors snapped up $40 billion worth of US equities in April, a record for monthly inflows, according to Emma Wu, a global equity derivatives strategist at JPMorgan. And individual clients at Bank of America Corp. have been buyers for 19 consecutive weeks, the longest streak to start a year in the firm’s data going back to 2008.

Meanwhile, the sentiment among institutional investors has only slightly improved, shifting from significantly underweight US stocks to neutral, according to data from Deutsche Bank AG. It’s unlikely the group will move to overweight stocks without concrete signs that Trump is backpedaling on his trade policies, the bank added.

“We were pulling back from markets starting late last year, so we have some dry powder,” said Keith Buchanan, senior portfolio manager at GLOBALT Investments LLC, “But we’re scratching our heads right now at how the market can make a bottom before things are clear.”

Need Clarity

Indeed, clarity is what’s most lacking at the moment. Many companies, like American Airlines Group Inc. and Delta Air Lines Inc., have abandoned earnings outlooks for the year because the economic backdrop is just too uncertain. Meanwhile, Amazon.com gave a weaker-than-expected forecast for operating income and said it’s bracing for a tougher business climate in the coming months.

Overall, the earnings guidance from Corporate America is the worst since the pandemic, according to Bloomberg Intelligence chief equity strategist Gina Martin Adams.

“You don’t know who the winners and losers are going to be, yet you’ve got some idea about who might navigate things better or worse,” said Chris Zaccarelli, chief investment officer at Northlight Asset Management. “The opportunity for getting whipsawed is just so much higher because of the uncertainty. It’s an unintended side effect of really whatever the Trump administration is trying to do.”

Things are also sketchy on the tariff front, where the real tensions are with China. Chinese state media said the Trump administration has reached out to initiate talks, but it appears the US president’s tough stance has only strengthened China’s resolve to fight. For now, Chinese officials say they are assessing the possibility of trade talks with the US.

The Trump administration says it’s close to some kind of resolution with India, Japan and South Korea. But even if an agreement in principle is reached, it will likely take months or years to hammer out the final terms of a deal.

“The markets have moved on comments from Trump and his administration, hopeful the tariff mess will just go away,” said Thomas Thornton, founder of Hedge Fund Telemetry LLC. “Trade deals historically take a lot of time, and in a world when we can order something on Amazon and get it the next day, people have unrealistic expectations.”

For anyone looking ahead rather than responding in the moment, the soft economic data indicating that a slowdown is coming may be most troubling. US consumer sentiment is among the lowest going back to the 1970s, and long-term inflation expectations are the highest since 1981, both because of fears of the tariff fallout, according to the latest University of Michigan survey.

“The soft data that has been envisioning a sharp economic downturn I think is going to quickly turn into hard data,” said Kathryn Rooney Vera, chief market strategist at StoneX Group. “Even if we get a trade agreement, I think volatility affects sentiment, consumption and investment.”

–With assistance from Carmen Reinicke, Katrina Compoli, Reade Pickert and Matt Turner.

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