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If the market can rally this much on hints from Treasury Secretary Scott Bessent about de-escalation in the trade conflict with China, imagine how high the S&P 500 could jump if tariffs are actually lowered! Optimists are searching for reasons to buy US stocks, but Wall Street's veterans caution that the bear market is far from over. Beware of "fake outs" in the middle of a long-term downturn! Major players appear to be staying on the sidelines, leading to a 17% drop in trading volumes for the broad market index compared to historical averages.
When the market faces a ceiling of uncertainty from White House import tariffs and a looming US recession, and S&P 500 declines tempt investors to "buy the dip," sharp swings in either direction become a hallmark of the stock market. The trick is to determine when the rally will start to outpace the declines.
S&P 500 volatility during market pullbacks
This time, the bounce in the broad market index was triggered by conciliatory rhetoric from Donald Trump and his team. The president has said he does not intend to fire Jerome Powell from the Federal Reserve chair, only that he wishes Powell were more active in cutting rates. The Republican leader is not looking to be tough on China and believes that 145% tariffs are excessive. In reality, they will be much lower but not zero.
No matter how hard the White House tries to support the S&P 500 with conciliatory language, regaining lost trust is not so simple. Societe Generale points out that for decades, investors had no alternative to American stocks, which led to inflated valuations for both US equities and the dollar. Now, there is an ongoing rotation from US assets into those of other regions, a process that could last for years.
S&P 500 and USD trends
UBS expects the broad market index to decline in the short term but does not rule out a recovery to 5,500 by year-end if tariffs are significantly reduced.
In my view, the decisive factor will be whether the United States slips into recession or not. The IMF does not see a downturn yet but has raised the probability to 40%. Conversely, the Institute of International Finance forecasts US GDP to contract by 0.8% in the third quarter and 0.3% in the fourth, which would force the Fed to cut the federal funds rate three times by the end of 2025.
It is clear the White House understands it has gone too far but restoring investor confidence will not be easy.
On the daily chart of the S&P 500, the key question is whether bulls will activate a 1-2-3 reversal pattern. This requires a return to the 5,400 pivot level followed by a successful breakout. A rejection at this level would allow the expansion of previously built short positions. Conversely, a breakout would be grounds to reverse and take long positions.
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