The new bull case for the stock market is looking past short-term risks

Despite escalating tariff threats and macroeconomic uncertainty, strategists like Morgan Stanley's Lisa Shalett propose a market 'bull case,' citing anticipated 13-14% S&P 500 earnings growth by 2026, lower oil prices, and potential Fed rate cuts, which has fostered market 'immunity to uncertainty' and low volatility. However, Charles Schwab's Liz Ann Sonders warns of mixed signals, noting a divergence where the bond market suggests slowing economic growth while equity cyclicals price in acceleration, indicating potential downside risk for equities.

Analysis

The equity market is exhibiting significant resilience, with strategists presenting a new bull case despite persistent macroeconomic and trade-related uncertainties. This optimistic outlook, articulated by Morgan Stanley's Lisa Shalett, is predicated on several key factors: the perception of tariffs as a 'non-event' offset by lower oil prices, the potential for 'bad news is good news' Federal Reserve rate cuts in response to economic weakness, and a strong long-term corporate profit forecast. Specifically, S&P 500 earnings growth is projected to accelerate from 7-8% in 2025 to 13-14% by 2026. This sentiment is reflected in current market dynamics, where the S&P 500 has rallied over 25% since its April 8th lows and recent tariff announcements failed to trigger swings greater than 1%. Market complacency is further evidenced by the Cboe Volatility Index (VIX) trading below 17, a stark contrast to its spike above 60 in April. However, this confidence is not universally shared. Charles Schwab's Liz Ann Sonders highlights a critical divergence between asset classes, noting that low bond yields are pricing in slower economic growth while cyclical equities are pricing in an acceleration. This contradiction suggests underlying fragility and presents a notable downside risk for equities should the bond market's pessimistic forecast prove more accurate.

Key Decisions for Investors

• Given the forward-looking earnings growth projections and low current volatility, investors might view this period as an opportunity to hold or add to long-term equity positions, operating on the thesis that near-term macro noise will be secondary to future profit expansion.
• It is critical to monitor the divergence between the bond market, which is signaling an economic slowdown via low yields, and the equity market's cyclical leadership; a convergence toward the bond market's view could trigger a rapid increase in volatility and a market correction.
• Investors should watch for any break in the market's 'immunity to uncertainty,' particularly by tracking the VIX for a sustained move above the 17-20 range and closely scrutinizing upcoming earnings reports for any revision to the strong 2025-2026 growth outlook.