By Jacob Sonenshine

Some investors might be worried about the stock market, given President Donald Trump's policy gyrations and the way he communicates his plans. Don't be.

The market has shrugged off the noise: The S&P 500 rose to 6000 this week, up 20% from its 2025 low hit in early April--and not far from the index's February record close of 6144. But the reality is that the U.S. economy is resilient, supporting the recent rally.

True, the index may have come too far too fast in the short-term: The S&P more than erased all of its losses from early April when Trump announced sweeping tariffs on U.S. trading partners. But the S&P 500 has plenty of wind at its back to push it higher over the coming few years.

For now, tariffs are a concern. They've already caused companies to see higher costs and lift prices. While the White House has rolled back a chunk of the initial tariffs announced in April, the baseline 10% tax on imports is in place, providing impetus for some inflation. Walmart and other companies have said they could raise prices further soon. Inflation could come in a little too high later this year--keeping interest rates elevated and reducing consumer demand.

Wall Street also took note of this week's public spat between Trump and Tesla CEO Elon Musk, who traded barbs with each other online. Though their feud could present problems for Tesla, it's less important for the broader market.

The more pressing concern: The government spending that would result from Trump's "One Big Beautiful Bill," which Congress has yet to pass.

The Committee for a Responsible Federal Budget, a nonprofit, non-partisan organization, predicts the bill would add $3 trillion to the federal deficit through 2034 and would increase the annual deficit by 17% from last year's $1.8 trillion. The deficit would also rise as a percentage of economic output to 7%, according to the CFRB.

The government would need to finance this deficit by borrowing more money--which would push Treasury yields up and raise the cost of borrowing for people and businesses.

However, the stock market may be right in taking all of these policy developments in stride.

Morgan Stanley economists and policy analysts wrote in a note Friday that if the bill passes this year, the fiscal spending would boost total U.S. gross domestic product by 0.2% in 2026. They emphasized markets will focus less on the short-term mathematical impact and more on the aftereffects of any resulting increase in rates.

That could be good news: Rates are unlikely to skyrocket, and government spending may not send inflation drastically higher. The yield on the 10-year Treasury note is currently around 4.5%, roughly where buyers have repeatedly rushed in this year to buy bonds, sending their prices higher and yields lower. The few spikes above 4.5% have been mild and short-lived.

This yield is attractive to investors because expectations for average annual inflation for the coming decade, given the pricing in the Treasury Inflation-Protected Securities market, have risen to only 2.3%. That's up only a tiny bit from a 2025 low of 2.2%, according to the St. Louis Fed. This also means Treasury bond investors can earn a return that easily beats inflation -- encouraging more bond-buying and stable yields.

Tariffs, the mild inflation that could come, and the fact that the Federal Reserve has held off on lowering the federal funds rate, force markets to assume that consumers won't spend enough money to cause a more substantial jump in inflation.

The latest jobs report supports this. In May, the U.S. added fewer jobs than it did in April--and far fewer than it did in late 2024--as companies temper their expectations for demand.

"The economy will grow and inflation will stay relatively moderate," says economist Ed Yardenia of Yardeni Research, who notes that the bond market is focused on the many factors that drive inflation, not just fiscal policy. "Interest rates will stay around here."

Specifically, Big Tech spending should aid economic growth. Microsoft, Meta Platforms, Amazon.com, Alphabet, and Apple indicated on their first-quarter earnings calls that combined, they expect to spend hundreds of billions of dollars this year--translating to double digit year-over-year percentage growth--and likely new jobs.

These companies need to keep spending to keep their products competitive--and most of these businesses have the financial capacity to do it. Most of them have more cash than debt. Combined, their cash totals almost $400 billion--almost 13% of U.S. output.

"Technology is something you have to keep spending on no matter what to stay competitive and that's another source of the [economic] strength," Yardeni says.

Overall, mild economic growth would validate the fact that analysts expect continued aggregate earnings growth for the S&P 500 over the coming few years, according to FactSet. Earnings growth pushes stock prices higher, as long as rates remain largely stable, restoring confidence in the economy.

That's why the bull market has rolled on--and will continue over the long-term.

Write to Jacob Sonenshine at jacob.sonenshine@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

June 07, 2025 14:07 ET (18:07 GMT)

Copyright (c) 2025 Dow Jones & Company, Inc.