It's been a wild ride on the stock market of late. After a nearly three-year-long bull market, investors began to worry that the good times could have finally come to an end after the US's premier stock indices, the S&P 500 and Nasdaq 100, lost an average of between 20% and 25% in the first four months of 2025. Between persistent inflation and the dollar's weakness, a trade conflict between the world's two biggest economies, and increasing geopolitical uncertainty across Europe and the Middle East, it certainly looked as if the writing was on the wall for the US stock market. But just when everything looked hopeless, a recovery began, and now both key US indices are within touching distance of a new all-time high, having regained nearly all their previous losses.
But what is the driving force behind this sudden change of fortune, and how long can it be sustained? Positive conclusions from US-China trade negotiations coupled with more encouraging inflation data have certainly played a role, but as always, there's a variety of interconnected macroeconomic and fundamental factors at play.
Economic armistice
Quite understandably, the triple-digit reciprocal tariffs imposed on one another by the world's two biggest economies caused significant concern to global financial markets, of which equities are probably the most volatile expression. After the latest meeting between the two superpowers in London, a tariff truce was agreed, with Trump even declaring that a trade deal with Beijing was now "done". The reality is that the US still intends to impose 55% effective tariffs on China. However, crucially, an agreement has indeed been reached to ensure US companies can access Chinese rare earths, a previous sticking point in the earlier Geneva-based talks. China's Vice Commerce Minister Li Chenggang confirmed that "the two sides have, in principle, reached a framework for implementing the consensus reached by the two heads of state during the phone call on 5 June and the consensus reached at the Geneva meeting".
Naturally, this is a hugely positive development for US tech companies, the Magnificent 7, in particular. The availability (or not) of rare earth metals, in addition to potential high tariffs on goods produced in the China, are major issues for Apple, Microsoft, NVIDIA and even Tesla. The removal of these two big fears will certainly open the path up for continued growth. Yet, unfettered trade is still a pipe dream for US capital, with the US Court of Appeals for the Federal Circuit in Washington, DC, now ruling that Trump can indeed enforce his "Liberation Day" tariffs on imports from most US trading partners, as well as a separate set of tariffs levied on Canada, China and Mexico. When coupled with ongoing geopolitical tensions in the Middle East and Europe, it's clear that risks for global equities remain.
The home front
As important as the international picture is, the most powerful factor impacting the US stock market will always be the domestic economic situation. For a long time after the near-hyperinflation period in 2022, price pressure remained stubbornly high, preventing meaningful monetary softening by the US Federal Reserve. But the latest CPI numbers for May have brought some encouragement for investors. The Bureau of Labour Statistics reported Wednesday (11 June) that US inflation increased by a lower-than-expected 0.1% in May and that the majority of this was due to housing. This puts the annual CPI rate for May at 2.4%, within touching distance of the 2% Fed target. BlackRock CIO of Global Fixed Income Rick Rieder believes that the lower-than-expected CPI "significantly increases the likelihood of Fed cuts this year, particularly if there is material slowing in employment", and bets on such an eventuality have already begun rolling in following the data release.
The CME FedWatch tool now estimates the probability of a rate cut of at least 25 bps by September at over 70%. In response to the release of the May CPO report, Donald Trump took to his Truth Social platform to once again entreat Fed chair Jerome Powell to cut rates, writing: "GREAT NUMBERS! FED SHOULD LOWER ONE FULL POINT...SO IMPORTANT!!!". Turning our focus to the labour market, the US economy added 139,000 new jobs in May, while the unemployment rate held steady at 4.2%. Although this level of unemployment is historically quite low, it's a local high. If it were to rise any higher during the traditional summer lull, this would be yet another reason for the Fed to lower rates.
Trade stocks and more CFDs with Libertex
With Libertex, you can trade CFDs on a wide variety of instruments, including stocks, indices, and ETFs, all the way through to metals, energy and even crypto. Choose from major indices like the S&P 500, Nasdaq 100 or Dow Jones Institutional Average, as well as a range of individual stocks like Apple, Tesla and Microsoft. For more information or to create an account of your own, visit www.libertex.org/signup today!
