Wall Street’s Sudden Rebound
The recent US-China trade détente has triggered a powerful rally in US markets, catching many institutional investors unprepared. The S&P 500 has surged 4% this week, erasing all losses for the year after both nations agreed to cut tariffs for at least 90 days.
This rapid market reversal has particularly affected large asset managers who had positioned cautiously based on recession fears and policy concerns. The dollar initially strengthened while Treasury prices fell as traders abandoned safe havens. Despite the current optimism, some strategists warn the rally may have overextended, with ongoing concerns about lasting economic damage from trade disruption.
The market recalibration has been characterized by record-long positions in Treasury futures being unwound and the Nasdaq Composite surging nearly 30% from its recent low following Trump's April tariff announcement.
Forecast Scenarios (GCHQ)
Likely (55-75%): Continued Market Recovery with Moderating Growth
US markets likely continue their recovery over the next 3-6 months, though at a more moderate pace as economic reality tempers extreme optimism. Institutional investors gradually reallocate to equities but maintain some defensive positioning as second-order effects from trade disruption begin appearing in economic data. Inflation remains elevated while growth indicators modestly disappoint expectations, confirming mild stagflationary pressures. The dollar weakens gradually as markets price in growing probability of Fed rate cuts by Q4 2025, while sectors least exposed to trade tensions outperform.
Realistic Possibility (45-55%): Economic Data Forces Market Reassessment
Within 4-8 months, US economic data deteriorates more than anticipated, forcing a market reassessment. Consumer confidence metrics decline and corporate earnings guidance turns cautious as the lagged effects of earlier trade tensions and policy uncertainty manifest in spending and investment decisions. The S&P 500 gives back half of its recent gains while Treasury yields fall significantly as recession concerns reemerge. The Fed pivots to a more accommodative stance than currently expected, providing a floor for asset prices but failing to restore Q2 optimism levels.
Unlikely (30-45%): Renewed Trade Tensions Trigger Market Reversal
The US-China trade détente proves short-lived, with new disputes emerging after the initial 90-day period expires. Within 6 months, a combination of election-year positioning and disappointing compliance leads to renewed tariff threats. Market volatility spikes dramatically, with the VIX returning to liberation day levels or higher. Institutional investors who reluctantly reallocated to equities face significant losses, prompting a flight to quality that pushes Treasury yields sharply lower. Chinese retaliation measures further complicate global supply chains, accelerating nearshoring trends and triggering sector-specific market stress.
