Over the past few months, the market narrative has flipped dramatically. Just recently, client conversations were centered on stagflation risk and trade uncertainty. Today, investors are celebrating a bull rally that has defied expectations—even amid still-elevated tariffs and political volatility.
So what changed? And how sustainable is this shift?
From Panic to Rally
Earlier this year, markets were gripped by recession warnings, with stagflation—persistent inflation combined with sluggish growth—dominating the headlines. It was an outlook few investors wanted to position around.
Fast forward to now: the second-quarter GDP data showed that the U.S. economy returned to growth, and major banks, including Goldman Sachs and Bank of America, have upgraded their economic forecasts. According to Bank of America’s July fund manager survey, 65% of global investors now expect a soft landing.
Animal spirits have returned as well, evidenced by the resurgence of meme stocks and speculative momentum. For RIAs, this kind of investor sentiment requires both caution and context. The shift in risk appetite is real—but so are the risks.
Tariffs: Less Damage Than Expected
Despite the Trump administration’s aggressive trade stance, including tariff threats across a wide range of goods, markets have proven surprisingly resilient. The U.S. tariff rate currently sits at 18.2%—the highest since 1934, per the Yale Budget Lab. That said, investors have largely shrugged off the policy shift.
Doug Peta, chief U.S. investment strategist at BCA Research, summed up the unexpected calm. “If you’d told me six months ago we’d have 15% tariffs across the board, I would’ve expected the S&P 500 to be much lower. Instead, we’re hitting new highs.”
What’s helped? Markets seem to believe tariffs won’t be enforced as aggressively as initially feared. President Trump has often proposed extreme tariffs—50% or even 125%—only to settle at more moderate levels. That messaging tactic appears to have calmed investor nerves. As Peta put it, “When the final number is 15%, it feels like a relief compared to the threat.”
Even when tariff rhetoric escalates—like Trump’s open letters to 23 countries on Truth Social—investors lean on what some have dubbed the “TACO” trade: Trump Always Chickens Out. That belief is reinforcing bullish behavior, even in the face of unfriendly policy.
Shock Value Wearing Off
Paul Hickey, co-founder of Bespoke Investment Group, pointed out that much of the earlier market panic stemmed from the surprise factor. “Markets don’t just rally 20% without a trigger. Often it follows a dramatic selloff caused by an overreaction.”
This rebound is part market recalibration, part policy reassessment. For RIAs managing client expectations, that nuance is critical: the current rally isn’t based on an entirely new macro backdrop—it’s based on a more tempered interpretation of existing risks.
An Economy That Refuses to Break
Economic data has consistently outperformed dire forecasts. After contracting in Q1, U.S. GDP is now expanding. Corporate capex remains robust, supported by pro-growth policies. Meanwhile, inflation—though still above the Fed’s 2% target—has stabilized enough to reduce policy uncertainty.
Bank of America has recently walked back its stagflation warnings, citing a combination of fiscal support and strong consumer demand. And while inflation ticked up slightly, the broader trend remains manageable.
Perhaps most importantly, earnings season has been strong. According to FactSet, 80% of S&P 500 companies reporting so far have beaten earnings estimates. That performance is shoring up confidence that underlying fundamentals can support further equity gains.
“People expected grim earnings and downbeat commentary. That didn’t materialize,” Hickey said.
Caution Still Warranted
Still, advisors should note that not all risks have vanished. Many on Wall Street believe the full impact of tariffs hasn’t been fully felt yet.
Parag Thatte, director of global asset allocation at Deutsche Bank, pointed out that investors are still waiting to see the real economic drag from the tariff regime. That delayed effect could surprise markets later this year.
Even Peta cautioned that some of the current optimism feels overdone. “I’m skeptical that the recent trade deals are enough to offset the long-term drag from tariffs,” he said.
Major investment firms—including Evercore ISI, Stifel, Pimco, and HSBC—have recently flagged elevated risk of a market correction. That’s notable, especially as indexes continue to push past record highs.
Seasonal Weakness Ahead
For advisors focused on tactical asset allocation, the calendar may soon turn into a headwind. Hickey noted that the period from late July through September is historically weak for equities.
“The pendulum has really swung in terms of sentiment,” Hickey said. “But we wouldn’t be surprised to see the market take a breather in the short term.”
What RIAs Should Watch
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Client Positioning: Many investors who went defensive earlier in the year may now feel pressure to chase returns. Advisors should evaluate whether portfolios are still aligned with long-term goals—not short-term emotion.
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Earnings Sustainability: With corporate earnings propping up valuations, the next two quarters will be critical. Continued upside surprises could justify the rally; disappointment could spark a sharp pullback.
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Policy Volatility: Tariff policy remains a wild card. While markets have discounted the worst-case scenarios, any shift in tone or enforcement could reignite risk-off behavior.
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Inflation Trends: Inflation is moving closer to target, but not yet anchored. Advisors should monitor wage growth, services inflation, and Fed commentary for signals that could alter rate expectations.
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Sentiment Overshoot: Rapid reversals in sentiment—like the one just witnessed—can be fragile. If economic surprises turn negative or geopolitical risks escalate, this rally could unwind as quickly as it started.
Final Thoughts
The market’s pivot from stagflation anxiety to bullish exuberance has been swift—and in some ways, logical. Economic data has improved, policy risks have been diluted, and corporate earnings have delivered. But for wealth managers, the job now is to temper client expectations, manage behavioral biases, and position portfolios to weather whatever follows the rally.
As sentiment swings higher, discipline—not euphoria—remains the most valuable asset in any client relationship.
