Option To Trade SPY Whether Fed Rate Cut Priced In? Is Tariffs Concerns Over?

Investors largely believe that a Federal Reserve rate cut is imminent and have priced it into the market. This expectation, fueled by recent labor market weakness and steady inflation data, has been a key factor driving major U.S. stock indices to all-time highs.

What the market seems to have priced in

Fed rate cuts are expected

As of mid-September 2025, markets are overwhelmingly anticipating a 25 basis point cut at the upcoming Fed meeting.

There is also expectation of further easing, possibly more cuts before the end of the year.

Some of this expectation is already reflected in bond yields, mortgage rates, etc., which have softened ahead of the official decision.

Inflation and labor market are moderating, but remain concerns

Weakening employment trends are one of the reasons for the belief the Fed can begin easing.

But inflation, especially sticky parts or ones influenced by supply chain or trade-cost inputs (like tariffs) continue to be a concern. If inflation doesn’t move down smoothly, the Fed will likely be cautious.

In short summary, we think that many investors believe that cuts are coming and have priced that in to some extent. But it is not a done deal, because risks remain that could push things back.

Should Investors Still Be Concerned About Tariffs?

Yes, to a non-trivial extent. Some thoughts:

• Tariffs raise input costs & lead to inflation passthrough : Costs of producing goods increase when goods/components are taxed at the border. Some of that gets passed to consumers. That can hurt profit margins, especially for firms that have limited ability to raise prices or that compete globally.

• Uncertainty weighs on business investment & supply chains : Even if the ultimate nominal tariff levels are known, firms dislike policy uncertainty: not knowing whether tariffs will be raised further, rolled back, or whether there will be retaliation. That uncertainty can delay investment, slow expansion, or push firms to reconfigure supply chains in sub-optimal ways.

• Tariffs as inflationary shocks may complicate Fed’s path : If the inflation pressure from tariffs persists or intensifies (e.g., via retaliation, rising transportation costs, etc.), the Fed might have to slow down in cutting or even pause, reducing the expected boost to equities that comes from easing.

• Sectoral effects : Some sectors (e.g., consumer goods, manufacturing, retailers who import a lot) are more exposed. Other sectors (e.g. domestic-oriented firms, some tech with less reliance on imported components) may be relatively insulated.

So yes, tariffs are still a risk. They do not necessarily derail things, but they can restrain upside, increase volatility, and push investors to be more selective.

Can We Expect All-Time Highs (ATHs) to Continue?

It depends heavily on how several risk factors evolve. In general, there is momentum and many favorable conditions, but some caveats are large.

Positive drivers

• With rate cuts expected, borrowing costs will decline, which tends to support equity valuations.

• If inflation continues to moderate (especially core inflation) without major downside in growth, that can give confidence to markets.

• Strong corporate earnings (if they hold up) will reinforce the case for higher stock prices.

Key risks / headwinds

Persisting inflation / supply shocks : If inflation surprises on the upside (e.g. due to tariffs, energy, geopolitical disruptions, etc.), that might force the Fed to be more hawkish or keep rates higher for longer, which could dampen multiple expansion.

Geopolitical / trade policy uncertainty : Tariffs, retaliations, trade wars — if they escalate, tighten supply chains, disrupt flows, or increase costs significantly, that can hurt sentiment.

Economic slowdown : If the labor market weakens sharply, or consumer spending falters, that could lead markets to reprice risk. Even with rate cuts, if growth is in danger, investors may get cautious.

Valuation risk : At or near ATHs, valuations are often rich. Any negative surprise (earnings miss, weak macro data, policy missteps) tends to have a magnified effect, because investor expectations are high.

Our View: What Is Likely

The near-term is likely to see further gains or at least a drift upward, especially if the Fed delivers a “dovish cut” (i.e. cuts + signaling more cuts) as many expect.

But we are skeptical about a strong, rapid run to new ATHs without interruptions. There may be pullbacks, consolidation, especially if any of the risks materialize.

Investor selectivity will matter: companies with good cost control, resilient supply chains, lower exposure to import cost inflation, and strong cash flows are likely to outperform those with high exposure to tariffs, input cost risk, or import-heavy supply chains.

In the next section I will be sharing how we map this into best-case, base-case, and worst-case scenarios for equities (S&P 500 as proxy), tying Fed cuts + tariffs + inflation risks together.

$S&P 500(.SPX)$

Scenario Framework

1. Best-Case (Bullish Continuation → New ATHs, Momentum Holds)

Fed: Delivers a 25 bps cut and signals openness to more cuts if data allows (dovish tone).

Inflation: Core inflation continues to trend lower despite tariffs, helped by easing wage pressure and falling energy/shipping costs.

