(Bloomberg) — Global investors dived into the riskiest assets after a benign US inflation report dispelled fears of stagflation and lifted a roadblock for the Federal Reserve to cut interest rates.
Stocks jumped to fresh record highs, and small-cap stocks, emerging-markets and semiconductors extended a rally. Measures of implied volatility plunged even as President Donald Trump tariffs threaten to disrupt global trade. The crypto rally has also broadened, with Ether notching a 55% jump in the past month. Meme stocks are seeing a resurgence in popularity.
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The moves underscore the roaring optimism that’s been unleashed in the past few months. Fears over a looming trade war, which sparked a selloff in April, have given way to confidence that the economy can keep powering ahead. The latest move has been powered by renewed hopes over imminent rate cuts in the US.
“The mood is surprisingly bullish, it’s almost like ‘what tariffs, who cares?’ said Neil Birrell, chief investment officer at Premier Miton Investors. “There’s this detachment from economic reality on what’s happening and there’s a wave of either optimism or exuberance in equity markets.”
Swaps are now pricing in about a 90% chance of a quarter-point move in September, while some traders loading up on bets on an even bigger move. In an interview Tuesday, Treasury Secretary Scott Bessent suggested that the Fed ought to be open to a bigger, 50 basis-point cut next month.
Against that backdrop, the S&P 500 Index is back at record highs as solid corporate earnings highlighted a muted impact from sweeping tariffs. The benchmark has surged almost 30% since a low in April — when Trump’s trade shock sparked a flight from US assets. The gauge is also up nearly 12% since Trump won the election in November.
In another sign of market confidence: volatility measures have collapsed. The VIX is the lowest since December, while the MOVE Index of bond-market volatility is at its most subdued level since 2022. A measure of implied price swings in FX markets is also at the lowest in a year.
“Do I see a lot of potential risks to dent some of the sentiment and expectations? I do. But I do not think the market is being irrational at this point in time. We could go a lot further before the market gets irrational,” Bernard Ahkong, CIO at UBS O’Connor Global Multi-Strategy Alpha, said in a Bloomberg TV interview. “It’s very expensive right now to be bearish.”
In equity markets, sentiment has flipped from fears of a trade-induced recession in April to outright optimism around economic resilience, mild inflation and potential interest rate cuts.
Renewed buzz around artificial intelligence has once again put the technology behemoths in the lead. The so-called Magnificent Seven group of tech stocks, which include Nvidia Corp. and Microsoft Corp., have rallied almost 50% since early April after sinking in the first quarter.
Most of that is down to robust earnings, which allayed worries that the companies are overspending on AI. Megacap tech stocks almost single-handedly drove earnings growth in the second quarter, accounting for 90% of the overall increase in S&P 500 profits, according to an analysis by Deutsche Bank AG strategists.
What Bloomberg Strategists Say
“It would be foolish to fight this stock market rally, even if the fundamental framework underpinning the market seems extremely flimsy. At some point, the rise in US long-end yields will damage equities, if they don’t trip themselves up first, or we don’t get another Trump curveball. But there’s no need to prematurely trade that narrative.”
— Mark Cudmore, Markets Live Executive Editor. Click here for the full analysis.
The euphoria is even spreading to the riskiest corners of the US equity market. The Russell 2000 index of small-cap stocks — which tend to be more sensitive to interest rates than the large-cap cohort — is tracking a fourth straight month of gains.
The erratic moves in stocks this year have caused a frenzy among Wall Street strategists, who broadly struggled to keep with the slump in April as well as the subsequent recovery. Some — such as Morgan Stanley’s Michael Wilson and former Wells Fargo strategist Chris Harvey — were among the rare forecasters whose nerves of steel during the April rout proved right in the end. While Wilson warned that the S&P 500 faced further declines in the short term, he held on to his bullish 12-month target and, since May, has been advising clients to buy the dip.
His peers at banks such as Goldman Sachs Group Inc. and Citigroup Inc. were less successful. They rushed to slash targets in the aftermath of the trade announcements, only to return to a bullish view as Trump paused the steep levies and earnings proved resilient.
Now, Wall Street prognosticators are turning even more optimistic. Citigroup strategist Scott Chronert raised his year-end target for the S&P 500 again this month, partly as he expects tax cuts to offset the impact of tariffs. And while investors have matched that positive mood, positioning data show their equity allocation isn’t stretched.
In other markets, though, the recovery from April is less assured. US 10-year yields are within five basis points of levels seen at the end of March. Bloomberg’s gauge of the dollar is still down more than 9% from its high before inauguration day.
“Rates are going to continue to price in further Fed rate cuts on the back of the increasing debate that we’re likely see a 25 or 50 basis point move in September,” said Laura Cooper, head of macro credit and global investment strategist at Nuveen. “The inflation print yesterday cleared the way for that debate to become a bit move lively.”
–With assistance from Freya Jones and Alice Atkins.
