Investors jump into riskiest assets after US inflation report

Traders are snapping up risky assets of all stripes in the hope that falling US interest rates will add rocket fuel to an economy that’s so far been able to withstand the effects of Donald Trump’s trade war. 

Wall Street is set to extend record highs when trading begins on Wednesday, with shares of small-cap, emerging-market and semiconductor companies leading gains. Across global markets, everything from volatility indexes to speculative European bank bonds to crypto is underscoring a sense of confidence about corporate profits and global economic growth.  

Any worries about President Trump’s tariffs and whether America’s confusing economic policy is casting a chill on spending are being wiped away by the earnings power of big US tech companies. The latest economic readings also paint a picture of a soft labor market and inflation that’s been in line with expectations, which may allow the Federal Reserve to cut interest rates at its next meeting. For some investors, the question now is whether assets prices have risen too fast, given that the full effect of tariffs may take some time to filter through the US economy. 

“The mood is surprisingly bullish; it’s almost like ‘what tariffs, who cares?’ said Neil Birrell, chief investment officer at Premier Miton Investors. “There’s this detachment from economic reality on what’s happening and there’s a wave of either optimism or exuberance in equity markets.” 

At the moment, the mood on Wall Street is all about the optimism for rate cuts. Swaps are pricing in about a 90% chance of a quarter-point move by the Fed in September, and some traders betting on an even bigger reduction. In an interview on Bloomberg TV, Treasury Secretary Scott Bessent said “we should probably be 150, 175 basis points lower.”

The S&P 500 has surged almost 30% since a low in April, when Trump first unveiled his tariff plans. The gauge is also up 11% since he won the election in November. The Russell 2000 index of small-cap stocks is gaining for a fourth straight month.

“The US market has gotten a new leg of steam,” said Guy Miller, chief investment strategist at Zurich Insurance Co. “We’re no longer hearing about so much diversification away from the United States. In fact, the reverse. Investors are saying the only sure thing is that US big-cap tech are going to continue to deliver on earnings.” 

In another sign of market confidence: volatility measures have collapsed. The VIX gauge of expected volatility in the stock market is at the lowest since December, while the MOVE Index of bond-market volatility is at its most subdued since 2022. A measure of implied price swings in currency markets is also at the lowest in a year. 

Traders are also snapping up risky forms of debt, like Additional Tier 1 bonds, a kind of speculative bank notes that are popular in Europe. 

“Do I see a lot of potential risks to dent some of the sentiment and expectations? I do,” said Bernard Ahkong, CIO at UBS O’Connor Global Multi-Strategy Alpha, said in a Bloomberg TV interview. “But I do not think the market is being irrational at this point in time. We could go a lot further before the market gets irrational. It’s very expensive right now to be bearish.”

Renewed buzz around artificial intelligence has once again put the technology behemoths in the lead. Megacap tech stocks almost single-handedly drove earnings growth in the second quarter, accounting for 90% of the overall increase in S&P 500 profits, according to an analysis by Deutsche Bank AG strategists.

What Bloomberg strategists say

“It would be foolish to fight this stock market rally, even if the fundamental framework underpinning the market seems extremely flimsy. At some point, the rise in US long-end yields will damage equities, if they don’t trip themselves up first, or we don’t get another Trump curveball. But there’s no need to prematurely trade that narrative.”

— Mark Cudmore, Markets Live Executive Editor. Click here for the full analysis.

The whiplash in stocks this year has made it difficult for equity strategists to keep up. Some — such as Morgan Stanley’s Michael Wilson and former Wells Fargo strategist Chris Harvey — were among forecasters whose nerves of steel during the April rout proved right in the end. Strategists at Goldman Sachs Group Inc. and Citigroup Inc. were less successful. They rushed to slash targets in the aftermath of the trade announcements, only to return to a bullish view later. 

Now, Wall Street prognosticators are turning even more optimistic. Citigroup strategist Scott Chronert raised his year-end target for the S&P 500 again this month, partly because he expects tax cuts to offset the impact of tariffs. 

In other markets, though, the recovery from April is less assured. US 10-year yields are within five basis points of levels seen at the end of March. Bloomberg’s gauge of the dollar is still down more than 9% from its high before inauguration day.

“Rates are going to continue to price in further Fed rate cuts on the back of the increasing debate that we’re likely see a 25- or 50-basis-point move in September,” said Laura Cooper, head of macro credit and global investment strategist at Nuveen. “The inflation print yesterday cleared the way for that debate to become a bit move lively.”

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