Stocks Are Rallying on a Meat Loaf Theme: Two Out of Three Ain’t Bad

Artificial-intelligence enthusiasm and the potential for rate cuts has investors looking past the latest tariff threats, as stocks set record highs. (AFP via Getty Images)

Meat Loaf’s bombastic debut album Bat Out of Hell, released in 1977 and one of the best-selling records of all time, included a track that became synonymous with America’s optimistic culture shift near the end of a difficult economic decade.

“Two Out of Three Ain’t Bad,” the late Michael Aday belted out in the power ballad that became one of his biggest hits.

That practical summation of a fictitious love affair might also be used to reflect the reality investors are having to navigate heading into the summer months and beyond, as stocks reach fresh record highs while myriad risks tied to inflation, global trade, and stretched valuations linger over sentiment.

Tariff concerns, certainly, haven’t dissipated: President Donald Trump has sent 22 letters to U.S. trading partners, the latest threatening a 50% levy on imports from Brazil, and plans to impose separate and possibly “stacked” duties on various sectors and commodities.

Their impact on growth and inflation has remained a key investor risk for much of the year, but investors have largely dismissed the president’s “diplomacy by social media” and focused on the actual imposition of the sweeping tariff suite.

And that is only likely to happen next month. Or perhaps not at all. Or maybe in some sort of watered-down version that hasn’t been articulated as yet.

The other two keys to the market’s stunning spring recovery, and the bullish outlook emerging from Wall Street analysts this week, appear far more tangible.

The artificial-intelligence investment theme, which is powering the value of the S&P 500’s biggest stocks, and driving the lion’s share of the benchmark’s recent gains, remains a crucial component to the market’s bullish thesis.

LSEG data suggests collective second quarter earnings for the S&P 500 are likely to rise 5.8% from last year to $528.3 billion.

However, nearly all of that gain, in dollar terms, will come from just two sectors: Information Technology and Communications Services. The former is dominated by AI firms Nvidia, Apple, Microsoft, Broadcom, and Oracle. The latter, by Alphabet and Meta Platforms.

Taiwan Semiconductor Manufacturing, the biggest contract chip maker in the world and a critical link in the global tech supply chain, posted an impressive set of June quarter revenue on Thursday, powered in large part by demand from Apple and Nvidia.

The better-than-expected top-line tally of around $32 billion was also paired with comments last month from CEO C.C. Wei, who reiterated the group’s forecast for 20%-plus sales growth this year.

The second major investment theme for the year, Federal Reserve interest-rate cuts, has been less compelling, given the reluctance of Chairman Jerome Powell and his colleagues to look through the inflation risks tied to protectionist trade policies.

Minutes from the Fed’s June policy meeting, published late Wednesday, indicated some softening in the position.

Officials are still committed to at least two interest-rate cuts between now and the end of the year, the minutes suggested, and expect price shocks from tariffs to be “temporary or modest.”

So, while Trump has added a new dimension to his tariff strategy by targeting Brazil’s domestic politics (while seeming unfazed by the fact that the U.S. runs a trade surplus with South America’s biggest economy), most investors still think the final outcome will be far less severe than it appears on social media.

That still requires a bit of faith, and no small amount of risk, as the president’s Aug. 1 deadline looms with less than a handful of trade agreements firmly established.

Investors will know more on all three topics over the coming weeks.

TSMC will post detailed second quarter profits and update its full-year forecasts on July 17, Google parent Alphabet kicks off the megacap tech earnings season on July 22 and the Fed starts its two-day policy meeting in Washington on July 29.

Stocks are modestly weaker in early Thursday trading, but the S&P 500 is up nearly a full percent since the start of the month, and benchmark indexes in German and Britain set all-time highs earlier in the session.

Tariffs concerns might still linger, but if the AI trade gets more justification, and the Fed is able to meet market expectations on rate cuts, “two out of three” should be able to keep the current bull market rolling.

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