We should be cautious about any grand narratives in the current environment. The tail risks became less likely, but it will take more than one good-news week for investors to become convinced that global geopolitics is stable. There is still so much uncertainty about where the global economy is headed.

We can rationalise current market movements up or down with the latest news flow but, without clear economic signals, those rationalisations do not tell us much about the future. In this environment, we should step back and look at the bigger picture: the global growth outlook is now weaker than expected at the start of the year, putting stock valuations under pressure.

Don’t confuse a market recovery for an economic one. 
We wrote last week that market liquidity had become less troubling. That situation precipitated stock market rallies and calmer bond markets through this week. Gold prices also came down from their recent highs, suggesting investors are less fearful. This was helped by a renewed ‘buy the dip’ mentality, particularly among US retail investors. The clearest sign of this was Tesla shares climbing, despite a 70% drop in first quarter profits.

Investors’ good mood was attributed to Trump apparently backing down on his 145% tariffs on China, as well as his threats against Fed chair Jerome Powell. Although extensive tariffs are still in place for now, the president supposedly decided to change course after a private meeting with the CEOs of major US retailers. The fact he buckled under domestic economic pressure, and then markets rallied, was described as the return of the ‘Trump put ‘ by Bloomberg’s John Authers. We give an update on US tariffs in a separate article – and an explainer of the importance of Fed independence.

We should be careful not to think this is a crisis averted. Although retail investors are eager to buy cheaper US stocks, institutional investors – who provide the stable, long-term funding for capital markets – are still feeling nervous. Widespread uncertainty around tariffs has also halted business investment, which saps growth potential over the long-term. That weakened potential is now showing up in the latest quarterly earnings reports. Earnings are not dreadful, but the exceptional US profit growth which has propelled markets for so long is fading.

Policy depends on who wins the White House fight.
Markets were certainly helped by several public appearances from US treasury secretary Scott Bessent. Investors like Bessent and regard him as the main ‘adult’ in Trump’s cabinet room. His statements were more constructive than the emotion we often hear from the White House: he criticised the IMF, but affirmed that the US wants to engage with international economic institutions. He repeated Trump’s complaints about China, but affirmed the importance of US-China trade. And he suggested the Fed should reconsider its policies, but said there was no question of the central bank’s independence.

These are positive signs, but the problem is we have no way of knowing how long Bessent’s time in the sun will last. Trump’s cabinet is split between socially regressive ideologues, who do not seem that bothered by what markets think, and more market-friendly types like Bessent. The president seems to enjoy pitting these groups against each other for policy influence. The confrontational style was exemplified last week by a White House shouting match between Bessent and Elon Musk, that could be heard while Italy’s head of government Giorgia Meloni was meeting Trump in the Oval office.

The tariff matter is also complicated by the fact that China seems to be rejecting Washington’s olive branch. Chinese officials called Trump’s claims of dialogue between the nations “fake news” and said in no uncertain terms that Beijing will wait for better trade terms as the US shoots itself in the foot. That could just be bravado, but the suggestion itself will anger many in Trump’s inner circle. We should not be surprised if Trump announces further tariffs or restrictions in response. Judging by Bessent’s dominating media presence this week, he won the fight this time, but there is no guarantee he will next time.

Valuations are still under threat. 
Business investment is the key ingredient for long-term growth. US businesses are not investing as much, due to utterly uncertain policy. All else being equal, that means weaker growth in the world’s largest economy – though not necessarily recession. Economic forecasters have not only downgraded 2025 US growth, but are not predicting much of a bounce back next year either. Without business investment, growth becomes wholly reliant on consumption – which can be volatile and which Trump is actively suppressing through tariffs.

Despite the recent sell-off, US stocks are still more expensive than other regions in price-to-earnings terms. Those higher valuations have, over the last two decades, been sustained by world-beating earnings growth, but that profit exceptionalism is already turning. We should not overstate this (the world still relies on US tech companies) but it is a threat to valuations for US American companies. The underperformance of US stocks therefore has room to run.

There are other areas that could pick up some of the slack. Trump’s policies are forcing Europe to invest more, and that is an important part of investors’ bullishness on Europe. Amid the calls of US and global recession, it is worth noting that the economic data is merely suggesting slower growth rather than outright recession. But it is unlikely that the rest of the world can make up for potential reductions in US business investment.

Unless we get a sudden tariff resolution (and perhaps not even then) the global growth outlook is therefore worse than it was at the start of this year. Some of that has already been priced in to markets, but we should not be surprised if this week’s positivity is tested soon.