The Bull-Bear Debate Continues. Both Sides Could Be Right This Time.

Although tariffs aren’t as high as President Donald Trump indicated they would be in April, they are still well above what was expected early in the year. Above, shipping containers are stacked on a ship at the Port of Los Angeles. (Mario Tama/Getty Images)

With stocks bumping up against records despite increasing uncertainty, both bulls and bears have plenty of fuel for their cases. They might both be partly right.

The Nasdaq Composite notched a closing high on Wednesday, while the S&P 500 hit its fourth-highest close in history. That is a far cry from early April, when President Donald Trump’s effort to reorder world trade by imposing tariffs sent the market tumbling.

Bulls aren’t surprised by this. They say the TACO trade is in full swing. Despite the tariff shock of April 2, the idea that Trump Always Chickens Out does seem to hold when it comes to policies that would cause major harm to the market or the economy.

Although the U.S. hasn’t made trade deals with essential partners, such as China, they are optimistic favorable agreements will be hammered out. Their reasoning is that those deals, combined with likely interest- rate cuts and a still strong economy, will continue to support the rally. Enthusiasm about artificial intelligence could provide more fuel.

Skeptics see things differently. The Trump administration is unlikely to abandon its chaotic governing style, and some of its policies could still hurt the economy, they say. Tariffs may not be at the apocalyptic levels first suggested, but are still higher than any anticipated at the start of the year. If trade-related costs weigh on corporate profits and the already shaky job market worsens, they believe the jig will be up.

As often happens, the truth may wind up somewhere in the middle. “Our view is that both the bulls and the bears are exaggerating their respective arguments,” wrote TS Lombard economist Dario Perkins on Thursday. “Just as we don’t believe TACO is a good reason for US stocks to keep melting higher, so we think the bears are underestimating the resilience of the US economy (again).”

A scenario more likely than the market soaring or crashing, he argued, is that it will muddle through. “On balance, we think the Trump administration’s policies will damage the US economy, with the negative effects of tariffs and deportations likely to swamp any positive impact from tax cuts and deregulation; however, we think this damage will show up only gradually over time,” he argued. “The U.S. is not facing a recession, let alone a ‘fiscal crisis’ or a financial crash.”

That doesn’t mean investors should pile into U.S. assets. Perkins argued that the erratic nature of the Trump administration has pushed investors to consider other areas, so while U.S. stocks may ultimately be fine, they may underperform other assets around the world.

Plenty of strategists have made similar points recently. Sevens Report noted this week that while the current AI-dominant positive narrative could continue, investors should be prepared should sentiment shift. A shift back toward recession worry or a cyclical-led rally like the one that marked the start of the year that would benefit different players.

While many analysts have been raising their year-end S&P 500 targets, the most recent average, from June, implies the market will slip a bit.

With markets’ big moves this year, it is natural to ask if recent highs are sustainable. Yet rather than stocks crumbling or melting up, they may just muddle through.

That wouldn’t be the worst outcome.

Write to Teresa Rivas at teresa.rivas@barrons.com