Are investors now uncomfortably numb to macro geopolitical events?

AFTER falling to about 4 900 in April 2025, the S&P 500 has made a new high of 6 200 as of the close of June. The US equity market has rallied more than 25% in less than three months, despite the ongoing threats of tariffs and the escalation of war in the Middle East.

For years, if not decades, when market strategists were asked what one of the most devastating geopolitical black swan events on their radar would be, a potential war between Iran and Israel was top of the list. When this fear became a reality, the market mostly brushed it off, falling only slightly more than when US President Donald Trump and Elon Musk had a fallout on the internet.

We’re also now days away from the expiry of Trump’s tariff pause, where we could see tariffs return to their Liberation Day levels — levels that would see the US fall into a recession if sustained. But the market is assuming we will continue to see progress on trade, with any escalation being seen as a standard Trump negotiation tactic as opposed to any serious threat.

While markets tend to climb the wall of worry and things are improving from the worst-case scenario, it seems to us that investors are growing tired of trading the headlines. Perhaps more simply, investors are becoming uncomfortably numb.

I say uncomfortably, as the recent rally has none of the cheers or excess sentiment you’d expect. Positioning data shows that not many participated in the recent rally and are more likely to be dragged to upgrade to neutral as opposed to strong bullish posturing. Pundits continue to point to stretched valuations and lingering risks.

We have a ceasefire, but Iran still poses a threat. We have progress on trade, but China has only agreed to a trade deal framework, not a trade deal.

Other countries are apparently close to finalising negotiations, but even in the case of the UK trade deal, there is little substance behind these. We believe Trump is looking for an off-ramp, which is positive, but the uncertainty and damage done to the economy has slowed growth from stellar to sub-par.

We, therefore, see global growth muddling through this year, which makes excessive gains unlikely, but vacillating policy will continue to drive short-term volatility. Any surprise higher in tariffs will weigh on real wage growth and profit margins, but for now, we believe corporates will be able to pass on higher costs to consumers without denting demand or harming margins dramatically.

Fiscal policy remains in the spotlight, with the Big Beautiful Bill pushing deficits wider. However, it is unlikely to stimulate growth; rather, it will help avoid a severe downturn if Trump’s tax cuts were allowed to expire. Any resumption of hostilities in the Middle East could also push the oil price and thus inflation higher, but any oil price spike may be contained given the glut of supply from both Opec — the oil producers cartel — and non-Opec producers alike.

On the more positive side, real wage growth continues to remain robust in the US and unemployment remains low. US payrolls continue to improve, albeit with negative revisions, but continues to point to growing private sector job growth while federal government layoffs are being somewhat offset by state and local government hiring. Wage growth is holding in and will likely remain supported by a reduction in labour supply due to Trump’s immigration policies.

Bank lending standards continue to improve, potentially providing consumers with another tailwind to growth. The recent disappointing US GDP print of -0.5% was mainly driven by tariff front running with net exports collapsing. Private final sales were revised lower but still relatively healthy. Looking forward, the Atlanta Fed nowcast suggests the drag from net exports will reverse and personal consumption expenditure will pick up, assuming the job market holds up.

All this puts the Federal Reserve (Fed) on hold until they are more confident in the pass-through of tariffs on US inflation. While recent inflation prints have undershot expectations, the latest “dot plot” reveals a notable split within the Federal Open Market Committee (FOMC), with forecasts ranging from no cuts to as many as four by the end of 2025 — heightening the risk of a more pronounced division on the board.

Against this backdrop, Trump continues to exert pressure on Fed Chair Jerome Powell, openly calling for aggressive rate cuts and signalling his intention to nominate a more accommodating successor when Powell’s term expires in May 2026. This will worry investors who remain wary of the longer-term inflationary consequences.

A further steepening of the yield curve appears likely should the FOMC adopt a more accommodative stance under new leadership. Complicating matters is the unsustainable trajectory of the US fiscal deficit: the so-called Big Beautiful Bill currently before Congress does little to rein in spending or meaningfully address revenue shortfalls, leaving budget concerns firmly in place.

With the market uncomfortably numb to short-term geopolitical news, we believe the focus will shift back to fundamentals. Unfortunately, the growth outlook remains uncomfortably murky, with tariffs distorting net exports which in turn is causing wild swings in the GDP numbers.

The Fed remains uncomfortably on hold as it tries to determine the impact of tariffs on inflation, all while being put in an uncomfortable position of being undermined by Trump. This all leaves us uncomfortably neutral across all asset classes, as valuations remained stretched and expected returns remain muted, but the cycle remains intact, albeit uncomfortably slowing.

* Sebastian Mullins is the head of multi-asset and fixed income at Schroders Australia.

** The views expressed here do not reflect those of the Sunday Independent, IOL, or Independent Media.

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