Wall Street rallies as tariff fears ease and Fed boosts sentiment

Equity markets have resumed their upward trajectory, climbing the proverbial "wall of worry" despite persistent trade uncertainties and geopolitical tensions. Last week, Wall Street not only recovered all pre- and post-Liberation Day losses but also surged to new record highs, highlighting a resurgence in bullish sentiment across U.S. markets.

Markets Price in Trade Progress

There appears to be considerable optimism baked into current market valuations. As we approach the critical July 9th deadline for trade negotiations, investor sentiment reflects expectations of progress on key trade deals—particularly between the U.S. and China. While these deals are unlikely to roll back tariffs to pre-Trump-era levels (when average tariffs were around 2–4%), a consensus around a universal baseline of ~10% seems increasingly acceptable to market participants.

This anticipation of a “better-than-expected” outcome, though not quite the ideal scenario, is fuelling confidence. Importantly, the framework agreement—mistakenly described as a deal by the Trump administration—regarding rare earths and technology transfer between the U.S. and China provided the necessary catalyst to push equities to new heights.

Meanwhile, the temporary breakdown in negotiations between the U.S. and Canada added a layer of complexity, particularly around digital services taxation. However, this appears to have been more of a negotiation tactic than a fundamental breakdown. The Trump administration’s strategy of "flipping the table" seems to have been employed to extract concessions, a method that has so far yielded positive market responses.

Bullish Signals Across U.S. Indices

Technical indicators further support the bullish narrative. The S&P 500 broke through to a new all-time high last week, accompanied by a strong bullish signal on the RSI. This movement was largely triggered by easing geopolitical tensions, even before the ceasefire announcement by Trump on Tuesday. Despite minor pullbacks midweek, the general uptrend remained strong.

US 500 daily chart

(Past performance is not a reliable indicator of future results)

The Nasdaq has followed suit, reflecting broad-based strength in U.S. equities. Positive trade headlines continue to act as catalysts, pushing markets higher in the absence of any major negative surprises.

In contrast to the U.S., European equities have struggled to regain their bullish footing. Indices such as the DAX 40, STOXX 600, and FTSE 100 have shown muted reactions, failing to match the momentum seen stateside. This disparity may stem from lingering concerns over trade negotiations between the U.S. and the European Union.

President Trump’s comments over the weekend reiterated the EU's difficulty as a negotiating partner. Although a breakdown in talks is not expected, there remains a real risk. As with other negotiations, Trump may employ pressure tactics to gain leverage, creating short-term uncertainty in European markets.

Fragile Peace in the Middle East

While markets have largely moved past immediate concerns related to Middle East tensions, the situation remains fragile. Any escalation could act as a negative catalyst, though current sentiment suggests that investors are more focused on the opportunities from trade resolution.

Meanwhile, another encouraging development came from the Federal Reserve's latest stress test results. Data released on Friday showed that all 22 U.S. banks passed the test, indicating they would remain resilient in the event of a 2025 recession. This strengthens investor confidence and adds another layer of support to the equity rally.

Week Ahead

In summary, the path of least resistance for equities appears to remain to the upside. The combination of easing trade tensions, resilient economic data, and strong technical momentum supports continued bullishness. As always, risks remain—particularly around unresolved trade negotiations—but the market’s current positioning suggests optimism is prevailing.

Markets are likely to focus on the release of the US jobs data on Thursday (a day early given the 4th of July holiday on Friday). So far, the US economy has shown resilience, limiting the Fed’s ability to cut rates, but the latest readings have shown softening inflationary pressures and job creation, allowing markets to continue to price in two rate cuts for the remainder of the year. The data this week is unlikely to skew this belief, likely reinforcing the appetite in US equities.