Is it riskier to run with the bulls or to watch from the sidelines?

Investor optimism has picked up noticeably as cooler inflation, trade truce discussions and Big Tech results have sparked renewed exuberance in the markets

- Natale Labia

The bulls are back. After a few weeks of wobbles brought on by trade tensions and concerns that mega-cap tech valuations are at odds with reality, markets this week regained their swagger.

A trio of developments - cooler inflation, renewed trade optimism and the onset of Big Tech earnings - has restored animal spirits. Whether this latest bout of exuberance endures through Christmas will depend on whether reality bites.

The first reason for cheer was inflation. Last week's inflation data out of the US was unequivocally good news. Consumer prices are still above the Federal Reserve's 2%, but trending down. September data showed durable goods and core services easing even in areas affected by Trump's tariffs. Investors duly seized on the belief that the disinflationary dynamic remains intact.

Yet, as ever, there are caveats. Goods inflation looks benign largely because car prices, both new and used, have plunged. Strip out autos, and core inflation runs above 4% on an annualised basis. Services tell a similar story. Remove the depressed shelter component (which typically lags other sectors) and "supercore" inflation similarly hovers near 4%, fuelled by steep airfares and other volatile categories.

Regardless, the broad direction is enough to give the market hope. Inflation may not be tamed, but it certainly appears more docile. The market, as ever, is pricing in progress rather than needing perfection. Traders now expect rate cuts until the end of 2025 and into 2026, and believe this will be enough to get consumer sentiment booming again and hopefully breathe life back into a stalling house market.

Trade winds blowing again

A second source of investor optimism lies in geopolitics, or at least the pause thereof. After weeks of bickering and tension, the world's two largest economies are talking again.