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Stocks bounce back: Clear skies ahead or still stormy weather?
Jacob Falkencrone
Global Head of Investment Strategy
Key points:
- Earnings momentum is turning positive, with analysts upgrading corporate profit forecasts after months of pessimism.
- Investor sentiment and economic forecasts have improved significantly after easing trade tensions.
- Risks remain elevated, with higher-than-normal tariffs, lofty valuations, and lingering uncertainty about the economic outlook.
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"Markets hate uncertainty—and nothing breeds uncertainty like a sudden trade war."
After weeks of turbulence triggered by Donald Trump's 'Liberation Day' tariffs, global equities seem to have steadied their nerve. Stock markets are rebounding sharply, optimism is rising, and investor sentiment is finally improving. Yet, seasoned investors know better than to celebrate prematurely. The question remains: have the storm clouds truly cleared, or is this just the eye of a lingering storm?
A sudden recovery after months of turmoil
Early April saw investors scrambling as Trump's sudden tariff hikes triggered a sharp sell-off. Equity markets worldwide fell dramatically, briefly plunging the S&P 500 into bear market territory—down nearly 20%.
But almost as quickly as it fell, the market rebounded with striking resilience. Led by powerful recoveries from tech giants such as Nvidia, Microsoft and Advanced Micro Devices, the S&P 500 is now positive for the year and only about 4% below its all-time high. Investors seem to have concluded the worst is behind them, interpreting the turmoil as a temporary, event-driven shock rather than the start of a prolonged downturn.
Behind the brighter sentiment
This newfound optimism rests primarily on two pillars: easing geopolitical tensions and strong corporate earnings. The recent truce between the US and China, which has put a temporary pause on the very high tariff levels, along with negotiations for a new trade deal with the UK has provided crucial breathing space. This has markedly reduced recession fears, prompting economists to upgrade their growth forecasts and reduce their estimated likelihood of a recession this year.
Meanwhile, companies have defied the gloomy predictions of earlier months. In the recent earnings season, an impressive 77% of S&P 500 companies surpassed expectations, pushing analysts to upgrade their forecasts for the first time in half a year. This suggests corporate America may be far better equipped to handle tariffs and economic uncertainty than markets had assumed.
As a result, a key Citigroup indicator measuring analysts’ earnings revisions recently turned positive—clear evidence that corporate fundamentals might be on a healthier footing than previously feared.
The power of positive earnings revisions
Positive revisions don't just signal improved corporate health; they also lift investor sentiment and encourage a return to risk-taking. Indeed, stocks tend to respond positively as analysts raise their forecasts. The stronger-than-expected earnings results are already pushing forecasts upwards, reinforcing the positive feedback loop of improving investor confidence.
Crucially, companies leading this recovery share a common trait: pricing power. Firms able to maintain profit margins despite higher tariffs have weathered the storm best. Investors should therefore prioritise businesses with robust brands and unique products, well-equipped to pass on higher costs without severely impacting sales or profitability.
Cautious optimism required
But this brighter outlook isn’t risk-free. Tariffs, while now lower than initially feared, remain significantly elevated compared to pre-crisis levels. Companies sensitive to global trade remain cautious, with some pausing or withdrawing earnings guidance entirely. Sectors such as autos, durables, and industrials still face considerable uncertainty.
Furthermore, after this strong rally, market valuations—particularly in the US—have soared back to historically high levels. While optimism is justified, stocks have already priced in a relatively rosy economic scenario. This leaves limited room for error: if economic data disappoints, markets could swiftly retrace recent gains.
Where to from here? Opportunities and pitfalls
Looking ahead, investors must remain vigilant. Continued positive earnings revisions would validate recent market optimism, while central banks’ actions—particularly the Federal Reserve’s approach to rate cuts amid persistent tariff-driven inflation—will be closely watched.
Geographic diversification continues to offer valuable protection. European equities, notably Germany and Italy, have performed strongly and still trade at significant discounts to their US counterparts. Investing in regions less sensitive to US tariffs can provide crucial balance.
Moreover, while the initial hype around AI has cooled slightly, tech firms tied to structural AI growth, such as Nvidia, remain fundamentally strong. Their recent resilience demonstrates ongoing secular growth potential, particularly attractive amid easing global trade tensions.
Clear skies or still stormy weather?
Markets have undeniably enjoyed a welcome rally following the recent easing of tariff risks. Yet investors must acknowledge that significant uncertainties still loom. Higher tariffs, rich valuations, and ongoing geopolitical risks mean that markets remain vulnerable to sudden reversals.
The recent market moves underscore an essential investing truth: resilience pays off. Investors who stuck to their long-term strategies have been rewarded. If you had sold out when things looked darkest, you would have missed a 20% upside. We may not be completely out of the woods yet, but the wisdom of staying the course is proven time and time again.
For investors, this translates to careful optimism. It might be time to cautiously increase exposure to high-quality businesses with proven pricing power and resilient earnings. But it's also essential to maintain sufficient diversification and liquidity, remaining prepared for potential volatility ahead.
After all, experienced investors understand one truth clearly: even if the clouds seem to be clearing, you should always keep your umbrella close at hand.
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