The “Tightrope Walk” of U.S. Equities Continues: Three Optimistic Misconceptions and Two Known Unknowns

TradingKey - Tariff risks and concerns over economic slowdown have dominated trading sentiment throughout 2025 — yet risk assets like the S&P 500 and Nasdaq Composite continue to hit record highs.

Looking ahead, HSBC argues that many investor worries about inflation and valuations are overblown, while other analysts warn that markets may be too confident — setting the stage for potential disappointment.

The Q2 earnings season for U.S. equities is set to begin next week. Analysts broadly expect another weak earnings print — but with estimates already at a low bar, any upside could appear more significant than it actually is.

HSBC: Three Market Misconceptions

HSBC analysts identified three key risks that investors may be misjudging:

1. Tariffs Are Less Fearsome Than ExpectedNot all investors are worried about trade tensions. With the U.S.-China tariff truce holding and many trade disputes put on hold, market sensitivity to tariff news has clearly declined — as reflected in recent equity gains.
2. No Clear Inflation Spike YetWhile tariffs may lead to higher prices, so far, this impact has not materialized. Inflation remains under control — and markets are showing little reaction to the possibility of future price pressures.
3. Valuations Aren’t That HighConcerns over stretched valuations may also be exaggerated. If measured using an equal-weighted approach, the S&P 500 is only slightly above its long-term average.

HSBC also argued that corporate responses ahead of tariff implementation — such as cost-cutting and supply chain adjustments — may help companies outperform the most pessimistic forecasts, which reflect the largest downward revisions in three years.

Overconfidence Adds Risk

Reading too much into positive trends can be dangerous.

According to Thrasher Analytics, the percentage of declining stocks by volume across U.S. exchanges fell to 42% last month — the lowest since 2020.

This suggests that investor optimism during the recent rally may have been excessive — and could foreshadow a market correction.

Historically, overly bullish sentiment has often preceded S&P 500 pullbacks — as seen in 2020, 2019, and 2016.

A Positive Signal — or a Warning?

DataTrek noted that the recent decline in volatility is usually a sign of market calm — and the VIX index has fallen to its lowest level since late February.

However, the firm’s analysts warned that falling volatility may also indicate investors are underestimating known unknowns: trade uncertainty and slowing growth.

JPMorgan CEO Jamie Dimon echoed similar concerns this week, pointing out that:

• Investor complacency around trade tensions is growing
• The U.S.-EU deal remains fragile
• There's still a 40–50% chance of rate hikes, rather than the widely expected cuts