As markets continue to break records, where to now for stocks after this ‘hated’ rally?

It could feasibly be one of the most reviled sharemarket rallies since Covid-19 swept the globe but investors who didn’t panic sell during the February-April drop have done very well.

The scale of the rebound in stocks over the past two months has caught many by surprise. Picture: Getty Images

It could be one of the most hated stock market rallies since the Covid-19 era.

But there is some common ground in the potential for a short-term dip.

With President Donald Trump dialling back his trade war after the US stock market hit bear-market territory and US bond yields shot up in early April, the MSCI All-Country World index has risen as much as 24 per cent in two months, hitting record highs for the past five consecutive days.

Australia’s ASX 200 has followed suit, hitting a record high of 8639.1 points on Wednesday.

In the US, the S&P 500 is now less than 2 per cent off its record high, driven by a 33 per cent rise in the Nasdaq Composite where Nvidia has bounced 66 per cent.

The scale of the rebound in stocks over the past two months has caught many by surprise.

But investors who didn’t panic sell during the February-April drop have done very well.

“Just doing nothing has turned out to be the best strategy, followed by the few who bought when the market was sold off,” Bell Potter head of institutional sales and trading Richard Coppleson said.

“Those that did panic sell or sold short and refused to buy as the rally gained momentum have hated it as they have been waiting for a big sell-off that hasn’t eventuated.

“They will be the buyers on the dip now when we see the next sell-off, thus it will only be 5 to 7.5 per cent.”

It was only four weeks ago that Bank of America’s survey of global fund managers found that the big ones were a net 38 per cent underweight on US stocks, which was the most in two years.

BofA’s survey, taken just before the US-China trade talks in Geneva, was “bearish enough to suggest pain trade modestly higher”, the bank’s strategist Michael Hartnett wrote at the time.

JPMorgan chief of global markets strategy Dubravko Lakos-Bujas also said the “pain trade” was upward after the US economy and consumers showed surprising resilience to extreme policy uncertainty this year.

“Given the encouraging fundamental backdrop combined with the Trump administration’s pivot from tariffs to tax cuts at a time of low investor positioning, we expected the pain trade for equities remains to the upside in the short term,” he said.

Even after a V-shaped rebound in global equities, investor positioning was light to moderate and sentiment lukewarm as investors were more focused on hedging than equities hitting new highs, and realised volatility was far from average levels, Mr Lakos-Bujas said.

“Absent major policy surprises, the path of least resistance is to new highs supported by tech/AI-led strong fundamentals, a steady bid from systematic strategies on improving volatility and momentum signals, and flows from active investors on dips.”

Perhaps it’s taking time for fund managers to change their views and increase their weightings.

Of course once they have done so, the stock market could be vulnerable to another sell-off.

But it could first punch through to another record high in a “melt-up” scenario.

Still, while the overall de-escalation of the trade war since Trump paused the country-specific tariffs on April 9 and also paused the retaliatory tariffs on China has happened, the stock market is back up to price and valuation levels that seem to imply no significant increase in tariffs will be sustained.

According to Morgan Stanley Wealth Management chief investment officer and head of the global investment office Lisa Shallet, the previous bull narrative exhausted itself well before Inauguration Day and the new bull market was “still seeking a rationale to drive to all-time highs”.

While many suggest the powerful retracement is tied to corporate profit resilience and trust in an imminent capex-driven productivity boom, she views it with some caution.

With bulls focused on 2026 earnings-growth reacceleration, market action has essentially re-expanded multiples despite a higher neutral policy rate and required material productivity gains.

While plausible given potential surprises from Washington, it’s not backed by chief executive confidence.

Similarly, conviction in profit-margin expansion conflicts with ISM surveys suggesting businesses’ “prices paid” are surging ahead of “prices received” and capex dynamics are discouraging, as durable goods orders have fallen down recently.

While markets are anticipatory, she said this rally was “struggling with a credible narrative”.

Ms Shallet recommended active stock picking from here, as the passive index undergoes “compositional rotation”, and the so-called “Magnificent Seven” is no longer acting as a correlated block.

She tells clients to use risk-asset repricing to rebalance and position for higher volatility, higher real interest rates, a weaker US dollar and potential US stocks returns of just 5 to 10 per cent over the next 12 months and that “this isn’t the time to count on valuation expansion”.

Ms Shallet favours diversifiers in international equities, commodities, energy infrastructure and hedge funds, and overweights in short-to-neutral duration investment grade and municipal bonds.

Morgan Stanley chief investment officer Mike Wilson said there was no need to fight the rally as the rate of change in the breadth of US earnings revisions was improving, Trump was shifting from growth-negative to growth-positive policies and a widely expected slowdown in US growth was “priced in”.

While “risks do persist which can lead to some choppiness in price action”, it would take a “new shock” that causes an “adverse reaction in the labour market” to cause “material downside” in stocks.

Originally published as As markets continue to break records, where to now for stocks after this ‘hated’ rally?