By Paul R. La Monica

Was the post-Liberation Day stock market selloff just a dream? It's certainly starting to feel like one.

The S&P 500 index has gained 3.2% this week and is once again at an all-time high. The Nasdaq Composite is too. The Cboe Volatility Index, or VIX, has tumbled back to the midteens, a level that reflects few signs of worry, let alone panic. Quite the contrary.

Investors are betting that the U.S. economy will remain resilient and are banking on strong earnings growth when companies start reporting in July. Eventual interest rate cuts from the Federal Reserve and a further de-escalation of tough talk from President Donald Trump on tariffs before his July 9 deadline for new trade deals would help, too.

But with visions of pristine markets dancing in their heads, investors shouldn't forget that valuations look frothy once again, geopolitical jitters have a way of lingering, and higher tariffs are a very real possibility.

"The risk again is that there is too much complacency and an overbought market," says Liz Ann Sonders, chief investment strategist at Charles Schwab. "July 9 is front and center and we have no idea how that will play out."

Sonders also worries that while market sentiment has improved, big businesses remain far more cautious, which could impact profits over the course of the year. In fact, full-year 2025 earnings estimates for the S&P 500 have barely budged since April. "The earnings outlook is murky right now," she says. "We had a strong first quarter, but there was no extrapolation for the rest of the year."

So what should investors be doing in this scenario? Play defense. "We're positioning more to value from growth," says Tom Hulick, CEO of Strategy Asset Managers, a financial-planning firm. He recommends companies paying healthy dividends, including high-yielding stocks such as Kinder Morgan in the energy sector -- Barron's stock pick this week -- aerospace giant Lockheed Martin, and tobacco company Altria Group.

Investors should look beyond the U.S., too. Krishna Mohanraj, a portfolio manager at Diamond Hill, says that the recent outperformance of international stocks versus U.S. equities is likely to continue, noting that low valuations continue to make them more attractive. The iShares MSCI EAFE exchange-traded fund (ticker: EFA), which invests primarily in companies in Europe, Australia, and Asia, trades for just 15 times 2025 earnings estimates, compared with a price/earnings ratio of 23 for the S&P 500. That valuation gap could narrow, particularly as European governments are showing a willingness to spend more.

"We're more positive about international stocks in general," he says. "Valuations are still super attractive, and it's more of a stockpicker's market."

Mohanraj said he bought Allied Irish Bank after the Liberation Day selloff, arguing that the pullback was misplaced because Ireland's largely services-based economy wouldn't be hit too hard by tariffs. He also has added to other international stocks with a global presence, such as luxury goods maker Richemont, Taiwan Semiconductor Manufacturing, Sweden-based Spotify, and Chinese tech giants Alibaba Group Holding and Tencent Holdings.

International stocks have lagged behind their American counterparts for years and are now finally having their moment in the sun. If the outperformance continues, it could be a dream come true.

Write to Paul R. La Monica paul.lamonica@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

June 27, 2025 10:35 ET (14:35 GMT)

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