Economic Worries Are Piling Up. Why the Market Can Relax.

There are plenty of reasons to believe the bull market in stocks can continue. (Dreamstime)

While conversations about whether the economy will take a hit have grown louder again, there is plenty of reason to believe it won’t, and that stocks will be just fine.

Several factors are behind the concern. First, the U.S. economy has been growing since the second half of 2020, and expansions don’t last forever. Gross domestic product has more than recovered from the pandemic, and consumers have spent much of the excess cash they accumulated at that time. The pace of job growth has slowed.

Second, and more important, President Donald Trump’s tariffs threaten the outlook, though they aren’t now as high as he announced in early April. Tariffs are here for the foreseeable future, whether they rise or fall from their current levels. They should lift the cost of imports, force companies to raise prices, keep inflation elevated, and restrict the Federal Reserve’s ability to cut interest rates, the bank’s ordinary medicine for a weakening economy.

Tariff rates are up in the past few weeks, and Trump is threatening to lift them further by Aug. 1. Even if he doesn’t, tariff-driven inflation may soon show up in companies’ financial reports, reflecting higher costs in the second quarter.

“Tariff-related cost pressures may be forthcoming this quarter or next as higher cost inventory starts to flow through to the income statement,” wrote Morgan Stanley’s chief U.S. equity strategist, Mike Wilson, on Monday.

The good news is that the economy is still in solid shape and can remain strong.

The Atlanta Fed’s GDPNow model forecasts GDP growth of 2.4% in the second quarter, compared with the 2.8% increase achieved in all of 2024. Supporting that relatively strong forecast has been mild growth in consumer spending, which is consistent with moderate job gains and growing business investment. Big Tech companies, which generate vast amounts of cash, are still increasing the enormous sums they are pouring into artificial intelligence.

The most recent economic data has been better than expected. The Citi U.S. Economic Surprise Index, which rises when economic figures turn out to be healthier than anticipated, jumped this month to the high end of its range for 2025, according to Evercore strategist Julian Emanuel. It was one of the highest results in more than a year.

“The strength supports an Atlanta Fed GDP Now forecast of 2.4% which in turn has been a major support for the surprisingly persistent equity market strength,” Emanuel wrote on Sunday. The S&P 500 had set seven record highs since April coming into Tuesday’s trading session.

The GDP Now reading hasn’t moved much since the end of June, even though many data points have been better than expected in recent weeks. That creates reason to believe the GDP data for the second quarter won’t disappoint, and might be surprisingly positive, when the Bureau of Economic Analysis releases it on July 30.

A healthier-than-expected economy would make the tariff picture look less threatening. If the economy is strong when tariffs hit, a growth slowdown could happen, but maybe not a recession, or a decline in GDP.

Plus, investors should remember the idea behind the TACO trade, that Trump Always Chickens Out. He isn‘t a complete chicken—he has indeed implemented tariffs in his second term—but he prefers to avoid a recession, and seems to care about the stock market. When the S&P 500 fell 19% to its 2025 low of 4982 in April, he quickly rolled back tariffs.

While he now has wiggle room to play around with tariffs, given that the index is near record levels at almost 6300, he’s more likely to reduce the levies, or hold off on raising them, if stocks fall or economic data weaken. “Markets don’t mind the tariff tactics because of TACO,” wrote Sevens Report’s Tom Essaye last week.

The point is that investors should look for opportunities to buy stocks. While it likely isn’t the best time to aggressively buy more—the S&P 500 is at one of its most expensive levels in several years, so any negative news would likely send it lower—there is hope beyond the short term. As long as the economy remains in growth mode, which is likely, so will profits.

The S&P 500’s bull market can continue. “We’re buyers of dips,” Wilson wrote.

Write to Jacob Sonenshine at jacob.sonenshine@barrons.com