The S&P 500 climbed nearly 10% in a single month. Corporate earnings are holding up, AI investments keep flowing and the market looks immune to bad news. But don't be fooled by the surface, because what lies beneath deserves your full attention.
Markets are currently trading on momentum, not on macroeconomic fundamentals. And that is a crucial distinction. As long as nothing breaks, prices can keep rising. But pressure is steadily building through oil, politics and declining confidence. The market looks strong on the surface, but is becoming increasingly fragile from within.
This is not a clean macro rally. It is a move on pure momentum, driven by the assumption that nothing will break in the immediate term. Because while equities rise, oil rises too. And oil feeds directly into inflation and rate expectations. The disruption of oil supply is getting worse by the day and there is still no solution in sight. At some point those pressure factors inevitably start to count.
Without any clear sign that geopolitical tensions are easing quickly, this could be a premature rally — an upward move in preparation for something far more destructive. Especially now that Trump has rejected Iran's proposal and is threatening to attack. Market movements are rarely random. Watch them with extra caution.
Trump needs a solution fast
Political pressure in the US is mounting and Trump feels it. His approval rating currently sits at 34%, the lowest point since the start of his term. The polls are sliding, economic concerns are growing and geopolitical decisions are becoming increasingly aggressive. At the same time, the military presence in the Middle East has expanded and defence spending is being scaled up significantly, including a 24,000% budget increase for drones.
Trump is under enormous pressure to deliver a victory in the war with Iran. Whichever path he takes, it has to look good and serve both him and the US. He cannot afford any further mistakes with the midterm elections on the horizon.
After rejecting the Iranian proposal and threatening to attack, including maintaining the blockade until a nuclear deal is reached, Trump appears to be leaning towards escalation rather than de-escalation. And that has consequences. Oil keeps rising. The whole world is feeling it. And while the US benefits in the short term, consumer prices are pushing retail into the ground, which is also negative for Trump himself.
We may be on the verge of seeing rushed and dangerous decisions as tensions build and pressure mounts. The consequences will be felt globally. And markets will be watching, and reacting.
The silent time bomb: confidence
Beyond oil and politics, a third risk is slowly building: the collapse of consumer confidence. Survey data shows sentiment has fallen to levels worse than during the pandemic. Households are increasingly worried about inflation, job security and the broader economy.
Markets are not currently reflecting that risk. But confidence drives behaviour. If this sentiment translates into real economic behaviour — less spending, more saving, postponed major purchases — it eventually feeds through to corporate earnings. And that is where markets are most vulnerable.
The dollar is also under pressure. Growth concerns should weaken it, but global uncertainty is pulling capital back in. That interaction creates uneven moves, with strength and weakness rotating quickly rather than forming a clear trend. An end to the war would be the starting point for normalising the situation, but right now no resolution looks close.
Where this leaves markets
Markets are not ignoring risk. For now, they are choosing to look past it. Momentum is strong, earnings are holding up and that is enough to drive prices higher. But pressure is building underneath.
Oil is rising. Political risk is rising. Confidence is weakening. None of that has gone away, it just hasn't forced a reaction yet. That puts markets in a position where they can keep rising, but with little margin for error.
Because environments like this don't break down slowly. They hold, until something forces them to adjust all at once. And perhaps it is precisely Trump's aggression that becomes the moment when that happens.