Tariffs: Markets treat tariffs as noise rather than a structural hit. Companies show ability to pass on costs or diversify supply chains quickly.

Growth: U.S. economy achieves “soft landing” — moderate slowdown but consumer spending resilient, no spike in unemployment.

Equities:

• S&P 500 rallies +8–12% over 6 months, setting fresh ATHs above current levels.

• Nasdaq outperforms, with AI/tech leading. $NASDAQ(.IXIC)$

• Valuations remain elevated but justified by lower rates + strong earnings.

2. Base-Case (Choppy but Upward Bias)

Fed: Cuts 25 bps, stays data-dependent. Guidance is balanced: willing to cut again, but not in a rush.

Inflation: Sticky but manageable — tariffs add modest upward pressure, but not enough to derail disinflation.

Tariffs: Create sector divergences — consumer goods & import-heavy names under pressure, while tech/services less impacted.

Growth: Economy slows but avoids recession. Job market softens gradually, helping inflation but not collapsing demand.

Equities:

• S&P 500 grinds higher +3–6% into year-end, but with 2–3 pullbacks of 5–7%.

• Leadership is narrow — mega-cap tech, healthcare, and selective financials outperform.

• Broader market (small/mid caps, cyclicals) lags due to tariff exposure.

$Technology Select Sector SPDR Fund(XLK)$

3. Worst-Case (Hawkish Surprise or Tariff Shock)

Fed: Cuts once but delivers a hawkish cut (signals limited room for more). Or inflation surprise forces pause in further easing.

Inflation: Tariffs feed more broadly into CPI/PCE. Energy or supply chain shocks compound the effect.

Tariffs: Escalate into retaliation, sparking trade tensions. Higher costs hit margins, supply chains disrupted.

Growth: Consumer demand weakens, unemployment ticks up sharply. Talk of “hard landing” grows.

Equities:

• S&P 500 corrects -10–15% from ATHs, struggling to regain footing.

• Earnings revisions turn negative.

• Flight to safety: Treasuries, gold, and defensive sectors (utilities, staples) outperform.

$SPDR Gold Shares(GLD)$

Takeaway for Investors

Best-case → momentum traders & growth investors ride the rally.

Base-case → selective positioning, bull call spreads in leaders (tech, healthcare) + hedges on tariff-sensitive sectors.

Worst-case → defensive allocation + volatility hedges (VIX calls, protective puts) to guard against sharp drawdowns.

In the next section, we have build a scenario playbook with option strategies tied to each path (best/base/worst), using the S&P 500 ETF (SPY) as the proxy. $SPDR S&P 500 ETF Trust(SPY)$

We believe that this way it is tradable, liquid, and closely follows the index.

Scenario-Based Option Strategies on SPY

1. Best-Case (Bullish Continuation → New ATHs)

View: Fed delivers dovish cut, tariffs contained, equities grind higher.

Aggressive Twist: Add a short put spread (cash-secured put or bull put spread) to finance the call spread if confident in support levels.

2. Base-Case (Choppy but Gradual Uptrend)

View: Fed cuts, but inflation + tariffs keep volatility high. Upside biased, but with pullbacks.

Hedge Twist: Pair with protective put spread (buy $550 Put / sell $520 Put) to guard against tariff shocks.

3. Worst-Case (Hawkish Fed or Tariff Shock)

View: Fed hawkish, inflation sticky, tariffs escalate → correction risk.

Summary Grid

These are not trade recommendations, but frameworks you can adapt depending on your conviction and risk appetite. The key is defined-risk positioning, since volatility and policy risk can swing fast.

Summary

While the market is optimistic about a "soft landing," where the economy slows enough to warrant a rate cut without falling into a recession, investors should still be concerned about tariffs. Tariffs can raise inflation and disrupt global supply chains, creating headwinds for corporate earnings and economic growth. This uncertainty can cause market volatility and could derail the current rally if the Fed is less aggressive with rate cuts than expected.

The continuation of all-time highs hinges on this delicate balance. If the Fed's rate cuts meet or exceed market expectations and the economic impact of tariffs is contained, the rally could persist. However, any deviation from this narrative—such as a more hawkish Fed stance or escalating trade tensions—could lead to a market pullback.

Appreciate if you could share your thoughts in the comment section whether you think market ATH can continue with rate cut and less tariffs concerns.

@TigerStars @Daily_Discussion @Tiger_Earnings @TigerWire @MillionaireTiger appreciate if you could feature this article so that fellow tiger would benefit from my investing and trading thoughts.

Disclaimer: The analysis and result presented does not recommend or suggest any investing in the said stock. This is purely for Analysis.