Summary
⚈ The U.S.-China trade truce, AI-driven productivity gains, and expectations of Fed rate cuts have helped lift investor confidence.
⚈ Liquidity is rising again, with more capital flowing into the market and supporting the rally.
⚈ As a result, the S&P 500 has recovered sharply, and recession fears have eased for now.
Wall Street, it seems, has changed its mind. After months of pricing in a possible downturn, markets have come roaring back, and suddenly, recession talk has been pushed to the sidelines. The S&P 500 is up roughly 18% since early April, effectively erasing its losses for the year.
What’s driving the about-face? A handful of factors, starting with an unexpected thaw in U.S.-China trade relations.
S&P 500 has regained its footing. Source: Google Finance
U.S.-China trade truce
The recent 90-day tariff truce between the U.S. and China has provided a much-needed respite for global markets. The U.S. agreed to reduce tariffs on Chinese imports from 145% to 30%, while China lowered its tariffs on U.S. goods from 125% to 10%. While not exactly free trade, it’s friendlier trade, and that was enough.
This development has alleviated immediate concerns over escalating trade tensions, leading to a significant rally in U.S. stock markets. Indeed, the S&P 500 surged by 3.3% on May 12, 2025, effectively erasing its year-to-date losses. For now, at least, trade war panic has been shelved, possibly until the next tweet.
AI is already cutting costs
Generative AI is starting to deliver measurable productivity gains across industries. According to the St. Louis Fed, workers using AI tools have saved an average of 5.4% of their work time, translating into a 1.1% increase in overall productivity.
That may not sound transformative on its own, but in aggregate, it’s material. More importantly, it’s tangible. Unlike the dot-com era, where valuations ballooned ahead of business performance, today’s optimism around AI is grounded in operational gains. Companies are reducing costs, not inflating them, and that’s feeding directly into margin expansion.
Possible rate cuts
While interest rates remain elevated, the Federal Reserve has shown no urgency to tighten further. In fact, markets are now pricing in two to three rate cuts before the end of the year. The current target range, 4.25% to 4.5%, is increasingly viewed as the upper bound.
This policy backdrop has given investors room to reposition around growth. Instead of worrying about aggressive tightening, markets are adjusting to the possibility of a more neutral or even accommodative Fed. That sense of monetary stability is reinforcing the broader risk-on sentiment.
Liquidity
The M2 money supply, a broad measure of cash in the financial system, is once again growing. As of March 2025, it stood at a record $21.8 trillion USD, up 4.2% from the previous year.
Liquidity is a critical but often overlooked factor in market momentum. When there’s more capital available, it tends to flow into risk assets. This renewed expansion is creating another tailwind for equities, particularly in the tech sector.
Featured image via Shutterstock.
