*

Stock rally largely driven by retail investors and share

buybacks

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Institutional positioning in equities remains underweight

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Avoiding a major tariff escalation could help ease

near-term

market worries

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Upcoming economic data and Q2 results key for assessing

the U.S.

economic outlook

By Saqib Iqbal Ahmed

NEW YORK, July 4 (Reuters) - Investors will be keeping a

close eye on tariff headlines out of Washington next week, as a

temporary suspension of punitive import levies is set to expire.

If that Wednesday deadline passes without an increase in trade

tensions, it could prove positive for the markets.

Negotiators from more than a dozen major U.S. trading partners

are rushing to reach agreements with U.S. President Donald

Trump's administration by July 9 to avoid even higher tariffs,

and Trump and his team have kept up the pressure in recent days.

On Wednesday, Trump announced a deal with Vietnam that he says

will impose a lower-than-promised 20% tariff on many Vietnamese

exports. While the administration has teased a forthcoming deal

with India, talks with Japan, the sixth-largest U.S. trading

partner and closest ally in Asia, appeared to hit roadblocks.

Investors have shifted from panicking about tariffs to relief

buying, recently lifting the U.S. stock market back to record

highs, with corporate earnings and the U.S. economy holding up

better than many had expected through a period of dramatic

policy change.

The S&P 500 has risen about 26% from April 8, when stocks

bottomed following Trump's draconian April 2 tariff

announcement.

But much of the rally has been driven by retail market

participants and corporate share buybacks, even as institutional

investors have been more reticent.

Despite the S&P 500 making new highs, equity positioning is

far below February levels as investors remain underweight

stocks, according to Deutsche Bank estimates.

"This has definitely been a junkier rally, a more

speculative rally," Lisa Shalett, chief investment officer at

Morgan Stanley Wealth Management.

"In the last week or so, it's been driven a lot more, I

think, by retail than it has been by institutions. Institutional

positioning is really just average," she said.

While many factors are keeping investors cautious, including

worries about U.S. economic growth and lofty stock market

valuations, getting past the tariff deadline without a major

escalation in tensions would be one less thing to worry about in

the near term, analysts said.

"I think that there may be some threats and saber-rattling,

but I don't really think that any of that now poses a major

danger to the market," said Irene Tunkel, chief U.S. equities

strategist, BCA Research.

Still, investors don't expect the tariff deadline to put an

end to trade tensions for good.

"I don't view it necessarily as a hard deadline," said

Julian McManus, portfolio manager at Janus Henderson Investors.

"The 90-day pause itself was instituted because the markets

were falling apart, and I think policymakers needed breathing

room and time to try and negotiate these deals or find some kind

of off ramp," he said.

Investors' cautious approach to boosting equity exposure now

is reminiscent of their behavior immediately after the pandemic

market drop of March 2020, when allocations to stocks recovered

more slowly than major market indexes, Deutsche Bank strategist

Parag Thatte, said.

"It does mean that there is room for exposures to keep

rising, which is a positive for equities all else equal," Thatte

said.

After a roller-coaster first half, the S&P 500 is entering a

historically strong period. Over the past 20 years, July has

been the strongest month for the benchmark index with an average

return of 2.5%, according to a Reuters analysis of LSEG data.

Investors will also be keeping an eye on economic data -

especially inflation numbers - and second quarter results in

coming weeks for clues to the health of the U.S. economy, and

the Federal Reserve interest rate outlook.

"We're right at the point where institutions are going to

have to decide one way or the other, do they believe the rally

or not," Morgan Stanley's Shalett said.

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