Wall Street sees AI, rate-cut optimism fueling rally

President Trump’s tariffs weren’t enough to derail the stock market rally last week as the S&P 500 (^GSPC) and Nasdaq Composite (^IXIC) continued to hover near record highs.

Wall Street strategists point to other factors fueling the major averages higher: optimism over the AI trade and expectations that the Federal Reserve will cut rates in September.

“August could very well be a little bit of a volatile month,” Gargi Chaudhuri, BlackRock chief investment and portfolio strategist for the Americas region, told Yahoo Finance on Thursday morning.

“I don’t know that any pullbacks we see in the market will be long-lived. I think they’ll be short-lived in nature,” she added, highlighting that investors may want to add short-term, fixed-income investments to their portfolios as a way to diversify.

Even as Trump’s tariff deadline landed on Thursday, with imports from nearly 200 countries now facing duties ranging from 10% to 50%, strategists downplayed longer-term risks to equities.

Read more: The latest news and updates on Trump’s tariffs

“Our base case remains that the US effective tariff rate will settle at around 15% — enough to weigh on growth and lift inflation, but not enough to derail the US economy or the equity rally,” said Ulrike Hoffmann-Burchardi, global head of equities at UBS Global Wealth Management.

Strategists also point to companies’ ability to navigate the tariff front, with heavyweights like Apple (AAPL) and TSMC (TSM) receiving exemptions due to their US investment commitments.

“On a margin and short term, sure, the tariffs will affect earnings,” Rockland Trust vice president and portfolio manager Michael Sayers told Yahoo Finance.

“But once the tariffs rates are finally set, then it will be a one-time adjustment to company earnings, and then I think long-term fundamentals will take over.”

Overall earnings have come in strong this season, with roughly 82% of the companies that reported beating estimates, according to Bloomberg data.

Wall Street has its eyes set on the AI trade, which has led the market. Data analytics firm Palantir (PLTR) saw its market cap balloon past $420 billion this week after posting a boom in revenue and contracts.

Bullishness around AI followed strong quarterly results from software and cloud leader Microsoft (MSFT), social media giant Meta (META), and cloud and search engine provider Alphabet (GOOGL, GOOG), all among the biggest data center spenders.

“I think the big story that’s driving the market, as it very well should, is how the large-cap, quality tech and friends — if we can call it that name — continue to have absolutely stellar earnings growth,” said Chaudhuri.