After months of a ceaseless rollercoaster ride driven by trade policy announcements, it appears stock investors are finally developing a thicker skin. There’s a cautious optimism bubbling up, suggesting that the worst of the tariff-related shocks might just be behind us.

Consider this: the S&P 500, that ever-important benchmark, has managed to claw its way back within a stone’s throw of its February record high. This rebound comes even after the political leader recently announced a doubling of steel tariffs. 

Remember that “Liberation Day” tariff shock back in April? That sent stocks plummeting and sparked some of the most extreme market swings we’ve seen since the early days of the global health crisis five years ago. 

Yet here we are, with volatility measures considerably moderated, and the market seemingly patching up the technical damage from that slide.

But we can’t get too comfortable. Investors are acutely aware that the markets remain susceptible to daily swings as trade negotiations continue and key deadlines loom. With valuations currently elevated, any disappointment could make stocks particularly vulnerable. As one strategist wryly noted, “What has allowed this almost full recovery in the stock market hinges on the negotiations that are now under way.” It seems we’re entering a “critical summer” that will truly test the market’s momentum.

Despite the ongoing risk of tariffs, the market is no longer viewing them as some “big outlier event.” We’ve moved beyond the period where tariffs were the only thing that mattered; now, they still matter, but they’re part of a broader landscape. Indeed, some major financial institutions are becoming more upbeat, even raising their year-end targets for the S&P 500, citing a less severe expected hit to corporate profits from these trade measures. The emerging “base case” on Wall Street seems to be a general tariff rate of 10%, with a higher 30% on a major trading partner, alongside some sector-specific levies.

The calming fears are also reflected in volatility indicators. The options-based measure of investor anxiety, the Cboe Volatility Index, which spiked dramatically in early April, has steadily receded to levels around its long-term median. The daily range of the S&P 500 has also shrunk considerably from the height of the “Liberation Day” volatility. Moreover, a growing list of technical evidence suggests this recovery is, in fact, “real,” with a rising percentage of S&P 500 stocks in an uptrend. Options data, too, points to increasing bullish sentiment.

Now, a word of caution from the skeptics: the threat of tariff disruptions isn’t simply going to vanish into thin air. Some investors are wary of market complacency, particularly given the notion that the political leader “Always Chickens Out” from the harshest tariff threats.

While this “TACO” theory provides some comfort, there’s a lingering concern about a potential backlash. Moreover, stock valuations are, well, rather plump. The S&P 500’s forward price-to-earnings ratio is at its highest since late February, significantly above its long-term average. This elevated state makes the market a little bit more sensitive to what it perceives as negative news.

So, while the market has shown a remarkable ability to shrug off some of the initial tariff pain, the underlying uncertainty from trade policy remains a potent ingredient in the investment mix. It’s a delicate dance between optimism and apprehension, and it seems investors are figuring out their rhythm.