3 Reasons Why Bears Have Been Very Wrong About the Market
Second-quarter earnings season will present another opportunity for market skeptics. Will they continue to strikeout?
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The major indexes are hovering around all-time highs as they have largely ignored President Trump's push to put retaliatory tariffs into place by August 1. Brazil is the latest country to receive notice, a 50% tariff, which is the highest level yet.
Many economists are convinced that these tariffs are going to increase inflation and cause a slowdown in economic growth. However, the market just doesn't seem to care. There are three reasons why this is occurring.
1. Climbing a Wall of Worry. The primary market driver for most of 2025 has been that the bears have been wrong. There has not been any hard evidence that the predictions of economic disaster are valid. Data have consistently been better than expected, and the thesis about the impact of tariffs is being called into question.
This creates a Wall of Worry dynamic where the skeptical bears are forced to keep adding long exposure or risk being run over by the market action. The more they reposition, the more it drives the market higher, and the more buying they must do.
It doesn't matter if they are convinced that the market is wrong. They have to keep buying and covering, and that supports the market.
2. AI dominance. Bloomberg notes today that Nvidia's NVDA market cap of around $4 trillion exceeds the entire market cap of the German stock market by about $1 trillion. The Magnificent Seven MAGS alone is about 37% of the entire S&P 500 market cap.
These stocks are not impacted by tariffs and trade issues to the same degree as much of the market, and they are so large that they offset much of the negative economic implications. Many economists appear to be ignoring how much influence AI has on market conditions.
3. Poor economic forecasting. The conventional economic arguments have been wrong. A few months ago, there were endless predictions about how tariffs are a tax and that they will have widespread negative implications. It hasn't happened. This is due in part to how Trump has consistently shifted as he negotiates and also because there appears to be price-cutting by foreign entities that don't want to lose their U.S. market share.
The Fed has always had a very poor track record of economic forecasting, such as the whole "inflation is transitory" issue a few years back. Fed Chair Jerome Powell appears to be wrong again about measuring the impact of tariffs.
While the market is handling the tariff issue quite well, the start of second-quarter earnings season is going to present another opportunity for the bears. With the indexes and many stocks hitting all-time highs, conditions will be ripe for a "sell-the-news" reaction unless earnings exceed expectations by a significant amount.
We will have to wait and see how things develop, but currently the market is expecting some very good reports, and it may be difficult to bring in more buyers if there aren't some giant blowouts.
We have a little softness on Thursday morning, but the market has been enjoying a run of weak opens and strong closes that is preventing bears from gaining any traction.
At the time of publication, Rev Shark had no positions in any securities mentioned.
