MW The bull market has survived Trump's tariff onslaught. But stocks aren't out of the woods just yet.

By Joseph Adinolfi

Wall Street professionals highlighted several looming risks that could create problems for investors in the not-too-distant future

For a few tense days last month, it looked like a roaring bull market for U.S. stocks was coming to an end after an impressive 21/2 year run.

As the magnitude of President Donald Trump's "liberation day" tariff announcement took investors by surprise, economists and analysts at Wall Street banks scrambled to ratchet up their recession forecasts, while ratcheting down their year-end targets for the S&P 500 SPX.

The market is now in a much different place. A trade detente with China involving a 90-day pause on some of the administration's most punitive tariffs helped send major U.S. equity indexes rocketing higher.

At last check, the S&P 500 was up by more than 3% on the day, leaving it on track to finally finish above its 200-day moving average after spending more than 30 sessions below the key momentum threshold.

That is a far cry from where things stood on April 8, when the S&P 500 tallied its lowest close in nearly a year. A drop of nearly 19 percentage points from its February high had brought the popular U.S. equity benchmark right to the cusp of bear-market territory.

Other equity indexes, including the Nasdaq Composite COMP and Russell 2000 RUT weren't so lucky. Both indexes entered bear-market territory last month, although the Nasdaq was on track for an exit Monday, with the tech-heavy index up more than 20% from its lows. A bear market is typically defined as a drop of 20% or more from a recent high.

Barring any unforeseen developments on the trade front, it seems unlikely that stocks will return to levels consistent with their April nadir soon, strategists told MarketWatch.

But that doesn't mean the market is heading right back to its record highs, either.

Wall Street professionals who spoke with MarketWatch highlighted several looming risks that, according to them, investors have yet to take into account.

"There are reasons for optimism," said Ross Mayfield, an investment strategist for Baird Private Wealth Management, during an interview with MarketWatch.

"But there are still plenty of headwinds, even with this massive de-escalation, you still have an average tariff rate north of anything seen over the past 75 years."

Signs of consumer weakness

While tariff rates are much lower than the worst-case scenario unveiled on "liberation day," they're still remarkably high relative to recent history, as Mayfield pointed out.

Jonathan Pingle, chief U.S. economist at UBS Investment Bank, said he expected the 90-day pause on China tariffs would lower the aggregate effective U.S. tariff rate to about 15%, down from 24% if the China levies had been allowed to stay in place.

This is an improvement relative to the alternative, but it still represents a regressive tax hike on consumption. And this tax is being imposed at a time when the strength of the American consumer is already showing signs of strain, said Garrett Melson, portfolio strategist at Natixis Investment Managers Solutions.

These warning signs were evident in recent corporate earnings reports, as well as economic data released over the past month or so.

Quarterly results from quick-service restaurants like McDonald's Corp. $(MCD)$ highlighted a growing unwillingness to spend among more cash-strapped consumers. This is one reason why consumer-discretionary stocks have become this year's worst-performing sector in the S&P 500.

Shares of the Consumer Discretionary Select Sector SPDR ETF XLY were down more than 5% year-to-date. Small-cap stocks, which tend to be more domestically focused, have struggled as well.

Signs of a weakening labor market could soon leave American consumers with even less room to maneuver. Data on job openings and the number of Americans quitting their jobs show that companies have been reluctant to hire. To Melson, this could mean that the state of the U.S. labor market might be more precarious than the Federal Reserve would have investors believe.

To be sure, the pace of job creation surpassed economists' expectations in April. But like other recent monthly readings, Melson said he expected that these data would also be revised lower.

Meanwhile, growth in average hourly earnings continued to slow last month, Melson said. If consumers don't see meaningful wage growth, it could make it more difficult to keep up with any price impact from the tariffs.

"We're setting up for a tug of war where you see this back and forth between optimism on the trade front and, in our view, economic data that's skewed to the downside," Melson told MarketWatch. "There's risk of pretty meager growth as you look out over the back end of the year."

Stocks are still expensive

If Trump's tariffs do dent economic growth and corporate earnings, the market might not be so forgiving.

After all, U.S. stocks have remained expensive relative to history. As of Friday's close, the S&P 500 was trading at 20.6 times its price-to-earnings ratio, according to FactSet data. That's well above its historical average.

While Monday's tariff announcement has removed some of the downside risk for stocks and the economy, the outlook for corporate earnings growth has soured somewhat since the start of the year. And the latest developments have shown few signs of improvement.

"Markets ultimately follow earnings and the economy, yet the prospects for earnings and the economy haven't improved much with today's news. This is what worries me," Callie Cox, chief market strategist at Ritholtz Wealth Management, said in emailed commentary.

"Relief rallies may not amount to much if the foundation is crumbling," she added.

Earnings growth during the first quarter was solid, according to a team at Goldman Sachs Group $(GS)$ led by David Kostin, the bank's chief U.S. equity strategist. S&P 500 firms ended up tallying 12% growth in their profits compared with the same period one year earlier, compared with forecasts of just 6% as of the start of the quarterly reporting season, Kostin said.

Risks percolating in the bond market could also weigh on stocks and the economy. For example, Treasury yields shot higher on Monday.

The closer the 10-year yield gets to the 5% threshold, the greater the chance that rising borrowing costs could start to weigh on equities, Baird's Mayfield said. The yield on the 10-year note BX:TMUBMUSD10Y stood at 4.452% in recent trade on Monday, according to FactSet data.

"It's a tricky environment right now. Obviously it's good news, it's a risk-on market, but you get that 10-year too high, then the equity market could respond really negatively," he said.

U.S. stocks were set to finish higher on Monday. Aside from the S&P 500, the Nasdaq Composite was up more than 4% in recent trade at 18,678, while the Dow Jones Industrial Average DJIA was up 1,100 points, or 2.7%, at 42,347. The blue-chip gauge was on track to exit "correction" territory and erase all of its post-"liberation day" losses.

-Joseph Adinolfi

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May 12, 2025 15:17 ET (19:17 GMT)

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