The market is back. But why?

2nd April, 2025, The liberation day in the USA wasn’t an auspicious event for most investors, especially for the equity market. The market saw a massive decline as investors expressed negative sentiments and started to sell their positions, causing a massive fall in the market. But the recent discussion on delaying tariffs has increased the confidence of investors, which is evident in the performance of the market. Chief economist Michael Feroli explained this temporary tariff pause reflects a $300 billion tax cut, which may have boosted consumer spending and built trust among investors, which shifted the market from modest contraction to modest growth.

Big banks showing optimism:

Goldman Sachs predicted a 45% chance of recession this year, which has been cut to 35% as of now. The other banking giant, JP Morgan, notably reduced the likelihood of recession from 60% to below 50%. It was only the CEO of Bank of America who claimed the economy will remain stable and somewhat sidelined the fear of recession when other big banks sound pessimistic. Goldman Sachs also increased the GDP projection from 0.5% to 1% and cut the unemployment rate as well.

What’s happening on the market?

The S&P 500 has ended up in the green, and the dollar rose by almost 1%. Once conservative investors who showed interest in defensive stocks such as utilities are investing in growth stocks. It is wise to bear in mind that this is just a 90-day pause, not a ceasefire of the tariff war. David Kostin, the chief equity strategist, also suggests the investors keep a low profile and look for businesses with strong margins that are resilient to tariffs. Palantir Technology closed at their record high due to the ongoing optimism. Qualcomm, a semiconductor company that is largely dependent on China, has seen a surge in their stock price by 5% since May 9.

What does it mean for you as an investor?

Risk of overvaluation persists: Quite largely, there is a risk of overvaluation almost by 21 times. David Kostin claimed the US stock market trades at a P/E of 21, which is a historically high multiple and a tricky one where there is a 50/50 chance of recession. The disconnection between high valuations and looming recession risk is a red flag. The market is running on optimism that tariffs won’t be fully imposed. Everything is vague.

The European market seems lucrative. Although the STOXX 600 fell by 0.2% following a four-day rally driven by the UK-US deal, analysts across financial institutions are still giving green signals to invest, potentially a great spot to diversify. Barclays raised the STOXX 600 target as recession fears eased.

Wait until Q2: Where tariffs will take companies will be public only after the Q2 reports are published. Q2 reports will reflect the full impact of tariff changes and ongoing trade tensions. July-August will be a deciding month whether the market could sustain its optimism or not.