The S&P 500 has rebounded sharply from its early April lows, rising approximately 14% following President Trump’s announcement of a 90-day pause on most tariffs, excluding those on Chinese goods. This policy shift sparked optimism and a swift rebound in equity markets, with the S&P 500 reclaiming levels last seen around the “Liberation Day” announcement. The Volatility Index (VIX) confirmed this reversal in sentiment, posting its second-largest four-week decline on record, falling nearly 50% and closing below 23.
Yet beneath this apparent calm, signs of fragility persist. Market internals and macroeconomic indicators suggest that this rally may not be built on a durable foundation, and that the economic impact of unresolved trade tensions could still disrupt the market’s fragile footing.
The Rebound in Context
The relief rally was fueled by hopes that the tariff pause might ease economic pressures. However, the continuation of tariffs on Chinese imports, a country that accounted for 13.8% of total US imports in 2024, or approximately $462.6 billion, preserves stress on a critical link in the global supply chain. The 145% tariff on these goods has already begun to distort trade flows. The Port of Los Angeles, for example, expects a 30.4% drop in weekly container arrivals and has canceled 17 scheduled May sailings. These developments highlight the fragility of US-China trade relations and underscore the risk that this rebound could prove short-lived without further policy clarity or resolution.
Source: Trading Economics as of YE 2024
Breadth and the Illusion of Strength
While index-level gains paint a picture of strength, the underlying market participation tells a different story. A narrow subset of large-cap technology stocks has powered much of the rally, with the percentage of S&P 500 constituents trading above their 200-day moving average in notable decline. This divergence between index performance and broader market participation is characteristic of bear market rallies and raises questions about the sustainability of current price levels.
Importantly, the dramatic decline in the VIX may signal not just relief, but complacency. A sharp drop in volatility can reflect the unwinding of hedges or an overreaction to short-term news, leaving markets vulnerable if economic or geopolitical risks reemerge.
Source: Macro Micro as of May 6, 2025
Macro Stress Signals Remain
The broader economic picture is also clouded. US GDP contracted by 0.3% in the first quarter of 2025, marking a potential inflection point in the post-pandemic expansion. Notably, these figures do not yet reflect the potential downstream effects of prolonged trade tensions or supply chain disruptions. Market-based models now place the odds of a technical recession, defined as two consecutive quarters of negative growth, at 55% for this year.
Labor market data provides mixed signals. April saw a stronger-than-expected gain of 177,000 jobs, but year-over-year job growth has slowed to just 1.2%, its weakest pace since March 2021. Meanwhile, announced job cuts have surged to their highest year-to-date total since the COVID recession, pointing to rising stress beneath the surface of the labor market.
Conclusion
The equity rally in recent weeks reflects renewed investor optimism, but it may be masking deeper structural vulnerabilities. Concentrated market leadership, a declining economic growth trajectory, and unresolved trade policy risks all suggest that caution remains warranted. As markets move forward, the underlying health of the economy, not just headline price action, will determine whether this rebound has legs or merely represents a temporary pause in a more volatile path ahead.
