Martin Baccardax

U.S. stocks are poised for a solid rally over the second half of the year, Deutsche Bank analysts indicated in a note published Tuesday, as the impact of tariffs on corporate earnings wanes and the domestic economy continues to outperform.

Deutsche Bank analysts, lead by Binky Chadha, added 400 points to their year-end S&P 500 price target, taking it to 6,550 points, a level that suggests a 10.3% advance from Monday night's close. The bank's economists, meanwhile, boosted their outlook for U.S. growth this year to an annualized rate of 1.5%, just shy of the OECD's lowered forecast of 1.6% that was published earlier on Tuesday.

The move follows similar upgrades from Goldman Sachs and Morgan Stanley last month, as well as the S&P 500's 19% rally from its early April lows.

Chadha and his team argue that President Donald Trump's backtracking on tariffs, as well as a ruling from the U.S. Court of International Trade last week, will likely reduce the overall effect rate of levies below 10%. That drag on earnings would be around a third less than estimated when the tariffs were first unveiled in early April.

"This hit is arguably well within normal variation for corporate planning, with companies repeatedly emphasizing that they have been battle tested by a series of crises over the past few years," Chadha wrote.

S&P 500 earnings per share, which were penciled in at $287 at the start of the year, were lowered to $240 following the "Liberation Day" unveiling on April 2. Deutsche Bank now sees year-end earnings per share for the index at $267, implying a growth rate of around 5%.

The bank noted, however, that while its bullish outlook is supported by an estimate of around $1.1 trillion in overall company share buybacks this year, investors will still need to weather significant market volatility.

"We expect the rally to be punctuated by sharp pullbacks on repeated cycles of escalation and de-escalation on trade policy," Chanda wrote. "We don't think the administration has abandoned the pursuit of higher tariffs, with the risk of renewed escalation as equities approach new highs."

Analysts at LPL Financial, however, remain concerned about what they describe as the "asymmetric risk around trade policy," where investors bet on rapid deal outcomes and lower tariff rates.

That could leave markets either overvalued at current levels, or priced to perfection in terms of a "blue-sky scenario" powered by rising corporate profits and a robust economy.

"We believe consensus earnings estimates are too high for the current expected tariff regime," Jeffrey Buchbinder, LPL's chief equity strategist, wrote in a report. "Our expectation is tariffs will drag S&P 500 earnings per share down 2%-3%, to perhaps $255 in 2025."

However, the LPL team also argue that while the "macro backdrop remains muddied by ongoing trade policy uncertainty," technical changes to the S&P 500 over the past six weeks could suggest further gains are on tap.

The group notes that around 60% of stocks in the benchmark are now on an uptrend, having moved past their 200-day moving average (a key market metric for performance). For tech stocks, which represent the largest weight in the S&P 500, that figure rises to 88%.

"Overall, the weight of the technical evidence suggests this recovery is real, and not a 'bull trap' or 'bear market rally,'" Buchbinder wrote. "For investors, this means dips above support should be considered buying opportunities."

Write to Martin Baccardax at martin.baccardax@barrons.com

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June 03, 2025 08:09 ET (12:09 GMT)

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