The trade headlines, while encouraging, aren’t especially promising. The negotiations with Japan are bumpy. The Japanese, understandably, are reluctant to buy American rice, and as a result, they may soon receive a ‘reveal letter’ detailing the tariff rate they’ll be subjected to. As for the EU, talks are just as uncertain. European could accept 10% universal tariff but demand exceptions for key sectors like drugs, alcohol, chips, planes, cars, steel an aluminum that they might not get.

On the monetary policy front, Fed Chair Jerome Powell has been crystal clear: it’s not smart to rush to the exit when the implications of new tariffs on inflation and growth are still unknown. That warning was reinforced by last week’s core PCE data, which came in hotter than expected, suggesting that inflation may be making a U-turn—moving away from the 2% target. That means even if economic data on growth or jobs begins to weaken, the Fed is likely to prioritize tackling inflation first. Yet, this doesn’t seem fully priced into markets.

There’s a clear mismatch between how markets are positioned and the risks that remain on the table. Trade tensions, geopolitical uncertainty, the ballooning US debt burden, the possibility that the Fed might not be able to cut rates, signs of economic slowdown, and even a potential re-acceleration in inflation—none of these risks have disappeared. They’ve simply been pushed aside, priced in and out over recent months, but they persist.

Retail investors continue to drive the rally. The latest COT data shows that institutional demand has improved slightly, but still feels lukewarm. That’s understandable, given the trend in earnings expectations. According to FactSet, second-quarter S&P 500 earnings growth estimates have been revised down from 9.4% at the end of March to just 5%. That downgrade is barely reflected in market pricing, making the upcoming earnings season a potential minefield.

From here, the path forward is essentially a coin toss. In one scenario, trade deals are struck, everyone leaves the negotiating table happy, the Middle East finds peace, the US addresses its soaring debt, inflation slows, and economic growth accelerates. But if that doesn’t happen—and some of the risks materialize—markets could face a sharp reality check. Earnings could disappoint, macro data could weaken, trade deals could fall short or prove unsustainable, and US debt worries could resurface—especially given that the latest tax bill is expected to add $3 trillion to the federal deficit. That would require a ramp-up in debt issuance, which could push yields higher just as corporate profits come under pressure.

Investors vs CFOs

Investor sentiment may appear upbeat, but those making real-world business decisions are more cautious. A recent Teneo survey shows nearly 80% of investors expect the global economy to improve over the next six months. Yet 43% of global CFOs disagree. In fact, the majority of US CFOs expect interest rates to rise—not fall—over that same period. We can choose to ignore those views, but CFOs are decision-makers, and they’ve already started to act, slowing hiring and reassessing supply chains.

That said, one area continues to shine: AI. Strong capital expenditure is flowing into AI projects, with the aim of replacing labour, cutting costs, and boosting productivity. That could help tame inflation over the long run and support growth. Oracle announced a major cloud deal expected to bring in up to $30 billion annually from fiscal 2028. Its stock jumped 4% on the news. Meta also hit an all-time high on reports it plans to spend ‘hundreds of billions’ on projects and research. Nvidia continues to hover near record highs.

But beyond the AI sector, the broader macro picture remains fragile. All eyes are now on US labour market data this week. Job openings are due today, followed by the ADP employment report tomorrow and nonfarm payrolls, wage figures, and the unemployment rate on Thursday. Moderately soft figures may support expectations of Fed rate cuts and push equities even higher. But if the data is too weak, it could raise concerns about the economic impact of recent policy shifts, prompting some investors to lock in profits and head to the sidelines ahead of the slower summer months.

Meanwhile, the US dollar remains under pressure. The EURUSD touched the 1.18 level this morning after an unexpected dip in German inflation revived dovish European Central Bank (ECB) expectations. Today’s euro area aggregate inflation number is likely to land near the ECB’s 2% target, reinforcing the view that the central bank will remain accommodative. The euro outlook remains positive, but technically speaking, the RSI indicator points to overbought conditions. Deep bearish dollar positioning also suggests that some profit-taking could lead to a short-term correction before the euro resumes its march toward the 1.20 mark.