Markets Are Up, But Could a Pullback Be Near?

Markets found fresh momentum this week after another round of central bank cuts. The U.S. Federal Reserve reduced its key interest rate for the second time this year, aiming to support growth and hiring even as inflation remains above target. The Bank of Canada followed, trimming its policy rate to 2.25% and signalling that further easing may be limited. The goal: keep inflation near 2% while helping the economy adjust to slower momentum.

Despite ongoing concerns about tariffs, growth, and shifting Fed policy, investor confidence remains strong. In fact, the Barclays Equity Euphoria Indicator, which tracks investor sentiment, shows bullishness near multi-year highs. The biggest fear now isn’t about losing money but rather the fear of missing out (FOMO). However, investors have to keep in mind that after such a strong rally, a brief pullback in the markets would be normal, not alarming.

So, what could challenge the current bull market? Three key risks stand out:

1. U.S. Recession: Tariffs remain elevated, and private payroll data suggest hiring momentum is slowing. If that continues, growth could lose traction.
2. Higher Inflation: Inflation has hovered around 3% for nearly two years. Strong fiscal spending, tight labour markets, and trade restrictions could keep prices higher for longer.
3. An AI Reality Check: AI-related stocks have powered much of this year’s gains, but real-world profits haven’t caught up. A sentiment shift could spark volatility in tech.

Despite these risks, the broader outlook remains encouraging. Europe and China are showing signs of renewed growth, governments are still spending, and most central banks are easing policy rather than tightening.

For investors, the takeaway is clear: stay diversified, stay disciplined, and stay invested. Volatility is part of every market cycle, but today’s environment still favours a balanced, long-term approach.