Investing.com -- Markets have staged a strong rally in recent weeks, and according to the Sevens Report, there are three core drivers behind the shift in sentiment, even as some analysts remain skeptical about the sustainability of the surge.
Just a month ago, the market outlook was dominated by fears of stagflation and concerns of a “lost decade” for stocks, but that narrative has flipped.
“In the past month, the S&P 500 has surged basically 10%, the VIX has dropped from 30 to 18 and sentiment indicators have swung more bullish,” Sevens wrote.
Reason 1: Sevens highlighted tariff clarity and limited economic damage. The firm said investors increasingly view the new 10% global tariff regime as manageable.
“Tariff levels aren’t enough to derail the economy,” Sevens said. Despite isolated price increases, like a 40% jump in the price of a Barbie at Target, Sevens notes that “if tariffs rates are 10%,” and cost absorption is split among supply chain players, the consumer burden remains limited.
Reason 2: Inflation may stay low, opening the door to rate cuts, according to the firm. Sevens argues that price increases from tariffs could be offset by falling housing and energy costs, potentially keeping CPI and Core PCE inflation measures contained.
“Once that’s obvious, [the Fed will] cut rates and further support stocks,” wrote the firm.
Reason 3: Valuations may not be as stretched as they appear. Finally, Sevens explained that while 2025 S&P 500 earnings suggest a pricey 22.2X multiple, switching to 2026 estimates brings it down to 20.3X.
That “can be increased at least a ‘turn’ to 21.3X,” implying further upside, stated Sevens.
Despite the positives, the firm cautions against excessive optimism. “The bullish argument has merit and for those that want to follow it, I don’t think they’re fools,” they wrote.
“However, I do think they’re aggressive right now and as such, I continue to think that while short-term momentum is bullish, chasing stocks here remains an unattractive risk/reward proposition.”