A growing chorus on Wall Street is making a provocative argument: the worst is over, and a new bull market fueled by the Trump administration’s trade agenda is about to take hold. The thesis rests on a simple but contested premise — that the tariff chaos of early 2025 was the storm before a prolonged calm, and that investors who buy now will be richly rewarded.
Not everyone is convinced. But the money is moving.
Since bottoming out in early April after President Trump’s sweeping tariff announcements sent shockwaves through global markets, the S&P 500 has mounted a stunning recovery. The index has climbed roughly 18% from its April 8 low, erasing nearly all of the losses triggered by what many analysts called the most aggressive U.S. trade action in a century. As of mid-May, the S&P 500 sits just a few percentage points below its all-time high set in February, a recovery that has caught many institutional investors flat-footed, according to Yahoo Finance.
The catalyst for the latest surge: a 90-day trade truce between the United States and China, announced on May 12. Under the agreement, both sides slashed tariffs dramatically — the U.S. reduced duties on Chinese goods from 145% to 30%, while China cut its retaliatory tariffs on American products from 125% to 10%. Markets erupted. The S&P 500 jumped more than 3% in a single session, and the Nasdaq Composite posted an even larger gain.
For the bulls, this was vindication.
Tom Lee, the head of research at Fundstrat Global Advisors and one of Wall Street’s most persistent optimists, told clients that the rally has legs. His argument, as reported by Yahoo Finance, centers on the idea that the tariff shock created a “clearing event” — a moment of maximum pessimism that set the stage for a durable move higher. Lee has pointed to historical parallels, noting that markets often stage their most powerful advances after periods of acute policy uncertainty, once that uncertainty begins to recede. He’s maintained a year-end S&P 500 target of 6,600, implying roughly 12% upside from current levels.
He’s not alone. Ed Yardeni of Yardeni Research, another closely watched strategist, has struck a similarly bullish tone, arguing that the combination of resilient corporate earnings, a still-strong labor market, and the prospect of further trade deals could propel equities to new highs before year-end. And JPMorgan’s equity strategy team recently upgraded its outlook for U.S. stocks, citing improving trade dynamics and better-than-expected first-quarter earnings as reasons to add risk.
The Anatomy of a Tariff Recovery
To understand why the bull case has gained such traction, it helps to rewind to early April. When the Trump administration unveiled its “Liberation Day” tariffs on April 2 — imposing sweeping duties on imports from dozens of countries, with effective rates on Chinese goods reaching 145% — the market reaction was swift and brutal. The S&P 500 plunged nearly 15% in a matter of days. The VIX, Wall Street’s fear gauge, spiked above 50. Credit spreads widened. And recession fears, which had been simmering quietly, boiled over into mainstream forecasts.
Corporate America sounded the alarm. Major retailers warned of empty shelves and price increases. Manufacturers scrambled to reroute supply chains. The Atlanta Fed’s GDPNow model briefly flashed a negative reading for Q1 GDP. It felt, for a moment, like the beginning of something much worse.
Then the administration blinked. Sort of.
The 90-day pause on the most punitive tariffs — first announced for most countries, then extended to China — changed the calculus almost overnight. Suddenly, the worst-case scenario of a full-blown global trade war seemed less likely. Not impossible. But less likely. And in markets, the distance between “catastrophe” and “manageable disruption” can be worth thousands of points on the S&P 500.
What followed was a textbook short-squeeze rally amplified by systematic and algorithmic strategies that had been positioned defensively. Hedge funds that had built up significant short positions were forced to cover. Commodity trading advisors, whose trend-following models had turned bearish, began flipping long. Retail investors, emboldened by the reversal, poured money into leveraged ETFs tracking the Nasdaq and S&P 500. The result was a rally that fed on its own momentum, gaining force with each session.
But momentum alone doesn’t make a bull market. The question now is whether the fundamental underpinnings can support the prices.
First-quarter earnings season offered some encouragement. With more than 90% of S&P 500 companies having reported, aggregate earnings growth came in around 13% year-over-year, well above the roughly 7% that analysts had expected at the start of the quarter. Revenue growth was solid too, running at about 5%. Margins held up better than feared, even as companies absorbed higher input costs from tariffs that had already taken effect.
Tech giants did the heavy lifting. Microsoft, Meta, Amazon, and Alphabet all posted results that beat expectations, driven by continued strength in cloud computing and advertising. Nvidia, the undisputed king of the AI chip market, provided forward guidance that exceeded even the most optimistic projections, sending its stock to new highs and dragging the broader semiconductor sector along with it.
But dig beneath the surface and the picture gets murkier. Forward guidance from industrial and consumer-facing companies has been notably cautious. Many CFOs have widened their earnings ranges or withdrawn full-year guidance entirely, citing tariff-related uncertainty. Walmart, in its most recent earnings call, warned that price increases were coming and that consumers should expect to see the impact on shelves within weeks. Target struck a similar tone.
This is the tension at the heart of the bull case: the backward-looking data says the economy is fine, but the forward-looking signals are flashing yellow.
