On the surface, tariffs and U.S. recession risks are diminishing, yet the S&P 500 appears to be encountering short-term resistance around the 6000 mark. Several tail risks persist: escalating Russia-Ukraine tensions, uncertainties surrounding Section 899, and the inability to pinpoint a catalyst for deleveraging beyond Trump-era tariffs. Following the strongest May performance in over three decades, fund managers find themselves in a dilemma. Not only did they miss the rally, but they now face a critical decision at elevated levels that could define their annual performance: chase the momentum or wait for a pullback?
Superficially, few factors seem to warrant fear. U.S. corporations continue to deliver robust earnings, recession probabilities remain subdued, and clarity on Trump’s tariff policies is anticipated soon. However, institutional investors are grappling with deeper risks—renewed Russia-Ukraine conflict, Section 899 ambiguities, resurgent political risks, potential retaliatory trade taxes, and a weakening U.S. dollar. Despite hovering just 2.3% below all-time highs, the S&P 500 struggles to breach 6000. Data reveals that until last Friday, the index recorded movements under 0.6% for seven consecutive days, marking its longest calm period since December. While anxiety lingers, no clear deleveraging catalyst has emerged aside from tariff concerns. Eric Diton, President and Managing Director of Wealth Alliance, noted: ‘To reclaim record highs, we must resolve uncertainties, yet most catalysts remain elusive until trade chaos subsides.’ Amid weak economic data, markets rally with complacency. Traders see little immediate threat—strong corporate earnings, stable recession odds, and impending tariff clarity dominate the narrative. Goldman Sachs analysis shows the Nasdaq surged 9% and the S&P 500 rose 6% in May, the best May performance in over 30 years. The IPO market echoes 2021’s frenzy: Coreweave skyrocketed over 200%, E-toro gained ~30% on debut, while Circle doubled its issuance size, priced above guidance, and soared 300% intraday before closing 168% higher. Simultaneously, the AI sector regained momentum.Nvidia’s robust earnings report has set off a chain reaction, with the Mary Meeker report forecasting the AI market to expand from $244 billion in 2025 to $1.01 trillion by 2031. As the Federal Reserve enters its quiet period ahead of the June 18 interest rate decision, investors are holding their breath for the upcoming CPI inflation data. Market projections indicate the Consumer Price Index report will show core readings (excluding food and energy costs) rose 0.3% month-over-month in May, up from 0.2% in April. This would push the core metric up 2.9% year-over-year, exceeding the Fed’s 2% target. Wells Fargo economists anticipate inflation will rebound in the second half of the year.
“We’ve become numb to inflation because everyone is betting tariffs will take months to show up in economic data,” said Brooke May, managing partner at Evans May Wealth. “But a hot CPI reading could trigger another stock market sell-off. Will investors use any pullback to continue buying the dip or choose to sell?” According to Asym 500 data, over the past three months, the S&P 500’s average realized volatility on days with CPI reports, government monthly employment data, and Fed rate decisions was nearly 42%, compared to 29% on all other trading days. Amid pervasive complacency, global stock markets face multiple potential risks. Just as markets began to believe tariffs and trade risks were under control and recession probabilities had declined, institutional investors find themselves in “no man’s land.” The S&P 500 has lagged the MSCI All-Country World Index (ex-U.S.) by nearly 12 percentage points in 2025, marking its worst start relative to global peers since 1993. Bank of America strategist Michael Hartnett noted that global stocks are approaching a technical “sell” signal after investors flooded into risk assets, stretching positions. “Once overconfidence sets in, there’s risk of surprises, so I’m more cautious about the upcoming summer,” said Patrick Fruzzetti, portfolio manager at Rose Advisors. Political risks have resurfaced. The breakdown of the “bromance” between Trump and Musk immediately impacted markets: the S&P 500 experienced selling pressure, and Tesla’s stock plunged up to 18%. The budget reconciliation bill also harbors dangers. Congress is advancing the bill to extend 2017 tax cuts with new changes. While capital expenditure and R&D expensing could boost S&P 500 earnings per share, Section 899 has become a focal point for investors.This clause introduces retaliatory tax measures targeting non-U.S. individuals and businesses from countries imposing “unfair foreign taxes.” It may impact entities in the EU, Australia, Canada, Norway, Switzerland, and the UK, affecting commercial income, corporate profits, capital expenditures, operational expenses, foreign investments, as well as dividends, interest, and capital gains.
More concerningly, exchange rate factors are becoming increasingly significant variables. Data shows that the gap in absolute returns between the S&P 500 and Germany’s DAX index is approximately 20%, but after currency adjustments, this gap widens to about 30%. For the first time in years, dollar exposure is turning into a headwind rather than a tailwind. Behind this shift are the U.S. 30-year Treasury yield approaching 5%, Moody’s downgrade of the U.S. credit rating, weak long-term bond auction performances (with bid-to-cover ratios hitting lows since 2012), and a notable decline in foreign investor demand for U.S. long-term bonds. Hidden concerns beneath the surface: U.S. stock trading volume hits yearly lows, intensifying market divergence. Despite the apparent activity, last week recorded the fourth-lowest trading volume week of the year. This divergence between volume and price reveals deep market splits: investors are rotating among quality stocks, large-caps, and growth stocks, favoring long-term growth stories with strong balance sheets while moving away from low-growth, bond-sensitive, or weak-balance-sheet stocks. Currently, the S&P 500 appears to face short-term resistance around 6000 points. Although anxiety persists, aside from Trump’s tariff factors, no one can pinpoint a catalyst for deleveraging. With employment data and central bank policy meetings approaching, and a significant tilt in U.S. stock ownership toward households, any shifts in employment trends could ultimately affect these households’ liquidity needs, potentially triggering selling pressure. For fund managers who missed the rally, the question grows more urgent: reallocate by chasing the rally now or wait for a minor pullback? In this uncertain moment, this decision could be pivotal for annual performance. Risk Warning and Disclaimer: Markets involve risks; investments require caution. This article does not constitute personal investment advice and does not consider individual users’ specific investment objectives, financial situations, or needs. Users should assess whether any opinions, views, or conclusions herein suit their particular circumstances. Investment decisions based on this are made at one’s own risk.
