Stocks continue to rise, but the economic backdrop suggests a more cautious approach. Inflation remains sticky, interest rate cuts appear less likely, and global trade pressures are mounting. Yet, markets seem to be looking past these risks—for now.

A Market Betting on Rate Cuts That May Not Come

For months, investors have anticipated Federal Reserve rate cuts in 2024. But with inflation proving more persistent, those expectations are shifting.

• Producer prices rose 0.4% in January, exceeding expectations.
• Core inflation climbed to 3.6%, the highest since September 2023.
• December’s inflation figure was sharply revised higher, from 0.0% to 0.4%.

What This Means for Interest Rates

• The market now expects rates to remain above 4% through 2025.
• The Fed is unlikely to cut rates while inflation is still elevated.
• If trade policies push inflation higher, rate cuts could be off the table entirely.

The result? Mortgage rates, business loans, and corporate borrowing costs will remain high, pressuring both consumers and companies.

Tariffs, Trade, and Inflation Risks

On Tuesday, former President Donald Trump proposed a new round of tariffs on imported goods, set to take effect in April. The market reaction was surprisingly positive, with traders focusing on the delayed timeline rather than the long-term implications.

But tariffs could add further inflationary pressures by increasing costs for businesses, which are likely to pass those costs onto consumers. Combined with already elevated inflation, this could reinforce the case for keeping interest rates higher for longer.

A Rally Detached from Reality?

The S&P 500 and Germany’s DAX index have been climbing, but the fundamentals suggest caution.

• Corporate struggles are emerging – Porsche announced layoffs, signaling weakness in the auto sector.
• China’s slowdown is weighing on Europe – Germany’s largest trading partner is facing economic headwinds.
• Eurozone growth is stalling – Inflation remains a challenge, and economic expansion is slowing.

Despite these factors, markets continue to push higher—not necessarily because of improving fundamentals, but likely due to institutional investors driving momentum.

Investor Sentiment Shows Signs of Unease

While markets are rallying, investors appear conflicted:

• Only 28% of investors say they are bullish.
• Yet stock buying remains strong, driven by fear of missing out.

This kind of contradiction often signals an inflection point—either the rally has more room to run, or markets are setting up for a sharp reversal.

Key Takeaways

1. Inflation remains stubborn, making Fed rate cuts less likely.
2. Tariffs could further increase costs, keeping interest rates elevated.
3. The stock market rally lacks fundamental support, raising concerns about sustainability.
4. Investor sentiment remains skeptical, despite aggressive stock buying.

Markets may be looking past the risks for now, but history suggests that reality tends to catch up. Volatility could be ahead.