Exuberant investors ignore turmoil at their own risk
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Stocks absolutely, positively don't want to go down.
- Tariffs? War in the Middle East? Rising energy prices? Surging deficits? High interest rates? Weak dollar? Plunging CEO confidence? Climate change? Nope, nope, nope. The TACO trade is for everyone.
Why it matters: Investors are already ignoring a slew of headwinds.
- Any of a number of risks could be the final straw that breaks the stock market's grind to the upside.
What they're saying: Lori Calvasina, the head of U.S. equity strategy at RBC Capital Markets, observed three main risks cloud the path forward for stocks in a client note Monday.
- Valuations could be compressed if national security concerns rise.
- The sentiment recovery after April's brief bear market could be derailed.
- Rising oil prices (if they turn around again) could weigh on U.S. equities.
Reality check: Stocks rallied Monday after Iran conducted a performative retaliation, sending oil plunging more than 7% and reinforcing relentless investor optimism.
- President Trump announced a ceasefire that both sides had confirmed, but Israel later accused Iran of violating it, and the coming days will be crucial.
Yes, but: Markets are already priced for "multiple best case scenarios," David Bahnsen, chief investment officer with The Bahnsen Group, writes in a note.
- This year alone, investors have traded on hopes of tariff deals, rate cuts from the Federal Reserve, and continued outperformance of AI names, pushing the broader market to trade at 23 times forward earnings, a historically rich valuation.
- That leaves "plenty of risk for short-term volatility," Bahnsen writes.
Zoom in: While the threat of war remains unpredictable, investors would be wise to continue to focus on the "known" unknowns, including the risks that tariffs drive inflation higher, keeping interest rates elevated, warns JPMorgan Asset Management chief global strategist David Kelly.
Zoom out: A fresh lift in oil prices could add fuel to the inflation expectations fire, which could make it even less likely that the Fed lowers interest rates.
- That could be a bearish signal for investors already eager for cuts, with Bahnsen arguing lower rates are needed for the Fed to be "ahead of the curve."
What we're watching: Stocks overall are up 0.5% since President Trump's inauguration, after the S&P 500 rebounded after "Liberation Day" with the fastest snapback since 1982.
The bottom line: If investors continue to ignore geopolitical risks, that could be a sign of a bigger downturn to come, rather than a bullish signal for those who continue to test the limits of their own conviction.
