NEW YORK (Reuters) -After months of Wall Street gyrations to the twists and turns of U.S. trade policy, signs suggest stock investors are becoming more resilient to developments and cautiously defaulting to optimism that they have weathered the worst of the tariff-related shocks.

U.S. equities have edged higher over the past two weeks as they digest a sharp rally that has brought the benchmark S&P 500 within 3% of its February record high, fueled in part by easing fears about the economic fallout from tariffs.

 A case in point: stocks ended Monday's session higher even as markets had grappled with President Donald Trump's announcement of doubling steel tariffs to 50%.

Trump's stunning "Liberation Day" tariff announcement on April 2 sent stocks plunging and set off some of the most extreme market swings since the onset of the COVID-19 pandemic five years ago.

Since then, volatility measures have moderated considerably, and, with the market's rebound, there are signs that technical damage from the slide has healed. Still, investors are mindful that markets remain susceptible to daily swings stemming from negotiations between the U.S. and trading partners as key deadlines near in coming weeks, with elevated valuations making stocks more vulnerable to disappointments.

"What has allowed this almost full recovery in the stock market hinges on the negotiations that are now under way," said Angelo Kourkafas, senior investment strategist at Edward Jones.

"Markets, consumers and businesses have vested interest that we get clarity sooner than later," Kourkafas said. "So potentially it's going to be a critical summer that is going to test the market's momentum."

After falling to the brink of confirming a bear market on April 8, the S&P 500 has surged back nearly 20% and erased its losses for the year. Near the halfway mark of 2025, the index is now up 1.5%.

While Trump's tariffs remain a risk, the market no longer is perceiving them as "this big outlier event," said Keith Lerner, co-chief investment officer at Truist Advisory Services. 

"We went through a period where the only thing that mattered for the markets was tariffs," Lerner said. "And now we are in a period where tariffs still matter, but they are not the only thing that matters."

Truist is among the firms becoming more upbeat on the outlook for equities, with RBC Capital Markets and Barclays this week lifting their year-end targets for the S&P 500.

Deutsche Bank strategists this week boosted their year-end target to 6,550, about 10% above current levels, as they cited a less severe expected tariffs hit to corporate profits.

The strategists noted they expect the rally to be "punctuated by sharp pullbacks on repeated cycles of escalation and de-escalation on trade policy."

Several investors and strategists pointed to a "base case" on Wall Street emerging for Trump's tariffs - 10% broadly, 30% on China along with some specific sectoral levies.

The market "started saying the worst is behind us in terms of this whole tariff discussion," said King Lip, chief strategist at BakerAvenue Wealth Management. "The U.S. and China still have a lot of things to work out, but likely the worst is behind us."

MODERATING VOLATILITY

Volatility measures indicate calming fears about trade. The Cboe Volatility Index, an options-based measure of investor anxiety, reached 52.33 in early April, its highest closing level in five years, but has steadily receded and hovered at 17.6 on Wednesday, around its long-term median.

In another sign, the average daily range of the S&P 500 has fallen to about 75 points, on a 10-session basis, about one-third the size from April during the height of post-Liberation Day volatility.

Meanwhile, the S&P 500 has traded above its 200-day moving average - a closely watched trend-line - for about three weeks. The percentage of S&P 500 stocks trading in some form of an uptrend has jumped from 29.4% at the April 8 low to 60% as of last week, said Adam Turnquist, chief technical strategist for LPL Financial.

"There is a growing list of technical evidence that suggests this recovery is real," Turnquist said in a note this week.

Options data also suggests growing bullishness. Over the last month, on average about 0.84 S&P 500 call options traded daily against every put contract traded, the most this measure of sentiment has favored call contracts in at least the last four years, according to a Reuters analysis of data from options analytics firm Trade Alert. 

Calls confer the right to buy stocks at a specific price and future date, while puts grant the right to sell shares. 

To be sure, some investors warn the threat of tariff disruptions is not going away anytime soon and are wary of market complacency.

"There is still just so much uncertainty," said Matthew Miskin, co-chief investment strategist at John Hancock Investment Management. 

Indeed, talk of the acronym "TACO" - Trump Always Chickens Out - has spread on Wall Street as a rationale for why markets should not fear harsh tariffs because many believe they will likely be walked back. But some investors are worried about a backlash from the president.

BCA Research strategists said they were wary of "relying on a TACO backstop."

"Trade tensions may have peaked, but we are unwilling to assume they won't sporadically rise from current levels," BCA said in a note this week.

Stock valuations also continue to swell, with the S&P 500's forward price-to-earnings ratio reaching 21.7, its highest level since late February and well above its long-term average of 15.8, according to LSEG Datastream.

Stocks are at "a more vulnerable level," said Chuck Carlson, chief executive officer at Horizon Investment Services. "The market is probably going to be a little bit more sensitive to what it perceives as negative news."