Reconciling the myriad tailwinds supporting U.S. stocks near record highs and the laundry list of potential hurdles that have the potential to catalyze equity weakness on the way to making a decisive directional call is virtually impossible in the current environment due to the sheer number of embedded contingencies in the narrative.

I’ve talked a ton about this over the past couple of weeks, with the most poignant piece perhaps being the deliberately comical “Pepe Silvia”.

What makes the situation even more vexing than it already would be is the fact that the very same policies which are responsible for the euphoria in U.S. stocks are also at the heart of international risk sentiment malaise. Late-cycle fiscal stimulus stateside is bullish for U.S. equities as it underwrites record corporate profits, catalyzes buybacks, and supercharges the domestic economy, but it’s a severe drag on emerging markets to the extent it forces the Fed to lean more hawkish than they otherwise might, driving the policy divergence between the U.S. and the rest of the world wider and underpinning dollar strength.

(Bloomberg dollar index)

U.S. trade policy also serves to perpetuate the performance divergence by denting the prospects for global growth and causing palpable angst for developing economy policymakers which in turn further incentivizes investors to seek out the relative safety of U.S. assets.

Midway through last month, the dollar took a breather, helping to buoy EM sentiment, which paradoxically helped lift U.S. stocks to new records. Generally speaking, the consensus narrative now revolves around the notion that the historic divergence between U.S. stocks and the rest of the world needs to resolve itself in order to avoid spillover from EM turmoil to Wall Street, and to the extent a weaker dollar helps that resolution manifest itself in EM assets outperforming U.S. stocks in the back half of the year, that’s actually a good thing if it means an outright EM crash doesn’t finally boomerang back to the previously bulletproof S&P.