The Stock Market’s Struggles and Potential Catalysts for Recovery

The stock market has faced significant challenges in recent months, largely due to concerns over tariffs and the ongoing trade war initiated by President Donald Trump. Despite these struggles, Wall Street research firm BCA Research has identified several potential catalysts that could spark a turnaround and propel the market back toward its all-time highs. While these scenarios are considered longshots, they are plausible and warrant attention from investors.

1. A Shift in Trump’s Trade Policy

One potential catalyst for a market recovery could be a change in President Trump’s trade policy. Historically, Trump has closely tied the success of his presidency to the performance of the stock market. However, his administration has recently signaled a shift in priorities, with Treasury Secretary Scott Bessent indicating that the White House is willing to tolerate market volatility in pursuit of its policy goals. Despite this, BCA Research suggests that if the market decline becomes too steep, Trump may soften his stance on tariffs. The firm notes that the American public’s tolerance for economic pain, particularly if it appears self-inflicted, is relatively low. This could pressure Trump to backtrack on his trade policies to avoid further market downturns.

2. Stability in Bond Markets

Another potential driver of a market turnaround could be stability in the bond markets. Investors have expressed concerns that bondholders might rebel against Trump’s plan to extend his 2017 tax cuts, leading to a sell-off that could drive up yields and harm stock prices. However, BCA Research points out that this scenario has not yet materialized. The yield on the 10-year U.S. Treasury bond, a key indicator of long-term interest rate expectations, spiked earlier in the year but has since declined, suggesting that concerns about the fiscal situation have eased. The firm advises investors to keep a close eye on Treasury term premia to gauge whether risk premia on bonds are rising to dangerous levels. So far, this does not appear to be the case.

3. Economic Growth in Europe

A third potential catalyst for a market recovery could be improved economic growth in Europe. Fiscal stimulus and structural reforms in the European Union and other regions could boost global growth, which would have a positive impact on U.S. markets. BCA Research highlights the potential for gains from reducing internal trade barriers, noting that such reforms could raise GDP in countries like Canada by as much as 8%. European stocks have already outperformed the S&P 500 this year, with the EURO STOXX 50 Index rising 9% since January. This momentum could spill over into U.S. markets if European growth continues to accelerate.

4. Declining Energy Prices

A fourth potential driver of a market turnaround could be declining energy prices. Oil prices have already fallen this year, with Brent crude dropping from a peak of $82 per barrel to around $70 per barrel. BCA Research suggests that further declines in energy prices could provide a boost to stocks, as lower oil prices have historically been a positive signal for the market. The firm notes that increased production, including plans by OPEC+ to ease production curbs and Trump’s push to expand U.S. energy infrastructure, could contribute to further price declines. While oil prices are already depressed, additional supply increases could push prices even lower, benefiting consumers and businesses alike.

5. AI-Driven Productivity Gains

Finally, BCA Research identifies the potential for artificial intelligence (AI) to drive significant productivity gains as a key catalyst for a market recovery. The firm estimates that the impact of AI on economic growth could be as transformative as the agricultural and industrial revolutions, with growth scaling anywhere from 30 to 100 times. While these gains may take time to materialize, the U.S. is currently in the midst of an AI investment boom, which could lead to long-term economic benefits. However, the firm also cautions that the returns on these investments may depreciate over time, posing a risk to investors.

Conclusion: A Cautious Optimism

While BCA Research maintains a bearish outlook on equities, the firm acknowledges that these potential catalysts could challenge its thesis and spark a market recovery. Investors should remain open-minded and closely monitor these factors, as they could lead to a resurgence in the stock market and a return to all-time highs. However, the firm’s overall bearish stance serves as a reminder that the road ahead is uncertain, and investors should approach these potential catalysts with caution. By staying informed and adaptable, investors can better navigate the challenges and opportunities presented by the current market landscape.