July 6, 2025

QuickTakes

MARKET CALL: Slow-Mo Meltup

Fueled By Less Uncertainty

The fireworks started early in the stock market last week. On Thursday, the day before Independence Day, both the S&P 500 and the Nasdaq rose to new record highs (chart). In addition, their 50-day moving averages rose above their 200-day moving averages. Those "golden crosses" tend to be bullish breakout patterns, indicating the possibility of a long-term bull market.

The unprecedentedly fast rebound in the stock market since April 8 is attributable to less uncertainty. The S&P 500 volatility index (VIX) peaked at 52.3 on April 8 (chart). On Thursday, it was back down to 17.5, below its average over time of 19.5. We wouldn’t be surprised to see it fall to 10.0 over the rest of the summer. That's because the rapidly rising uncertainties on a number of fronts that caused the stock market correction from February 19 through April 8 have been rapidly abating since then.

The US Treasury bond volatility index has dropped sharply as well, from 139.9 on April 8 to 86.10 on July 3 (chart).

Let's review the main sources of uncertainties so far this year and why they’ve dissipated:

(1) Tariffs. Stock prices soared on April 9 when President Donald Trump postponed the reciprocal tariffs he intended to impose on America's trading partners. The markets rightly concluded that these tariffs would be negotiable.

(2) Economy. The tariff issue hasn't gone away, but it hasn't weighed on economic growth or boosted inflation as was widely feared. According to Polymarket.com, the odds of a recession have declined from 65.5% on May 2 to 22.0% currently (chart).

Thursday's reports for weekly unemployment claims and June's employment confirmed the resilience of the labor market. Payroll employment rose solidly by 147,000. The unemployment rate edged down from 4.2% to 4.1% because of a drop in the unemployment rate for those who were unemployed in May (chart). This implies that it isn't getting harder to find a job as rising continuing unemployment claims would suggest.

(3) DeepSeek & datacenters. Fears that DeepSeek would deep-six spending on AI infrastructure dissipated during April, as the major cloud companies confirmed their commitment to invest heavily in datacenters around the world.

(4) Earnings. Industry analysts stopped lowering their 2025 and 2026 estimates for S&P 500 companies’ operating earnings per share in recent weeks (chart). They are currently expecting $263 this year and $300 next year. So are we. Forward earnings rose to yet another record high during the July 3 week.

(5) Geopolitics. The chaos in the Middle East has turned less chaotic since the US bombed Iran's nuclear sites on June 22 in an operation called "Midnight Hammer." Fears that Iran will close the Strait of Hormuz have eased significantly (chart).

(6) Big Beautiful Bill (BBB). Trump signed his BBB on July 4. The legislation extends Trump's 2017 tax cuts (and then some) beyond the end of this year, when they were set to expire. If they were allowed to expire, that would have been a big tax increase next year. For now, the bond market doesn't seem to be worrying about the deficit and debt implications of BBB.

(7) S&P 500 target. We are still targeting 6500 on the S&P 500 by the end of this year. It could get there sooner in a meltup scenario.

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