What the Bears See That the Bulls Don’t
The skeptics have a list of concerns, and it’s not short.
Start with tariffs themselves. Even after the U.S.-China truce, the effective tariff rate on Chinese imports remains at 30% — still dramatically higher than the pre-Trump baseline of roughly 3%. Tariffs on steel, aluminum, and autos remain in place. The 10% baseline tariff on imports from most other countries is still active. And the 90-day pause is exactly that — a pause, not a resolution. If negotiations stall or break down, the administration has made clear it’s prepared to reimpose the higher rates.
Barry Bannister, chief equity strategist at Stifel, has warned that the market is pricing in a best-case trade outcome that may not materialize. He’s argued that even the current tariff levels are sufficient to shave 1-2 percentage points off GDP growth over the next year and to add 0.5-1 percentage points to core inflation. That combination — slower growth and stickier inflation — is precisely the stagflationary environment that equity markets handle worst.
Then there’s the Federal Reserve. Chair Jerome Powell has repeatedly stated that the Fed needs to see more clarity on the economic impact of tariffs before adjusting interest rates. The federal funds rate remains at 4.25%-4.50%, and futures markets are pricing in only one or two cuts by year-end — far fewer than the four or five cuts that investors were hoping for at the start of 2025. If inflation proves persistent, even those modest expectations could be disappointed.
Consumer sentiment is another red flag. The University of Michigan’s consumer sentiment index has plunged to levels not seen since the depths of the pandemic. Consumers are worried about prices, worried about jobs, and — critically — starting to pull back on discretionary spending. Credit card delinquencies are rising. Auto loan defaults are ticking up. The savings cushion that sustained spending through 2023 and 2024 has largely been depleted for lower- and middle-income households.
And there’s the valuation question. The S&P 500 trades at roughly 21 times forward earnings — well above the 20-year average of about 17 times. That premium has historically been justified by the dominance of high-margin technology companies in the index. But if earnings growth decelerates in the second half of the year, as many analysts expect, those multiples could come under pressure.
So which side is right?
The honest answer: nobody knows. But the weight of positioning suggests that the market, for now, has chosen the bull case. Fund managers who were underweight equities in April have been scrambling to add exposure. Cash levels in institutional portfolios have dropped. And the options market, which had been heavily skewed toward puts (downside protection) in April, has shifted toward calls (upside bets).
This doesn’t mean the bulls will be proven correct. It means the market is betting they will be, and that bet itself creates a self-reinforcing dynamic — until it doesn’t.
History offers some guidance, if imperfect. The closest parallel to the current moment may be late 2018 and early 2019, when the first Trump trade war with China triggered a near-20% decline in the S&P 500, followed by a sharp recovery once the administration signaled a willingness to negotiate. The index went on to gain more than 28% in 2019. But the circumstances were different in important ways: the Fed was actively cutting rates, tariff levels were far lower, and the global economy was in better shape.
The Wild Card: What Comes Next in Trade
Perhaps the single most important variable for markets over the next several months is whether the U.S.-China trade truce evolves into a more permanent agreement — or collapses.
The 90-day window gives both sides until early August to negotiate. The administration has signaled that it wants a comprehensive deal covering not just tariffs but also intellectual property protections, market access for American firms, and currency practices. China, for its part, has indicated a willingness to engage but has also made clear that it won’t accept terms it views as one-sided.
Treasury Secretary Scott Bessent has been the administration’s point person on trade negotiations, and his recent public comments have been cautiously optimistic. He’s described the talks as “productive” and suggested that a framework agreement could be reached within the 90-day window. But he’s also hedged, noting that “nothing is agreed until everything is agreed.”
Meanwhile, the administration is pursuing parallel trade negotiations with the European Union, Japan, South Korea, India, and others. Any breakthroughs — or breakdowns — on these fronts could move markets significantly. A deal with the EU, in particular, would be a major positive signal, given the size of the transatlantic trade relationship.
For investors, the practical question is straightforward: do you buy the dip, or do you sell the rally?
The answer likely depends on time horizon. For long-term investors with a multi-year outlook, the case for staying invested in equities remains strong. Corporate earnings are growing. The U.S. economy, while slowing, is not in recession. And the AI-driven productivity cycle is still in its early innings, with the potential to boost earnings across a wide range of industries over the next decade.
For shorter-term traders, the calculus is different. The rally has been fast, and much of the good news on trade is now priced in. Any negative headline — a breakdown in negotiations, a spike in inflation, a disappointing jobs report — could trigger a sharp pullback. The risk-reward at current levels is less favorable than it was in April, when fear was at its peak and valuations had compressed.
One thing seems clear: volatility isn’t going away. The tariff story is far from resolved. The Fed’s next move remains uncertain. And the 2026 midterm elections are already casting a shadow over fiscal policy discussions in Washington.
The bulls say this is a buying opportunity of a generation. The bears say it’s a trap. The market, as always, will be the final arbiter. But the stakes — for portfolios, for the economy, and for the political fortunes of an administration that has staked its credibility on trade — have rarely been higher.
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