The #1 reasons US stock markets are near a record high | Forexlive

It’s the second sizzling day in a row for US equities with the S&P 500 now up 73 points, or 1.2%. It’s a nice peace dividend after a worrisome two weeks in the Middle East.

In the grand scope of the market’s memory, this episode will quickly be forgotten. The market has also come to terms with tariffs after a harrowing April and appears comfortable pricing in something like a 10% across-the-board US tariff. I think there is still some deserved worry about retaliation and an erratic White House tariff agenda but I’d imagine the reaction function in markets will be to buy-the-dip on tariff worries from here on out as businesses and consumers have shown they’re much more resilient than sentiment data initially suggested.

But none of that is the real reason why stocks are so resilient. The simplest expression of why is this: 4.33%. That’s the effective Federal Funds rate at the moment, landing within the target range of 4.25-4.50%. It’s a high starting point and means that the Fed has ample room to cut if anything goes wrong in the real economy — which is what matters for markets.

Here is how Bank of America put it today:

If something is going to break in the economy, we think it will happen over the summer.

In that case the Fed would probably cut by at least 75bp, starting in September.

Said differently, there are two possible outcomes (barring something stupid on tariffs). 1) The economy is find and the Fed holds rates, or 2) The economy worsens and the Fed cuts dramatically.

If you’re long stocks, that’s a scenario where it’s ‘heads I win, tails you lose’.