Markets Rally Despite Mounting Economic Fog, Policy Uncertainty Ahead

As the first half of 2025 closes with the S&P 500 notching a record high, investors are riding a historic rally. Yet beneath the euphoria lies a web of economic uncertainty, driven by tariff-induced inflation, policy ambiguity, and fading growth momentum.

Markets have rebounded sharply since their April lows, propelled by renewed optimism in tech and financials, consumer resilience, and expectations for interest rate cuts. But experts warn the second half of the year may prove more volatile.

“We are going to see an inflation reacceleration that will be tariff-induced,” said Greg Daco, chief economist at EY, in an interview with Yahoo Finance. “There’s more pressure to come into the economy that will lead to income erosion and a consumer spending slowdown.”

Indeed, inflation data released in May—particularly the Federal Reserve’s preferred price gauge—showed accelerating price increases, even as growth indicators suggested the broader economy is beginning to lose steam.

Daco called the present backdrop “a combination of data fog and policy fog,” a scenario that complicates economic forecasting and undermines confidence in long-term planning. The Federal Reserve, caught in the middle, is navigating those conditions carefully. While speculation of a July rate cut persists, Daco says the central bank is more likely to hold off until September.

“By then, we’ll likely have seen more evidence of demand erosion and labor market softening,” he noted, adding that the Fed will likely prioritize growth concerns over what could be a short-lived inflation spike from tariffs.

Despite these challenges, equity markets continue to climb. Truist co-chief investment officer Keith Lerner attributes the rally to investor focus on upside catalysts such as the potential for rate cuts, deregulation, and the likely passage of President Trump’s sweeping tax bill.

“Markets are beginning to price in more of the growth story,” Lerner said. “But there will be gut checks along the way.”

One of those checks came late Friday when President Trump abruptly announced a freeze on trade talks with Canada, just hours after declaring progress with China. The whiplash highlighted the volatility of Trump-era trade diplomacy—an environment where progress often feels as fragile as a tweet.

Canada reversed course on a contentious tech tax that had provoked the dispute, putting negotiations back on track. The markets, while briefly shaken, recovered quickly—underscoring how investors are learning to weather the unpredictability.

Yet that volatility has caused many major companies to withdraw earnings guidance for the year. General Motors, American Airlines, and Mattel are among those citing trade instability as a key reason for their reticence. Ironically, this reset in expectations may boost second-half performance.

“We have a lower bar that we can absolutely exceed,” said Jessica Inskip, director of investor research at StockBrokers.com. “And there are still knowns to rely on—like the resurgence of AI and a pipeline of IPOs that could fuel further gains.”

As Wall Street looks ahead, the only certainty is that uncertainty will remain a key market driver. For now, momentum reigns—but beneath the surface, risks continue to build.

By Staff Writer, Courtesy of Forbes | June 30, 2025 | Edited for WTFwire.com
Source: Yahoo Finance