After a rocky start to the year, markets have not only stabilized, they’re showing signs of turning higher. Volatility has eased, investor sentiment has improved and the S&P 500 continues to climb. Last week’s earnings from

Microsoft Corp.

and

Meta Platforms Inc.

added fuel to the rally, with both companies delivering standout results that exceeded expectations and lifted guidance. Microsoft’s AI business is now running at a US$13 billion annualized pace, up 175 per cent year-over-year, while Meta’s ad revenue surged past US$46 billion. These results underscore the strength of market leadership and the role mega-cap tech continues to play in driving index performance.

But this isn’t just a tech story. Beneath the surface, there’s a broader narrative unfolding, one of momentum, but also of divergence. This earnings season has been strong overall, with 80 per cent of S&P 500 companies beating expectations and blended earnings growth rising to 6.4 per cent year-over-year as of last week. Yet the gap between winners and losers is widening.

United Parcel Service Inc.

, for example, dropped more than 10 per cent after missing slightly on earnings and declined to issue forward guidance. Chief executive Carol Tomé cited “uncertainty around trade policy and peak season demand” — a reminder that global trade flows are softening and U.S. manufacturing and consumer demand are cooling.

AI and liquidity are keeping the rally alive

What is keeping markets afloat is a powerful combination of AI-driven optimism and abundant liquidity. The

artificial intelligence

investment cycle is in full swing, with hyperscalers and chipmakers leading the charge. Meanwhile, financial conditions are as loose as they’ve been since the post-financial meltdown zero-rate era. U.S. money supply hit a record US$22.02 trillion in June, up 4.5 per cent year-over-year — the fastest pace since July 2022. Even inflation-adjusted money supply is rising.

And now, there’s a new potential tailwind: fiscal stimulus. The Trump administration is pushing for a wave of pro-growth spending and pressure is mounting on the

U.S. Federal Reserve

to accommodate. Two Fed officials recently dissented from the decision to hold rates steady — one of the biggest splits in a generation. If the Fed bends to political pressure and liquidity continues to expand, the risk may not be a slowdown — but a melt-up, with an unsustainable increase in the price of assets.

But cracks are still forming

Despite the momentum, signs of weakness are emerging — they’re just not getting much attention. There was massive downward revision to U.S. job growth in May and June showing a net change in nonfarm jobs of -258,000 over those two months. The U.S. Conference Board’s labour-market differential — the gap between the percentage of consumers saying jobs are “plentiful” versus those saying they’re “hard to get” — has fallen to its lowest level since 2017. Second quarter U.S. gross domestic product (GDP) came in at a strong three per cent, but much of that was driven by a collapse in imports, which artificially boosted the headline. Real final sales to private domestic purchasers — a better measure of core demand — rose just 1.2 per cent. Business investment is slowing, labour supply remains constrained, and tariff uncertainty is rising.

On the geopolitical front, the EU–U.S. trade deal helped avoid a 30 per cent tariff shock, settling instead at 15 per cent. But the calm may be short-lived: U.S. President Donald Trump has threatened to impose 35 per cent tariffs on Canadian exports not under the Canada-United States-Mexico Agreement starting in August. Japan’s sovereign debt stress and concerns about the Fed’s independence are also lurking in the background.

The S&P 500’s equity risk premium is just 2.25 per cent — the lowest in two decades. The index’s market cap now equals 28 times real disposable personal income, a record. For context: It was 13x at the 2000 dot-com peak and 25x during the 2021 meme stock frenzy. Ten stocks now make up 40 per cent of the index — a level of concentration that makes the market more vulnerable to shocks in just a handful of names.

Enjoy the ride — but stay alert

This is a market with momentum, leadership, and liquidity — and the potential for a melt-up if fiscal tailwinds and AI enthusiasm persist. But it’s also a market where risks are being overlooked. Seasonal weakness could return this fall, just as the full impact of tariffs begins to bite. If the Fed grants Trump his wish and keeps liquidity flowing, the rally may continue. But if not, the narrative could shift quickly. For investors, the message is clear: enjoy the ride, but don’t lose sight of the risks.

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Martin Pelletier, CFA, is a senior portfolio manager at Wellington-Altus Private Counsel Inc., operating as TriVest Wealth Counsel, a private client and institutional investment firm specializing in discretionary risk-managed portfolios, investment audit/oversight and advanced tax, estate and wealth planning. The opinions expressed are not necessarily those of Wellington-Altus.

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