Just a few weeks ago, investors were still worrying about the unprecedented US airstrike on Iran’s nuclear facilities, and the concomitant fear of retaliation.
At the same time, the Trump administration was fighting on another front as it engaged in a trade war with pretty much the rest of the world.
Fast forward, and no one is talking about Iran anymore. Even the speculation over how much damage the US raids inflicted on Iran’s centrifuges has died down.
Despite the trade war and reciprocal tariffs, the screens show equity markets soaring, led by the tech-heavy NASDAQ.
The index is trading at fresh all-time highs, helped by NVIDIA, which has just become the first company in history to reach a $4 trillion market capitalisation.
Another postponement
Of course, those reciprocal tariffs didn’t kick in. President Trump postponed them until the 1st August, having already delayed them for three months, just a week after ‘Liberation Day’ on 2nd April.
Mr Trump has insisted that there will be no further extensions. Despite this, many investors believe that the President is more pragmatic than dogmatic when it comes to trade deals.
If he hasn’t got what he wants by the end of this month, then it seems likely that the tariff deadline could shift again.
This is one of the reasons that tariffs are no longer the bad, scary things they were back in April.
Firstly, negotiating deadlines aren’t set in stone, and secondly, as the UK deal showed, a 25% tariff threat can easily become a 10% tariff reality.
Yet it’s worth remembering that tariffs come in two forms: there is the country-specific tariff, such as the 10% one agreed with the UK, and there is the sector-specific tariff, such as the 50% levy on US imports of steel, aluminium, and copper.
And it’s not as if the Trump administration will stop there, as the President said his team was considering tariffs on semiconductors and pharmaceutical imports.
The latter may be as high as 200%, albeit with an 18-month lead time.
So, while some investors seem happy enough to buy US tech stocks at nosebleed high valuations, others may prefer to step away from their keyboards and sit on their hands, and their FOMO.
Second quarter earnings season
Now that there’s another window in which to finalise country-to-country trade deals, investors can turn their focus to the upcoming second quarter earnings season.
This kicks off properly in the third week of July with results due from, amongst others, Citigroup, JP Morgan, Wells Fargo, Goldman Sachs, Morgan Stanley, United Airlines, Netflix, TSML, and Amex.
That means it won’t be long before investors have a pretty shrewd insight into the state of corporate America.
As usual, forward guidance, or the lack of it, will be key.
And, with valuations stretched, at least amongst the mega caps, this earnings season has the potential to decide the market’s direction of travel for the rest of the summer.
Could results be so badly out of whack that they trigger a significant sell-off?
Well, there haven’t been any warning signs so far. But investors are certainly pushing their luck up here, and the tariff situation is far from resolved.
As things stand, most are prepared to carry on climbing a high wall of worry. So, it’s wise to look out for the loose brick that could trigger a nasty fall.
(David Morrison is a Senior Market Analyst at Trade Nation. Views are his own.)
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