S&P 500 Nasdaq Reach All-Time Highs Despite Tariff Uncertainty

The U.S. stock market concluded a tumultuous quarter on a positive note, with the S&P 500 and Nasdaq Composite reaching new all-time highs on Monday. This marked a significant turnaround from the previous months, which were characterized by extreme volatility and uncertainty.

The second quarter began with a dramatic announcement by President Donald Trump, who imposed sweeping tariffs in April. This move sent stocks plummeting and caused turmoil in the bond market, raising concerns about the U.S.'s global economic dominance. However, despite these initial shocks, the market has since shown a steady upward trajectory, with investors focusing on potential benefits such as tax cuts and deregulation.

On Friday, the S&P 500 and Nasdaq hit all-time highs following Trump's announcement of a trade deal with China. This momentum carried over into Monday, with the S&P 500 and Nasdaq increasing by 0.52% and 0.47%, respectively, from Friday's close. The Dow Jones Industrial Average also ended the day with a 0.63% gain, although it did not reach record territory.

According to Lisa Shalett, chief investment officer of Morgan Stanley Wealth Management, the market's recent performance indicates that investors are entering a phase where "bad news is good news." This shift in focus towards potential rate cuts, tax incentives, and deregulation has driven the market higher, despite lingering uncertainties and economic surprises at an 11-month low.

While the upward trend is supported by stabilizing inflation and higher earnings, some analysts and economists have pointed out potential weaknesses. Hubert de Barochez, senior markets economist at Capital Economics, notes that the S&P 500's return to its previous record is not sufficient. He highlights that the Russell 2000, an index of U.S. small caps, and the index of so-called Magnificent Seven tech stocks, including Amazon, Apple, and Tesla, have not surpassed their previous highs.

However, shares of Meta, one of the Magnificent Seven stocks, reached a record high late Monday. This surge followed CEO Mark Zuckerberg's announcement of a restructuring of the company’s artificial intelligence group, demonstrating the potential for individual stocks to outperform broader indices.

Looking ahead, there are several factors that could introduce more volatility into the market. Next week, the president’s 90-day tariff pause is set to expire, and deals with many countries have yet to be finalized. Additionally, there is uncertainty surrounding the Republican tax bill, which would add nearly $3.3 trillion to deficits over a decade, and whether it can pass through both chambers of Congress this week. Analysts also caution that the full impact of tariff-related inflation has yet to be reflected in official data.

According to de Barochez, the high level of uncertainty, particularly stemming from the chaotic policymaking, will likely slow the S&P 500's upward trajectory. The impending expiration of tariff "pauses" could spark another bout of volatility in the markets, as investors reassess the potential risks and benefits of the current economic environment.