By William Watts
‘Strength begets strength’, says ClearBridge’s Schulze after S&P 500’s rapid rally off April lows
Tariffs? Deficits? So what?
Stock-market investors who were in full-fledged panic just three months ago in the wake of President Donald Trump’s “liberation day” unveiling of sweeping tariffs on U.S. trading partners went into the long Fourth of July weekend with the S&P 500 SPX and Nasdaq Composite COMP in record territory. That’s even with a 90-day pause on those tariffs due to expire on Wednesday.
“The direction of travel for tariffs has really been one way over the last couple months, which has been a positive direction,” Jeff Schulze, head of economic and market strategy at ClearBridge Investments, with $180.4 billion in assets under management, told MarketWatch.
Stocks stumbled hard after the April 2 tariff announcement, with the S&P 500 finishing nearly 19% below its February record and on the cusp of a bear market, before roaring back after Trump announced the pause. Stock-market bulls barely looked back as equities extended their climb, with the S&P 500 and Nasdaq both pushing back into record territory in June.
Investors have been soothed by a framework agreement with China that helped cool tensions between Washington and Beijing. And while flare-ups between the U.S. and trading partners are possible, the expectation is that the pause will be extended for countries negotiating levies, all of which could make the July 9 deadline a “non-event,” Schulze said.
“The setup for stocks during the second half of 2025 is quite Goldilocks” – neither too warm nor too cold, but just right – as investors eye potential trade deals, the extension of the 2017 tax cuts with passage of Trump’s massive tax and spending bill, calming geopolitical tensions and a Fed that’s warming up to interest-rate cuts, said Clark Bellin, president and chief investment officer of Lincoln, Neb.-based Bellwether Wealth, which manages $630 million in assets, in emailed comments.
Congressional Republicans wrestled Trump’s fiscal legislation over the finish line shortly after markets saw an early close Thursday. That was also described as a positive for stocks, with tax cuts and other measures set to provide a fiscal tailwind.
“Enthusiasm is also heavily motivated by the fact that this growing economy will receive supply-side stimulus,” said Jose Torres, chief economist at Interactive Brokers, in a note, referring to the legislation.
Read: Trump’s big bill just passed the House. Here are the winners and losers as it goes to his desk.
So much for the bond-market vigilantes. Volatile moves in Treasury yields beginning last fall were tied by some investors to fears that Trump’s fiscal agenda would result in a further surge to the deficit. The legislation passed Thursday is projected to add $3.4 trillion to the U.S. government’s $36.2 trillion debt over the next 10 years.
Treasury yields rose Thursday, but that was driven more by good news on the economic front after a stronger-than-expected June jobs report. The yield on the 10-year note BX:TMUBMUSD10Y finished the week at 4.339%, up 5 basis points on the day but down 46 basis points from its 52-week high near 4.8% set in January. Yields and bond prices move opposite each other.
Deficit estimates don’t account for potential tariff revenues, which were $15.6 billion in April according to Bipartisan Policy Center data, analysts at Jefferies said in a Thursday note. “The key question for equity investors is whether the tax incentives will meaningfully boost economic growth and thus rein in the growth in public debt over the next decade,” they wrote.
Stocks rallied Thursday after June nonfarm payrolls rose a stronger-than-expected 147,000 and the unemployment rate fell to 4.1% from 4.2%. Economists didn’t love all aspects of the report, but investors were in a buying mood. The S&P 500 rose 0.8% to close at a record 6,279.35, while the Nasdaq advanced 1% to end at a record 20,601.10. The Dow Jones Industrial Average DJIA gained 344.11 points, or 0.8%, to close at 44,828.53, off 0.4% from its record close of 45,014.04 set on Dec. 4.
See: The June jobs report is grimy under the hood. Here’s a few key numbers that tell us why.
Investors may be reluctant to stand in the way of the stock market after such a ferocious rebound from the April lows. Schulze noted that the 19.8% 50-day rally off the April 8 low was the ninth-strongest such rally for the S&P 500 going back to 1950. Strong 50-day rallies have tended to be followed by impressive gains over the subsequent three-, six- and 12-month periods, he said (see table below).
“Strength usually begets strength,” he said.
Some strategists still see reasons to be cautious.
For one thing, the Wall Street consensus appears overly optimistic when it comes to the tariff outlook and thus the growth rate in calendar year 2025, said Scott Wren, global market strategist at Wells Fargo Investment Institute, in a note. As tariffs arrive in force, the economy is certain to slow, pushing up unemployment and denting consumer spending.
“Our feel is that stocks are ahead of themselves, and as a result, we are looking to trim positions in markets and sectors that we find overvalued, particularly U.S. small-cap equities and the industrials and consumer discretionary sectors” in the S&P 500, which have done well in recent months, he said.
Investors could hold those funds or reinvest in sectors that appear more favorable, including tech, financials, energy, utilities and communications services, he wrote. Or, since stocks aren’t cheap, they may opt “to hold those funds to reinvest if the downside volatility we expect develops.”
-William Watts
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07-06-25 0801ET
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