Why Markets Rally On Mediocrity: Inflation, Tariffs, And The 'Less Bad' Economy

In today’s market, "not as bad as feared" is often good enough. Investors have entered a new psychological phase where the absence of negative surprises—rather than the presence of strong fundamentals—is enough to fuel asset rallies. Whether it's a marginally softer inflation print or the announcement of modest tariffs, financial markets are increasingly reacting with optimism to developments that, in earlier cycles, would have been met with caution or indifference.

This shift speaks less to economic strength and more to expectation management. It’s not the absolute level of growth, inflation, or risk that drives market sentiment—it’s the delta between what investors expect and what actually unfolds.

The Market’s Reset Mindset

The backdrop for this dynamic is a multiyear accumulation of shocks: the COVID-19 pandemic, the inflation surge of 2021–2022, rapid central bank tightening, energy supply disruptions, and persistent geopolitical uncertainty. These events have fundamentally altered investor expectations and recalibrated their threshold for optimism.

Where markets once required evidence of strong growth or disinflation to sustain upward momentum, they now simply need reassurance that things aren't deteriorating further. In this new paradigm, moderate economic data, policy clarity, and even narrowly targeted geopolitical measures can be sufficient to lift equities and compress bond yields.

Moderate Inflation Is Now a Green Light

Recent inflation data is a case in point. Headline and core CPI figures in the US and UK have come in marginally below expectations—still elevated by historical standards but no longer accelerating. This has been interpreted as a sign that the worst of the inflation cycle is over and that central banks can plausibly pause, or at least slow, further tightening.

Markets have responded with relief. Equities have rallied as investors price in a longer period of policy stability, while bond markets have steadied after months of rate volatility. Importantly, a slow pace of disinflation is no longer viewed as problematic—on the contrary, it’s seen as a confirmation of a potential “soft landing.”

This response illustrates how central the inflation narrative remains, but also how low the bar has become. Inflation in the range of 3–4%—well above most central banks’ targets—can now underpin rallies if it suggests stability rather than acceleration.

Tariffs Without Panic

Another surprising source of market support has come from trade policy. The Biden administration’s decision to raise tariffs on Chinese electric vehicles, batteries, and semiconductors could, under normal conditions, have triggered risk-off sentiment. Instead, markets barely reacted—and in some cases, sectoral equities gained.

The muted response stems from how investors are interpreting these tariffs. Unlike the sweeping protectionism of 2018–2019, current measures are seen as tactical, politically motivated, and limited in economic scope. For certain domestic sectors, such as legacy auto manufacturing and industrial materials, they may even offer competitive tailwinds.

Rather than viewing the tariffs as the beginning of a broader trade war, markets appear to see them as manageable friction. This tolerance for mild policy shocks is another symptom of the “less bad is good” framework that now governs sentiment.

Winners in a World of ‘Okay’ News

The current market environment favors sectors and strategies built around resilience and policy predictability. Technology stocks have rallied on the expectation that interest rates may plateau, reducing the discount rate pressure on future earnings. Consumer discretionary stocks have benefited from solid, if unspectacular, household demand.

Meanwhile, cyclical sectors like industrials and materials have gained on the back of modest fiscal policy support and tariff protection. These moves aren't driven by stellar earnings or growth forecasts but by the removal of downside risks that had previously been priced in.

The Central Bank Factor

Central banks, particularly the Federal Reserve and the Bank of England, continue to play a defining role. By signalling a data-dependent approach and refraining from hawkish surprises, they have contributed to market calm even when rates remain high.

Importantly, central bank pauses are no longer seen as temporary holding patterns before further hikes. Instead, they are interpreted as de facto policy stability, allowing investors to extend duration, reweight toward growth assets, and look through near-term volatility.

The absence of surprises from central banks—even without dovish pivots—is reinforcing the "mediocrity equals safety" logic now embedded in market thinking.

But Fragility Remains

This rally on mediocre news is not without risk. Markets may be mistaking short-term stability for long-term resolution. Core inflation remains above target, wage pressures are persistent, and geopolitical risk is structurally elevated. If inflation reaccelerates or growth stalls more sharply than anticipated, the current narrative could reverse quickly.

There is also a risk of complacency. With investor expectations already low, further gains may require actual improvements rather than just the avoidance of deterioration. Earnings resilience, fiscal discipline, and credible monetary policy remain essential—but are no longer being priced with urgency.

Conclusion: The New Normal for Sentiment

Markets are no longer pricing perfection—they’re pricing relief. After several years of volatility, investors are eager for stability, even if it comes in the form of mediocre economic data and limited policy action. In this recalibrated environment, "not-so-bad" has become the new benchmark for success.

Whether this sentiment holds will depend on central banks staying predictable, inflation continuing its slow descent, and policy shocks remaining contained. For now, mediocrity is enough—and that, in itself, may be the most telling sign of the market cycle we’re in.

Author: Brett Hurll