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The stock market has experienced a significant rally since President Donald Trump's decision to pause most reciprocal tariffs on April 9. The S&P 500 surged nearly 20% and enjoyed nine consecutive days of gains. The technology-heavy Nasdaq Composite performed even better, with a remarkable 25% increase since hitting its April lows. This impressive upturn surprised many investors who had anticipated continued weakness following the president's announcement of reciprocal tariffs on April 2, fearing inflation and potential recession.

Recently, the market faced a slight setback as the S&P 500 dipped due to renewed tariff threats from Trump, including steep tariffs on imported smartphones and a 50% tariff on European goods. However, those concerns diminished significantly on May 27, following Trump's softened stance on EU tariffs and an upbeat consumer confidence report. This renewed optimism propelled the S&P 500 to another rally, driven by improving consumer sentiment.

Over the past two years, the S&P 500 achieved remarkable back-to-back returns of over 20%, bolstered by expectations that the Federal Reserve would adopt a more dovish monetary policy to support employment amidst falling inflation. The surge in artificial intelligence (AI) investment also played a key role, with companies pouring resources into developing AI solutions in response to the successful launch of OpenAI's ChatGPT in late 2022. However, this year's optimism has waned due to the Fed's cautious approach and new competitive pressures from Chinese AI developments.

Despite several interest rate cuts by the Fed in the latter part of the previous year, the central bank has paused further reductions as inflation remains stubbornly above its target. This pause has led to questions about whether lower rates will effectively boost business investment and reduce corporate debt expenses. Compounding these concerns, the emergence of the Chinese-built Deepseek-R1 AI has led to speculation that the peak of AI spending growth may have been reached, potentially prompting major players like Amazon and Google to reconsider their data center investments.

The economic outlook is further clouded by a rising unemployment rate, which has increased from 3.4% in 2023 to 4.2%, and the risk of inflationary pressures reemerging due to tariffs. This has raised doubts about whether the stock market will see the same kind of robust growth as last year. However, the recent sell-off in April was so swift that it left many investors on the sidelines, prompting a "buy-the-dip" mentality among those eager to capitalize on any market weakness before positive news breaks.

Supporting this optimism is the improved consumer confidence report from the Conference Board. After months of decline, the Consumer Confidence Index jumped 12.3 points in May to reach 98, while the Expectations Index, a potential recession indicator, soared 17.4 points to 72.8. While still below the critical threshold of 80, this marked improvement is encouraging.

Stephanie Guichard, a Senior Economist at the Conference Board, noted that the boost in consumer confidence was notably influenced by the stock market's recovery. She highlighted that 44% of consumers now expect stock prices to rise over the next 12 months, a significant increase from 37.6% in April. This positive shift in consumer outlook follows closely after the May 12 trade deal, contributing to the overall sense of optimism in the market.