U.S. stocks are set to hit new highs, but investors are in a "dilemma": should they chase the rally or wait for a pullback?

After the U.S. stock market has just experienced its strongest May performance in over 30 years, fund managers find themselves in a dilemma.

Not only have they missed this round of rebound, but they also have to make a key decision that could determine their performance for the entire year at the current high levels: Should they chase the rally or wait for a pullback?

On the surface, there seem to be not many factors to fear in the current market. U.S. companies continue to deliver solid earnings, the probability of an economic recession has not surged, and Trump's tariff policy is expected to become clearer soon.

However, institutional investors are facing multiple deep-seated risks, including the escalation of the Russia-Ukraine conflict, uncertainties surrounding Article 899, the return of political risks, potential retaliatory tariffs, and a weakening dollar. Despite being only 2.3% away from its all-time high, the current S&P 500 seems to encounter short-term resistance at 6000 points. Data shows that before last Friday, the index had not seen a fluctuation exceeding 0.6% for seven consecutive trading days, marking the longest period of calm since last December.

While anxiety persists, no one can point to a catalyst for deleveraging, aside from the Trump tariff factor. Eric Diton, President and Managing Director of Wealth Alliance, stated:

"To bring the U.S. stock market back to its historical highs, we must eliminate uncertainty, but most catalysts are elusive until the trade chaos is resolved."

Weak Economic Data, Yet the Market is "Numb" with Euphoria

For U.S. stock traders, the current market seems to have not many factors to fear. U.S. companies continue to deliver solid earnings, the probability of an economic recession has not surged, and President Trump's tariff policy is expected to become clearer soon.

According to Goldman Sachs analysis, the Nasdaq rose 9% in May, and the S&P 500 index rose 6%, marking the best May performance in over 30 years.

The IPO market is witnessing a resurgence of the frenzy seen in 2021. Coreweave surged over 200%, E-toro rose about 30% on its first day, but the real madness occurred with Circle—twice raising its issuance scale, pricing above the upper limit of the guidance range, and at one point soaring 300% after opening, closing up 168% on its first day.

Meanwhile, the artificial intelligence sector has regained momentum. Nvidia's strong earnings report triggered a chain reaction, and Mary Meeker's report predicts that the AI market size will grow from $244 billion in 2025 to $1.01 trillion in 2031.

As the Federal Reserve enters its quiet period before the June 18 interest rate decision, investors are holding their breath for the upcoming CPI inflation data. The market predicts that the consumer price index report will show a 0.3% month-on-month increase in the core reading (excluding food and energy costs) for May, up from 0.2% in April. This would bring the core indicator up 2.9% year-on-year, exceeding the Federal Reserve's 2% target. Wells Fargo economists expect inflation to rebound in the second half of the year.

"We have become numb to inflation because everyone is betting that tariffs will take months to reflect in economic data," said Brooke May, partner at Evans May Wealth Management

"But if hot CPI data emerges, it may lead to another sell-off in the stock market. However, will investors use any pullback to continue buying on dips, or will they choose to sell?"

According to Asym 500 data, over the past three months, the average realized volatility of the S&P 500 on the days of CPI reports, government monthly employment data, and Federal Reserve interest rate decisions has approached 42%, while the reading for all other trading days is 29%.

As complacency spreads, global stock markets face multiple potential risks

However, just as the market begins to believe that tariff and trade risks are under control and the probability of recession is declining, institutional investors find themselves in a "no man's land."

The S&P 500 is lagging behind the MSCI Global Index (excluding the U.S.) by nearly 12 percentage points in 2025, marking the worst relative performance at the beginning of the year compared to global peers since 1993. Bank of America strategist Michael Hartnett stated that as investors flock to risk assets and positions become overly stretched, global stock markets are nearing a technical "sell" signal.

"Once excessive complacency occurs, unexpected risks arise, so I am more cautious about the upcoming summer," said Patrick Fruzzetti, portfolio manager at Rose Advisors.

Political risks are resurfacing. The rupture of the "brotherhood" between Trump and Musk immediately transmitted to the market: the S&P 500 index experienced a sell-off, and Tesla's stock price plummeted by 18% at one point.

The budget reconciliation bill also harbors hidden dangers. Congress is advancing a budget reconciliation bill that extends the 2017 tax cuts and introduces some changes. While capital expenditures and R&D expenses may boost S&P 500 earnings per share, Section 899 has become a focal point for investors.

This section introduces retaliatory tax measures targeting non-U.S. individuals and businesses from countries imposing "unfair foreign taxes." This could impact the EU, Australia, Canada, Norway, Switzerland, and the UK, affecting business income, corporate profits, capital expenditures, operating expenses, foreign investments, as well as dividends, interest, and capital gains.

More concerning is that exchange rate factors are becoming an increasingly important variable. Data shows that the gap in absolute returns between the S&P 500 and the German DAX index is about 20%, but this gap widens to about 30% after adjusting for exchange rates. For the first time in years, dollar exposure is becoming a hindrance rather than a boost. Behind this change are the U.S. 30-year Treasury yield approaching 5%, Moody's downgrading the U.S. credit rating, weak performance in long-term Treasury auctions (with bid-to-cover ratios hitting a new low since 2012), and a noticeable decline in foreign investors' demand for U.S. long-term bonds.

Hidden worries amid the revelry: U.S. stock trading volume hits a new low for the year, market divergence intensifies

Despite the apparent hustle and bustle, last week marked the fourth lowest trading volume week of the year. This divergence in volume and price exposes deep-seated divisions in the market: investors are rotating between quality stocks, large-cap stocks, and growth stocks, leaning towards long-term growth stories with strong balance sheets, while shying away from low-growth and bond-sensitive or weak balance sheet stocksThe current S&P 500 seems to encounter short-term resistance at 6,000 points. Although anxiety persists, no one can point out the catalyst for deleveraging, aside from the Trump tariff factor. As employment data and central bank policy meetings approach, and with a significant tilt of U.S. stock ownership towards households, any changes in employment trends could ultimately affect these households' liquidity needs, leading to selling pressure.

For fund managers who missed the rebound, this question becomes increasingly urgent: should they chase the rally and reallocate now, or wait for a slight pullback? At this uncertain moment, this could be a key decision that determines performance for the year