By Jacob Sonenshine

The market has likely made too many gains, too quickly. If that big rally comes undone, it would put a serious dent into many stocks.

The S&P 500 is up 28% from its 2025 low in early April. Since then, President Donald Trump has paused many tariffs, while the existing ones haven't stoked much inflation, which remains a bit below 3%. As a result, investors are betting the Federal Reserve, which has an inflation goal of 2%, will cut interest rates this year, which would help extend the economic expansion.

Stocks that are typically more volatile have rallied the hardest. They took the hardest hits in April, when Trump unveiled his so-called reciprocal tariffs, so they had the most ground to recover. An improving economic outlook helps to explain the rebound: Many of them have earnings that are fairly sensitive to changes in demand for goods and services.

Now, the market is at a turning point. It could extend its gain if Trump keeps tariffs on pause, but it will almost certainly tumble if he resumes or increases some. Countries that don't reach deals with the U.S. will see tariffs on goods sold into this country return to April 2 levels by Aug. 1, Treasury Secretary Scott Bessent said on CNN on Sunday.

Increasing tariffs would knock the market down, partly because stocks are so expensive. The S&P 500 trades at just over 22 times the aggregate earnings per share its component companies are expected to produce over the coming 12 months, the high end of its range in the past 3 1/2 years. Stock prices are reflecting a high probability that companies' earnings will increase as much as analysts expect them to, and that interest rates will remain stable.

But more tariffs would make goods more expensive, weighing on consumer demand and thus potentially hurting profits. And that inflation could push interest rates higher.

At the same time, the S&P 500's rally has been looking increasingly overdone from a technical standpoint. The index came into Monday's trading session about 3% above its 20-day moving average, toward the high end of its range in the past three years.

On average, the index has been about 0.5% above that moving average over that period, according to Barron's calculations based on FactSet data. So right now, the index is well above its recent trend, making it vulnerable to a decline on any unwelcome news.

More volatile, relatively economically sensitive stocks are most at risk. The S&P 500 technology index stands out in that sense.

It is always fairly volatile, most recently dropping more than the S&P 500 from just before the April tariff announcement, and rising 43% since its low.

Tech stocks aren't most economically sensitive part of the market, but they are somewhat cyclical. Chip makers see greater demand from auto makers, consumers and industrial customers when the broader economy is stronger, and vice versa.

Now, the tech index is trading at almost 28 times earnings, five points above the S&P 500's multiple, about the largest premium seen all year. If the S&P falls, the tech index would fall, too, and likely by a greater degree.

The tech index's most obvious suspects for large declines in the near term are Nvidia, Broadcom, Advanced Micro Devices, Texas Instruments, Qualcomm, Taiwan Semiconductor, and Micron Technology. All of those dropped more than the market in April and have risen far faster.

Other chip makers look vulnerable, too. Several have so-called relative strength index readings of 70 or above on a scale from zero to 100, with anything over 70 considered overbought. Trading analysts at Mizuho highlight the chip makers Qorvo and Analog Devices as falling within this category, along with semiconductor-equipment manufacturers KLA Corp., Applied Materials, and Lam Research.

The copper miners Freeport-McMoRan and Southern Copper are at risk as well, with bigger declines and steeper rebounds than the overall market in response to April's tariffs news. Both dropped more than 20% from just before the initial tariff announcement in April, and have since rallied more than 40%. The price of copper dropped in April and has rallied back to where it was before the April announcement.

The SPDR S&P Bank exchange-traded fund and the SPDR S&P Retail ETF follow the same pattern as the copper miners. Banks lend more and do more corporate transactions when the economy is stronger, and see less activity when it is weaker. Retailers tend to prosper during stronger economies because their customers have more money to spend.

This isn't the time to buy more shares in those parts of the market. Their next moves could be sharp drops.

Write to Jacob Sonenshine at jacob.sonenshine@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.

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July 07, 2025 13:07 ET (17:07 GMT)

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