Global Stocks Rally Amid Anticipation: Investors Await Powell’s Fed Guidance on Tariff Risks

Investors have entered a state of cautious optimism as global equity markets climbed to multi-month highs ahead of Federal Reserve Chair Jerome Powell’s pivotal May 7 speech. Despite lingering economic headwinds—including a first-quarter U.S. GDP contraction and escalating trade tensions—the resilience of consumer demand and corporate earnings has fueled a rally. Yet, all eyes remain fixed on the Federal Open Market Committee (FOMC) meeting, where policymakers will weigh whether to hold rates steady or pivot to cuts in response to President Trump’s aggressive tariff policies.

The Data Behind the Rally: A Fragile Foundation?

Recent economic indicators paint a mixed but cautiously bullish picture. The U.S. economy contracted by 0.3% annualized in Q1 2025, driven by a 41.3% surge in imports linked to tariff-related stockpiling. However, labor markets remain stubbornly resilient: April’s nonfarm payrolls added 130,000 jobs, with unemployment holding steady at 4.2%. Meanwhile, the March Personal Consumption Expenditures (PCE) report showed core inflation at 2.6% year-over-year, slightly above the Fed’s 2% target but moderating from earlier peaks.

These data points have emboldened bulls, particularly in sectors tied to consumer spending. Discretionary stocks, for instance, have outperformed as low-end wage growth and reduced inflation pressures boost purchasing power. J.P. Morgan Research highlights that the S&P 500’s 2025 EPS target of $270—implying a price target of 6,500—rests on a “high for longer” Fed policy stance, where rates remain elevated to combat inflation while avoiding abrupt shocks to financial conditions.

Powell’s Crossroads: Tariffs, Stagflation, and the Fed’s Dilemma

The central event of the week will be Powell’s press conference following the FOMC meeting. Analysts expect no immediate rate cuts—CME FedWatch assigns a 94% probability to the Fed holding rates at 4.25%-4.5%—but markets will dissect his remarks for clues about future easing.

Powell’s recent warnings underscore the Fed’s precarious balancing act. In an April 30 speech, he labeled tariffs a “stagflationary shock,” noting they risk raising both inflation and unemployment. While the Fed’s dual mandate requires prioritizing price stability, the administration’s trade policies—such as 25% steel tariffs, 145% duties on Chinese imports, and a 10% baseline levy on all imports—are creating a “no-win scenario” for households and businesses.

The Fed’s cautious tone reflects uncertainty over how tariffs will play out. Goldman Sachs economists project a 60% chance of a June rate cut if GDP weakness persists, but Powell has emphasized the need for “clearer data” before acting. This hesitation stems from conflicting risks: tariffs could either trigger a sharp slowdown (justifying easing) or reignite inflation (requiring tighter policy).

The Market’s Gamble: U.S. Exceptionalism vs. Global Divergence

Investors are betting that the U.S. economy will outperform its peers, a theme central to J.P. Morgan’s bullish outlook. The firm argues that U.S. exceptionalism—fueled by tech innovation, resilient consumer demand, and fiscal flexibility—will allow equities to decouple from global headwinds.

Tech stocks, in particular, have become a refuge amid uncertainty. The S&P 500 Technology Sector Index has risen 12% YTD in 2025, driven by AI investments and corporate spending on cloud infrastructure. Meanwhile, European and emerging markets struggle with weaker growth and currency volatility, with China’s GDP forecast downgraded to 3.9% amid trade disputes.

Risks Lurking in the Shadows

Despite the rally, risks remain acute. Overvaluation is a concern: equity valuations are near their highest since 2021, with the S&P 500 trading at 18.5x forward earnings—above its 15-year average. Geopolitical tensions could also escalate, as Trump’s tariff policies face legal challenges, and the Supreme Court weighs cases that could destabilize trade relations.

Moreover, the Fed’s independence is under threat. Trump’s public criticism of Powell—calling him a “major loser”—has raised concerns about political interference. If the Fed appears swayed by administration pressure, it could erode credibility and amplify market volatility.

Conclusion: Powell’s Words Will Chart the Course

Investors are right to be hopeful—but complacency is misplaced. The Fed’s May meeting will clarify whether the central bank can navigate tariff-driven stagflation without sparking a sell-off. Key takeaways:

• Tariff impacts are asymmetric: While the U.S. benefits from reduced trade barriers, global growth and emerging markets suffer. This divergence supports U.S. equities but limits broader market cohesion.
• Fed credibility hinges on clarity: Powell must thread the needle between acknowledging tariff risks and avoiding panic. A “wait-and-see” stance could sustain the rally, but hawkish signals would test overvalued markets.
• Data remains king: June’s rate decision will depend on May’s inflation reports (headline PCE expected at 2.4%) and employment data. A second consecutive weak GDP reading or a pickup in wage growth could force the Fed’s hand.

For now, the market’s bet is that Powell’s speech will affirm the Fed’s caution—and that U.S. equities will ride the wave of innovation and fiscal tailwinds. But with tariffs reshaping the economic landscape, the next chapter of this story hinges on whether the Fed can deliver guidance as deftly as the markets demand.