Rapidly evolving bull thesis
We ended 2Q on the road seeing institutional US equity investors in several different states. While it did not appear to us that they were uniformly bullish on US equities, some came across as downright excited and most of those who had been more tempered in their outlooks appeared to be talking themselves into a more bullish stance. It was striking to us how much the bullish thesis on US equities changed in June. Back in mid-to-late May, the thesis we heard in client conversations was essentially that the stock market had already paid the price for any tariff-related impacts on inflation and the broad economy/labor market, and that tax cuts and deregulation would be stimulative in 2026. As a result, many argued that it made sense to ignore any 2025 tariff-related potholes, and to look ahead to 2026.
“Instead of displaying a willingness to power through any tariff-related potholes, US equity investors seem to be gravitating towards the idea that there simply will not be any potholes.”
Lori Calvasina, Head of U.S. Equity Strategy, RBC Capital Markets
While tax cuts and deregulation are still seen by many as stimulative, the focus on tax in particular has narrowed, with many investors making the case for a ramp-up in capex spend due to some provisions in the tax law (this has gone hand in hand with a high degree of bullishness on the extremely expensive Industrials sector). The cooler inflation data that has been seen recently has caused many investors to believe that there simply will not be any inflationary impacts from tariffs, and several also expressed doubts about any adverse impacts coming to labor or the broader economy. Instead of displaying a willingness to power through any tariff-related potholes, US equity investors seem to be gravitating towards the idea that there simply will not be any potholes. Anticipation of Fed cuts boosting stocks was something else we also heard a fair amount about as 2Q ended, which hadn’t been as prevalent in our May meetings. The benefits of a weaker dollar on earnings were also in focus for some and we’d estimate that about half of the US clients we spoke with at the end of June were excited about AI again, echoing the enthusiasm for the US/AI/productivity we’d heard in our non-US meetings several weeks ago from non-US based investors.
To be fair, not everyone we spoke with agreed with this rosy assessment, and we spent plenty as 2Q wrapped discussing with some investors how much pre-tariff inventories companies may have on hand and when those will run out, whether the pull-forward of demand will generate some weakness in future demand (and corporate revenues and earnings), whether companies will pass on prices or absorb tariffs, and whether any tariff-related potholes are simply being pushed into 2026 – delayed, but not disappeared.
Overall, we ended 2Q thinking that overall conditions in US equities didn’t seem frothy quite yet but were headed down that path. We also exited the week with a clear list in our head of how US equities could get derailed in the back half of the year. If we do end up getting some inflation pressure or broader economic potholes from tariffs or the Fed doesn’t cut after all, we think it will come as a negative surprise to many investors. If inflation impacts or broader economic potholes simply get pushed out into next year, it will dent the 2026 optimism that seems to be pulling in even the more cautious investors.
