The stock market showed mixed action as investors weighed a sharp drop in manufacturing activity in China and reduced growth estimates for the global economy. Interest rates have fallen in response to signs of a cooling economy, but skeptical bears have not yet seen much change in price action. However, three factors are currently working in favor of the bulls.
First, there is a large crowd of economic skeptics who believe the market is near a top and ready to decline due to negative impacts from trade and tariffs. These skeptics have been vocal all year, but have been mostly wrong about the health of the economy so far. Second, bullish technical patterns are present.
The S&P 500 has remained relatively stable, trading at approximately the same level as two weeks ago. Strong support has been building above the 200-day simple moving average, with multiple tests of overhead resistance around 5970. Third, there is potential for positive news on tariffs.
Trade worries are often alleviated by optimistic reports, as seen on Monday, when initial concerns over China negotiations were mitigated by later news of an upcoming discussion between President Trump and President Xi. Despite these bullish factors, the market remains difficult to trade due to the lack of a strong trend. Economic news may favor the bulls, but skeptics are still waiting for negative data to prove tariffs will be disastrous.
As a result, traders are focusing on managing existing positions and may hesitate to deploy new capital until there is more clarity. It has been a turbulent start to summer in the markets. Trade tensions are flaring again, with US tariffs on steel and aluminum sending a shiver down global equities.
China has vowed a firm response, while US courts debate the legality of the tariffs. Unsurprisingly, investors have turned cautious. However, a closer examination reveals a different picture.
UBS’s latest market outlook indicates that the overall direction still favors equities over the next 12 months, particularly in the US. Earnings are growing, interest rates could head lower again, and even geopolitical posturing may be more bark than bite.
Economic balance amid trade tensions
UBS advises against being blown off course by headlines and instead thinking long-term, gradually phasing into the market, exceptionally high-quality US stocks, and innovative sectors. Corporate earnings in the US rose faster than expected in Q1, and UBS upgraded its full-year S&P 500 EPS forecast to 4%. UBS sees 8% earnings growth in 2026, helped by rising real wages, clearer tax policy, and a return to Fed rate cuts.
Historically, times of high volatility and low investor confidence have often been followed by strong returns. With the S&P 500 just shy of a record high, UBS expects it to hit 6,400 by next June, up from 5,912 today. UBS believes the effective US tariff rate will settle around 15% by year-end, which is manageable.
Meanwhile, AI and other transformative technologies continue to advance rapidly. UBS highlights AI chips, cloud computing, and healthcare innovation as areas of “secular growth” that are rising regardless of the economic cycle. UBS recommends gradually adding to equities rather than trying to time the perfect entry point.
For those concerned about short-term volatility, strategies focused on capital preservation or diversifying into high-quality bonds remain sensible. The key takeaway is to stay invested, not retreat. On the surface, things are still going relatively well in the US, with robust hard data, according to Commerzbank FX analyst Antje Praefcke.
Most tariffs have been suspended for 90 days, reducing immediate market impacts. This suspension will last until mid-July, unless it is extended further. Although the ADP employment index showed weak results with only 37,000 private sector jobs added, Praefcke notes this index often underestimates official data.
Historical trends have revealed significant discrepancies between actual data (ADP) and official figures. Indicators like the ISM manufacturing and services indexes are showing weakening sentiment, suggesting underlying issues among businesses and consumers. However, Praefcke believes US fundamentals remain strong, mainly due to a resilient labor market, which is expected to be confirmed by the upcoming June jobs report.
The divergent behavior of interest rate and currency markets is partly due to their different focus areas. The interest rate market is highly attuned to the inflation outlook influenced by tariffs, while the FX market is more swayed by the still-decent growth figures. However, both markets remain affected by the perceived haven status of the USD and US government bonds.
