S&P Hits Record High, Risks Remain Unresolved in Second Half
As the first half of 2025 concludes, the S&P 500 continues to reach new all-time highs, driven by technology and financial stocks, with the market rebounding quickly from its April low. However, despite the improved market sentiment, inflation pressures from tariffs, conflicting economic signals, and unclear data present significant challenges for market prospects in the second half.
Greg Daco, Chief Economist at EY, told Yahoo Finance that in the coming months, the U.S. economy may face another bout of accelerated inflation triggered by tariffs, while slow income growth is likely to further weaken consumer spending, putting overall economic pressure.
The "Data Fog" and Policy Uncertainty Intertwine
The Fed's preferred inflation indicators show prices rising more than expected. Despite signs of cooling economic growth, inflation remains above the 2% target. Daco pointed out that the ambiguity of data combined with policy uncertainty makes future planning increasingly difficult.
Regarding the potential timing of a Fed rate cut, Daco believes that a July cut is unlikely as the majority of FOMC members do not yet support an immediate cut, making September a more probable juncture for policy adjustment. He expects economic growth to continue to slow in the coming months, with declining demand and a weakening labor market possibly offsetting short-term tariff-driven inflation impacts.
"The Fed may focus more on the slowdown in economic growth, as the current inflation uptick might be only temporary," Daco added.
Investor Optimism Persists, Market May Face Tests
Despite the risks of economic slowdown, the market's upward momentum persists. The strong performance of the AI and financial sectors has boosted market sentiment, and consumer confidence is gradually recovering. Investors are increasingly adjusting to the reduced uncertainty stemming from trade policies.
Keith Lerner, co-chief investment officer at SunTrust Bank, mentioned that the market is beginning to focus on more positive growth factors, such as the enactment of the Trump tax reform, deregulation, and potential rate cut expectations, all of which help sustain the stock market's ascent. However, Lerner also cautioned that volatility and challenges may still arise as the market climbs.
Market Uncertainty Coexists with Opportunities
Last Friday, Trump announced the termination of trade talks with Canada, just hours after confirming an agreement with China, a move that once again reminded investors that Trump's policies can change at any time, adding volatility to the market.
Additionally, several American companies, including General Motors, American Airlines, and Mattel, have withdrawn their performance guidance during earnings season, citing increased global trade uncertainty, which further exacerbates market instability. However, lower expectations also create room for potentially better-than-expected performances in the second half.
Reduced expectations mean the market could experience positive surprises in the earnings season. Coupled with an increase in IPO activity and the resurgence of the artificial intelligence concept, these could provide new upward momentum for the market.
