By Teresa Rivas

As the S&P 500 nears a fresh record and President Donald Trump's sweeping tariffs remain in question, last month's trade-driven market turmoil is looking more like a spring fever dream.

Markets appear to be betting it won't turn into a nightmare.

The S&P 500 is now on pace for a nearly 6% gain in May and is in the black for the year. The Nasdaq Composite has done even better, rising 9.5% through Wednesday's close and climbing further on Thursday.

That's a far cry from early April, when the chaotic rollout of the White House's surprisingly draconian tariffs sent stocks plunging. The S&P 500 and Nasdaq plummeted 4.8% and 6%, respectively, on April 3, the first trading day after the announcement. At the nadir on April 8, each index had tumbled 12.1% and 13.3% since the tariff shock.

The whiplash is understandable. Trump's trade policies have been almost single-handedly responsible for the wild swings in estimates for economic growth and corporate earnings. After all, the harshest of tariffs from the White House could have led to S&P 500 2025 earnings estimates being slashed by more than a third, while rapid backpedaling on levies has raised some hopes that the trade impact will be negligible.

And the swings continue: On Wednesday, the Court of International Trade ruled against the administration's justification for imposing many tariffs, arguing that the executive branch had exceeded its authority. Then on Thursday, a U.S. Appeals Court granted the White House's request to reinstate them temporarily.

However the court battles shake out, it's likely some form of tariffs will continue to be in place.

The rather muted stock market reaction to the CIT decision -- major indexes were edging higher on Thursday -- reminds us that this isn't the end of the story, however.

In terms of the CIT ruling, Kurt Reiman, head of fixed income Americas, UBS Global Wealth Management, notes the administration could pivot to areas like pharmaceuticals, lumber, copper, and semiconductors.

"These sectors were initially excluded from the 10% baseline tariff because President Trump had intended to levy separate tariffs to reduce the U.S.'s reliance on foreign producers of these products by encouraging domestic production."

Even so, tariff worries have calmed considerably, with growing expectations the levies will be milder than the worst-case scenario -- thanks to trade talks and possibly court decisions. And there are other factors that could propel stocks to new highs once again.

So far, the economy appears to be resilient, with more data than not pointing toward the U.S. avoiding a recession. Earnings season was largely better than feared. Expectations for interest-rate cuts are falling, but there is still some hope that lower inflation will help the Federal Reserve do at least some easing this year. Policymakers are also inching closer to finalizing a deal on tax cuts, even if they disproportionately benefit the wealthy.

Yet perhaps one of the biggest potential catalysts could be the continuing resurgence of the artificial-intelligence trade. Worries about American exceptionalism crumbling amid foreign AI developments like DeepSeek have taken a back seat amid chip deals and ongoing commitments from Silicon Valley. Tech was the main driver of stock returns in 2023 and 2024, so what's good for that sector is good for the market. Then posterchild Nvidia's first-quarter adjusted earnings topped Wall Street forecasts, sending shares higher on Thursday.

"Nvidia's blowout earnings reinforce the idea that innovation can still thrive even in a market full of uncertainty," notes Paul Stanley, chief investment officer, Granite Bay Wealth Management, who believes the report "may just be the catalyst we needed in order for the stock to break out of the range it's been in over the past year."

So what could go wrong from here? Plenty.

We've seen how quickly tariffs can be imposed at sky-high levels. It's worth noting that even at low levels, they remain a headwind that wasn't present at the start of the year. While the latest earnings season may have been calm, but the full impact of tariffs hasn't been felt yet.

The tax bill could drive growth, but it will also increase the deficit when more people are getting increasingly nervous about U.S. debt. At the same time, the unwinding of the yen-carry trade could remove one source of demand for U.S. Treasuries, if investors can no longer borrow the Japanese currency at near-zero interest rates to invest elsewhere.

There's also the question of irreparable reputational harm to the U.S.: Allies and investors alike have less reason to have faith in the government today than they did just last year, if daily policy changes and political quid pro quo seems to trump longstanding alliances.

Ultimately, the market appears to be subscribing to another aphorism as it marches toward new highs: What doesn't kill you makes you stronger. But what doesn't kill you can also leave deep scars -- fevers can be symptomatic of deeper problems.

Write to Teresa Rivas at teresa.rivas@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

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May 29, 2025 15:59 ET (19:59 GMT)

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