Is It Blue Sky for Here, or Are We Facing a Cruel Joke?

We want to point out some interesting statistics that have us asking, Are we in a blue sky world or a cruel joke?

Since the April 7^th intraday lows, equities have done some astonishing things. The S&P 500 is now up 22% from that low. On April 8^th, the S&P was down 15% year to date, yet it took just 25 trades from that closing low to reverse all that loss. The last time that happened was 1982 – a year the S&P went on to rally hard, and even in the preceding years before smacking into the 1987 bear crash.

So are we in the blue sky?

Well, currently, global equity markets are showing signs of near-term consolidation, but beneath the surface, a shift in sentiment is underway. The recent de-escalation in global trade tensions, especially from the U.S., is prompting investors to start pricing in this “Blue Sky” scenario in equities; however, it is not materialising in bonds.

This is also a faint appearance of a bubble, driven by investor enthusiasm around AI and the potential for looser monetary policy later in the year. Blue Sky thinking does lead to this – markets need this goldilocks scenario and appear to think that is going to be the path rather than the exception.

The realistic path is a near-term outlook that remains complex and, in some areas, fragile, in others already breaking.

The Cracks

While some indicators have improved, others reveal underlying softness.

Take earnings revisions and/or lack of guidance altogether. The 4-week moving average for U.S. earnings revisions has seen a modest lift, but that is in no small part due to the weak U.S. dollar. The more significant 13-week moving average tells a different story.

This longer-term gauge, both in the U.S. and globally, continues to lag, primarily because it trails the reporting cycle. For now, markets are clinging to hopes of an imminent turnaround in corporate earnings, but the data suggests that’s unlikely in the short run.

Adding to the caution, U.S. GDP growth is forecast to slow significantly, dropping from 2% year-over-year in Q1 to less than 1% by Q4. Look at auto sales, currently booming, back the consumer feedback is that this is due to ‘tariff beating’. If that is the case, come Q3 and Q4, there is going to be a collapse in sales as the price increases come in and consumers go on strike.

The Fed

The Federal Reserve is now expected to stay on hold until September, according to current market pricing, and that is post-the PPI and other inflation input measures that came in lower than expected, leading equities to assume it could be earlier.

Yes, the Fed is nearing the end of its tightening cycle, but a cautious tone and concerns of stagflation signal that policy normalisation will be slow, deliberate and data dependent, not sentiment driven or on geopolitics.

This measured approach will be a double-edged sword; it will have opportunities for some but also elevate the risk of market volatility around key data releases, including inflation, labour market trends, and consumer spending.

Tariff paths of resistance

• Path one: Moderation – consensus has a 50% blanket tariff on Chinese imports to coming into effect post-90 day pause with a 10% sector-specific measures globally – meaning the 25% tariffs on steel and aluminium will be cut to 10% and pharmaceutical which are yet to be hit will have a blanket 10%. This would lead to a moderation of the current buying in equities.
• Path two: This is the more optimistic path. If the recent tariff announcements are primarily negotiating tools rather than enduring policy shifts, markets could reprice upward. A more conciliatory tone on trade, especially ahead of the U.S. mid-term election, could reduce uncertainty and support a rerating of equities, as mentioned, this is what appears to be priced in by equities but not bonds.
• Path three: Bubble, this scenario can’t be dismissed. If investors become overly optimistic, buoyed by AI-driven gains, rate-cut speculation, and financial conditions that loosen too quickly, markets could overshoot fundamentals, reviving concerns of a speculative bubble.

The Good: Upside

Several forces could support further upside. Generative AI continues to be a structural driver, both in terms of productivity gains and equity multiples. Inflation is also expected to moderate. Consensus has U.S. inflation falling to 3.9% by year-end, giving the Fed cover to start easing at that September meeting. A fall in inflation, combined with improving real wage growth, could support consumer spending and corporate margins.

Wage growth remains a positive offset to macro headwinds. The U.S. voluntary quit rate is still elevated, and wage gains are holding steady around 3.5%. This is helping to stabilise corporate profit margins and close the gap between labour cost growth and productivity.

If this dynamic continues, particularly with inflation trending lower, it would strengthen the case for a supportive rate-cutting cycle. All market upsides.

The Bad: Downsides

Yet risks remain—and they are not trivial.

Trade policy remains the most significant near-term overhang. With the U.S. mid-term election on the horizon, the direction of global trade remains unpredictable. Whether tariffs become a core policy plank or merely a short-term lever will shape investor sentiment through the second half of the year.

Macro data surprises, particularly around inflation, labour markets, and corporate earnings, could also spark renewed volatility. At the same time, central bank missteps or unexpected geopolitical developments (of which there could be many) could easily upset the fragile equilibrium in markets.

The Outlook: Is it ugly?

The U.S. is expected to maintain its leadership position, but market breadth is improving. The dominance of a handful of mega-cap names is beginning to fade, and sector rotation is creating new opportunities across geographies and industries. See reactions in Europe and Asia.

Meanwhile, AI continues to disrupt the investment landscape. Algorithmic trading, real-time sentiment analysis, and personalised investment models are reshaping how capital is allocated and how fast markets react. This can lead to asymmetrical trading and disparities between fundamentals, technicals and actuals.

So it’s a little ugly, but that is the new world.