Stock Market Rally Faces Key Summer Stretch. Its Fate Is in Trump’s Hands.

The S&P 500 rally has stalled as Wall Street faces a crucial stretch. (Spencer Platt/Getty Images)

Investors are heading into a crucial three-week stretch amid a surge in uncertainty tied to key elements of President Donald Trump’s economic strategy.

The S&P 500’s searing spring rally has stalled since the start of the month, with the benchmark rising just 0.9% since the close of trading on June 30, and ending Friday’s session in negative territory for the week at just under 6260.

Looking into the back half of the year, Wall Street analysts remain cautious, with the median year-end forecast of 14 banks and investment firms holding at around 6279, according to data compiled by freelance journalist and chartered financial analyst Mike Zaccardi.

Tariff risks, meanwhile, have accelerated sharply, with the president unveiling new levies of 30% on goods from the European Union and Mexico over the weekend.

If duties unveiled by Trump over the past two weeks come into effect on Aug. 1, the International Chamber of Commerce estimates the overall tariff rate will rise by around five percentage points to more than 20%, the highest since the early 1900s.

At the same, key members of the president’s economic team have allowed for the possibility that Federal Reserve Chairman Jerome Powell could be fired before his term expires in May 2026.

Powell is accused of misleading Congress over the costs associated with refurbishing the Fed’s Washington headquarters. The Fed has denied this suggestion and published a detailed rebuttal on its website late Friday.

Investors are worried that an effort to oust the Fed chair, even if unsuccessful, would raise serious questions over the longer-term independence of the world’s most important central bank.

“Powell’s removal or resignation is likely to trigger a new round of severe downward volatility in the dollar, and the damage would be there to stay,” said Padhraic Garvey, regional head of research for Americas at ING.

“The value of the dollar as a reserve currency fundamentally lies in Fed independence, meaning large outflows from the dollar would likely be justified,” he added. “To us, that looks like an even worse combination for the dollar than ‘Liberation Day’.”

The heightened uncertainty comes just as investors are set to navigate a crucial second-quarter earnings season, the first in which tariffs will have played a direct role in revenue and profit generation.

Analysts are looking for S&P 500 profits, collectively, to rise just 5.7% from a year ago to $528 billion, according to LSEG data. That’s a sharp slowdown from the 13.7% pace recorded over the first three months of the year.

Financial stocks will play a huge role in the second-quarter earnings performance, and are expected to generate around a fifth of the S&P 500’s overall profit tally. JPMorgan Chase will kick things off prior to the market open on Tuesday, with updates from most of the major lenders over the following two days.

“The first week of earnings is about setting direction,” said Saxo Bank strategist Koen Hoorelbeke.

“If banks show stable margins, healthy credit trends, and even modest improvement in trading or lending, it would confirm the soft-landing view and support current valuations,” he added. “But if rising costs or credit losses creep in, markets may start to question the optimism.”

The Bureau of Labor Statistics also is set to publish the Consumer Price Index for June on Tuesday, with the Commerce Department following-up on Thursday with its report on retail sales gains for the month.

Faster-than-expected inflation, or a muted reading on consumer spending, likely will stoke concerns that tariff increases are starting to bite the world’s biggest economy.

Traders are already paring some of their bets on a September interest rate, with the CME Group’s FedWatch pegging the odds at just 57.2%, the lowest in a month. Nothing is expected from the Fed’s next policy meeting which begins on July 30.

Investors have worked hard to compartmentalize the market’s post-Liberation Day rally, and have remained largely numb to renewed tariff risks, a recalcitrant Fed, and slower growth prospects.

The next few weeks will put that resilience to its sternest test of the year.

Write to Martin Baccardax at martin.baccardax@barrons.com