Summertime sadness? Definitely not. Summertime madness? Quite possibly.

Another day, another record

The rally in global stock markets since the liberation day tariff tumble continues. Day by day, investors push shares further into record territory.

The latest catalyst for stock market euphoria has been the US–EU trade deal. Such is the power of managing expectations, that a 15% tariff on EU exports to America, with higher levies on key areas like steel, is seen as a good result.

Building on a similar deal with Japan a week earlier, the latest trade truce seems to suggest that tariff fears have subsided since their April peak.

At the same time, investors are viewing the One Big Beautiful tax bill as an unambiguous positive for the economy. It certainly does promise lower corporate and private taxes, funded in part by lower welfare spending. That could be good for markets in the short run.

But the price to be paid longer term is another $4trn of government debt. And that means more bonds to be issued and funded. And in the absence of significantly higher economic growth that almost certainly means higher inflation.

Fiscal dominance

Historically, the only way to manage such an expansion of government debt has been for the central bank to work hand in hand with the Treasury, easing the path to higher fiscal spending with more monetary stimulus. Keeping interest rates artificially low is what allowed the US government to pay for the second world war and, later, for Japan to spend its way out of deflation.

Trying and failing to pull off the same trick in the late 1960s and 1970s is what triggered that decade’s spiralling inflation. And it’s the spectre of that inflation disaster that has hung over central banks throughout the past 50 years.

It explains the tension between US Fed chair Jerome Powell and US President Donald Trump. And it should make investors worry about what happens after Powell’s term at the Fed ends next May.

Fed in focus

The simmering row between the White House and the central bank makes this week’s Federal Reserve interest rate decision all the more interesting. The markets are pricing in only a negligible chance of a rate cut on Wednesday. But they expect one or two reductions later this year, even if inflation sticks persistently above target. Markets are rightly worried about this attack on the independence of the Federal Reserve. It’s why, despite interest rates staying relatively high, the dollar has had such a weak year.

Earnings season

In the long run, it’s company earnings that drive the level of the stock market. And, so far, things look promising on that front. With about a third of S&P 500 companies having reported so far in the second quarter results round, more than 80% of them are beating expectations.

It’s business as usual, with expectations managed down ahead of results announcements only for forecasts to be adjusted upwards again afterwards. And that means that the 7% long-run growth average for company earnings should be comfortably met this time around.

Valuations

That will help to justify the current nosebleed valuations of shares in the US. But with the S&P 500 currently priced at more than 24 times expected earnings, or 3.3 times sales, earnings will have to work very hard to keep the bull market on track.

Fortunately for investors, valuations in the rest of the world are not so stretched. Although the FTSE 100 has broken decisively through 9,000, shares in the UK are still priced at only around 14 times forecast earnings. Although three quarters of global shares are currently in an uptrend, that looks less of a concern in Europe and Asia, where valuations are within their long-term range and not, as in America, at historically scary levels.