Wall Street closed the first half of 2025 with a historic rally as the S&P 500 and Nasdaq Composite surged to new all-time highs. The momentum was driven by easing geopolitical tensions and progress on trade agreements with China and the United Kingdom. However, leading financial institutions are urging caution, warning that the underlying strength of the US economy remains uncertain.
Central to the market optimism is what traders call the TACO trade, short for Trump Always Chickens Out. This reflects a belief that President Trump will ultimately step back from aggressive tariff threats. Investors are banking on a Goldilocks scenario that features strong corporate earnings, moderate inflation, and potential interest rate cuts from the Federal Reserve.
But many analysts believe this outlook may be overly optimistic.
“Just as Goldilocks awoke to face three bears, there are several areas where this optimism is likely to be challenged,” said Bruce Kasman, Chief Economist at JPMorgan.
Signs of Economic Strain
Despite record market performance, several underlying indicators are flashing warnings
Tariff Uncertainty
President Trump’s July 9 tariff deadline continues to weigh heavily on investor sentiment
Slowing Demand
Consumer spending and global manufacturing are showing clear signs of deceleration
Labor Market Pressure
Weekly unemployment claims have risen to their highest level since 2021
Mixed Economic Signals
First quarter GDP was revised downward and core inflation has moved slightly higher
“There are yellow flags in the economy but no red flags yet,” said Aditya Bhave, Senior US Economist at Bank of America. “We are at a fork in the road.”
Federal Reserve Cautious Despite Market Expectations
While financial markets are nearly fully pricing in an interest rate cut by September, leading banks are not aligned with that view
Morgan Stanley anticipates no cuts over the next two policy meetings but projects as many as seven cuts in 2026 if the Federal Reserve shifts toward a more dovish stance
JPMorgan maintains that a rate cut is unlikely unless job growth drops below 100,000 per month. Current forecasts for June suggest 125,000 new jobs and an unemployment rate of 4.3 percent
“The Fed is in wait and see mode,” analysts at JPMorgan stated
Key Economic Data to Watch
Job Openings in May
Unexpectedly rose to their highest level since November 2024, signaling persistent labor demand
Inflation Outlook
Declines in housing and energy costs could reduce the inflationary impact of potential new tariffs
June Jobs Report
Expected to show steady but slowing gains in employment, reflecting a cooling labor market
Powell Maintains a Cautious Stance
Federal Reserve Chair Jerome Powell has continued to stress a patient and measured approach to monetary policy. He has cited ongoing trade policy uncertainty as a major constraint on business confidence and investment
“Uncertainty is worse than bad news,” said Claudio Irigoyen of Bank of America. “Businesses cannot commit to long-term investments when the rules of the game are unclear.”
Final Outlook
Wall Street may be reaching new heights, but deeper economic signals suggest fragility. With tariffs unresolved, consumer momentum slowing, and the Federal Reserve exercising restraint, the second half of 2025 could bring more volatility than victory. Investors may need to shift from celebration to caution as underlying conditions evolve.
