Stocks Can Climb the ‘Wall of Worry’ as Long as These Anchors Remain in Place

U.S. stocks continue to defy a host of risks as their searing summer rally continues. Photo: Michael M. Santiago/Getty Images

U.S. stocks extended their astonishing rally in early Wednesday trading as investors appear content to look past a host of issues that would normally upend markets and have people shying away from riskier assets.

Stocks have powered through the increasingly complicated, and at times erratic, tariff strategy of President Donald Trump. They have shrugged off a worrying uptick in inflation pressures and slower consumer spending. And they continue to power ahead even though valuations for shares are sky-high.

Investors appear equally unconcerned by the president’s effort to reshape the Federal Reserve into an agency more aligned to the administration’s economic goals than its Congressionally-mandated task of taming inflation and ensuring full employment. That initiative has gone largely unchallenged.

The same can be said for his firing the commissioner of the Bureau of Labor Statistics, nominating a partisan who has floated the idea of abandoning the monthly reporting of jobs data to succeed her. Direct calls from the White House to remove the CEO of Intel, or the top economist at Goldman Sachs, are met with a collective shrug from investors.

Stock keep rising, although according to Bank of America’s August survey of global fund managers, the market is wildly overvalued. Now, the S&P 500 is up nearly 10% for the year. More impressively, it has surged nearly 30% from the low reached on April 8 in response to Trump’s “Liberation Day” tariffs.

A slowing economy, paired with a pullback in consumer spending and rising inflation, have raised the specter of stagflation. While that might be expected to force yields higher for longer-dated debt, that hasn’t happened.

Bonds are riding out the deficit-busting spending and tax cuts embedded in the Republican-led One Big Beautiful Bill Act, which the Congressional Budget Office says will lift U.S. debt to $40 trillion by the end of the decade.

Meanwhile, the market’s so-called fear gauge, the Cboe Group’s VIX volatility index, has slumped to the lowest levels since December. It was last marked at 14.46, suggesting traders see daily swings of just 57 points for the S&P 500 . Back in April, that figure was pegged at 160 points.

So what’s going on? Why are markets content to look past so many factors that would normally elicit a reaction from either stock or bond investors worried about how interventionist government policies will affect earnings and the economy.

Chris Zaccarelli, chief investment officer for Northlight Asset Management in Charlotte, N.C., has a theory. “Markets are continuing to climb a wall of worry—about tariffs, inflation and higher valuations—but as long as the unemployment rate remains low and inflation isn’t high enough to deter the Fed, the bull market will continue,” he said.

A second, and likely more powerful factor behind the rally is, of course, the influence of megacap tech stocks and their leadership in artificial intelligence. The biggest six stocks now comprise around 35% of the S&P 500’s total market value, meaning even small moves in a handful of stocks have an outsized influence on the benchmark.

The combined capital investment of the biggest hyperscalers, meanwhile, is eclipsing the decline in consumer spending. It has driven the lion’s share of economic growth in the U.S. so far this year.

Just two S&P 500 sectors, information technology and communications services, generated around 42% of the benchmark’s collective second- quarter profits. The former includes Nvidia , Microsoft , and Apple while Alphabet and Meta Platforms dominate the latter.

Nancy Tengler, CEO and chief investment officer at Laffer Tengler Investments, puts this down in part to the depreciation and research and development expensing benefits in the tax and spending legislation.

“It doesn’t seem the market pundits or, perhaps, even the market, is factoring in the benefits of the OBBBA to corporate America,” she said. “We are just now beginning to hear from the companies themselves, and the benefits seem to be a mighty contributor to cash flow.”

If markets are anchored on the AI trade, a resilient jobs market, Fed rate cuts, and the fiscal tailwind from the OBBBA, then at least three of those linchpins will be tested over the coming weeks.

Nvidia will post its fiscal second-quarter earnings on Aug. 28. Investors likely will focus on the chipmaker’s near-term outlook in order to gauge broader AI demand. The market likely will react harshly if management tells investors to expect third-quarter revenue of less than $52.6 billion, the current consensus call.

The Bureau of Labor Statistics will also release its August jobs report on Sept. 5, with its consumer price index inflation report following on Sept. 11.

Fed Chairman Jerome Powell, meanwhile, will deliver the keynote address to the central bank’s annual gathering in Jackson Hole, Wy., which begins on Aug. 21. He is likely to offer clues about the outlook for rates heading into its Sept. 16-17 policy meeting in Washington and address the conflicting signals from jobs and inflation data.

For Rich Mullen, founding partner and CEO at Pallas Capital Advisors, the latter could prove to be a key market risk. Powell has made it clear that he remains concerned about a potential rise in inflation, regardless of investors’ expectations and pressure from the White House.

“Just because the inflation data has remained calm, doesn’t mean it can’t spike in the future,” he said. “If the Fed proceeds with a September cut, and we start to see inflation rise from tariffs in the fourth quarter, that’s a worrisome combination for the central bank.”

We’ll have to see if the markets are willing to look past that, as well.

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