Why Markets Continue to Ignore Macro Risks
The S&P 500 hit a new all-time high last weekand rightlyso, as most of the actual news was positive as economic data was better than expected and pushed back on slow down fears, inflation metrics were a bit firm but not enough to materially upset rate-cut expectations and the start of Q2 earnings was very good with over 80% of companies beating estimates. And while there was more drama on the tariff and policy front (including the headline whiplash regarding potentially firing Powell), markets continued to largely ignore it as investors remain committed to the idea that, despite the drama, the administration won’t take any stepsto materially impact growth or U.S. assets.
The net result of that news, when combined with upside momentum and a minor case of “FOMO” (fear of missing out), sent the S&P 500 higher for much of the week. In effect, the market has taken a “show me” stance to allof thepotential negatives still lurking in the macroeconomic periphery. It’s entirely possible that tariffs, whichare going tobe much larger than expected regardless of where they settle, may create an inflation spike (and there’s evidence that’s starting to happen already). But the market’s viewof thatis “so, show me.”
Similarly, it’s entirely possible that tariffs and policy whiplash, which are much worse than most expected, could combine with still-higher rates to slow economic growth (and there’s some evidence that’s starting to happen already). But again, the market’s view of this risk is “so, show me.”
On tariffs, Trump and the administration appear serious about maintaining high tariffs on trading partners (including a potential 15% tariff on EU, which was floated on Friday)and tariffsat currently stated levels would not be good for U.S. or global growth.But the market’s view of this risk is “so, show me.”
Finally, the president could tryandfire Powell and there is some evidence that’s already in motion, andthat would be a demonstrable negative for markets (especially the dollar and U.S. Treasuries)if Powell is replaced by a Fed chair that’s viewed as bending to the will of the administration. But yetgain, the market’s view of this risk is “so, show me.”
Bottom line,the facts on the ground have been positive: Better-than-expected economic growth,stronger-than expectedearnings, relatively stable inflation, and anticipation of lower rates. Those positives have helped investors ignore risks looming on the periphery and adoptthis“show me” attitudetowardsthem, and that is why stocks are at new highs.
But this “show me” attitude is also reaching historical extremes. The S&P 500 is trading more than 23X 2025 EPS of $265 and more than 21X 2026 EPS of $298.Those are historically unsustainable valuations and if we think about them in the context of the greatestshake upto the global trading system in nearly 50 years,it seemspretty rich.
More generally, it’s bred a sense of complacency in investors regarding tariff and trade risks and mustbe consideredfor advisors and investors looking beyond the short term.It’s entirely possible these elevated tariff rates don’t cause inflation or slow growth, but it’s very uncertain and the aggressive nature with which markets have assumed it won’t happen should give us pause, because ifthose assumptions are challenged, 5% will come off the S&P 500 easily (and in reality, more like 10%).
From a strategy standpoint, this market remains a bit between an “Ignoring Macro Headlines/Focusing on the Positive” market and “Trumponomics Euphoria” market, which equates to holding longs with a focus on AI-related tech and broad, diversified longs across some cyclical sectors.The bottomline,I do thinkthis market is too complacent to the risks facing it, but prematurely exiting before the data validates those risks is not a sound strategy.So, maintaining a 25% position in short-term treasuries is still prudent, and a position of 25% in value is still the right mix in this environment. Yes,this means thatyou are not keeping up with the S&P 500, but weare preparedfor that 5% to 10%downturn that may occur sooner rather than later. My objective is to protect and move when the valuations are more reasonable.
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