Martin Baccardax

Stocks are back within touching distance of their record highs, reached in that narrow window between President Donald Trump's inauguration in late January and his unveiling of sweeping global tariffs in early April.

Wall Street is wavering, however, on bets that the S&P 500 will reclaim those highs over the coming year. A few of the big banks, including Citigroup earlier this week, are lifting their end-of-year price targets for the benchmark, but the average forecast from the top U.S. investment firms points to only modest growth over the next six months.

Earnings forecasts for the next 12 months, however, are now the highest on record, according to data compiled by Edward Jones, with analysts estimating a year-ahead tally of $280 a share for collective S&P 500 profits.

That disconnect suggests some investors are worried that several elements driving markets today aren't be sustainable, and that a lot of other things need to break just right for stocks to maintain their current bullish momentum.

Stocks have powered more than 20% higher over the past two months, buoyed by a strong first-quarter-earnings season that was effectively capped by Nvidia's solid near-term outlook for artificial-intelligence demand.

Jean Boivin, who heads BlackRock's Investment Institute, said views shared during a gathering of portfolio managers "included a shared conviction in the AI mega force driving further returns, pointing to Nvidia's recent earnings beat despite tariff-related drags on earnings."

That remains a key element to the market's overall optimism, as capital spending on developments in the world's hottest technology is expected top $400 billion this year, according to Bank of America, with a $432 billion tally pegged for 2026.

Trade optimism has also fueled the rally, with stocks rising sharply from their early-April lows after Trump decided to pause his "Liberation Day" tariffs to allow negotiations with America's biggest trading partners. A federal court decision challenging the legality of those tariffs last month also boosted investor sentiment.

More of the same will be needed in the months ahead, however, as the July 9 deadline looms for the tariff pause, and the U.S. and China keep at the slow process of establishing a comprehensive trade pact.

"China is key," said Louis Navellier of Navellier Calculated Investing "The rest of the world will be watching closely for what kinds of flexibility the Trump administration shows to reach an agreement."

Those talks, and the broader trade and tariff landscape, will also be key to the near-term path of the dollar, which has fallen nearly 9% against a basket of its largest global peers this year.

That decline, however, has been a tailwind to U.S. corporate earnings forecasts, as it makes the repatriation of overseas profits increasingly more attractive.

Further weakness could come over the second half of the year, particularly if the Federal Reserve begins lowering interest rates at its September policy meeting. Faster inflation pressures, however, tied to the Trump administration's tariff regime, could delay Fed rate cuts and blunt the greenback's decline.

"In the absence of a credible reserve currency alternative, U.S. exposure will remain a foundational component of global portfolios," said Seema Shah, chief global strategist at Principal Asset Management.

GDP growth prospects, both at home and abroad, are also inexorably linked to the fate of the president's tariff strategy, and key to stock market performance.

The World Bank, in a report on Tuesday, trimmed its global growth outlook to just 2.3%, the weakest non-recession advance since 2008.

"Downside risks to the outlook predominate, including an escalation of trade barriers, persistent policy uncertainty, rising geopolitical tensions, and an increased incidence of extreme climate events," report said.

And finally, Congress is going to have to thread the proverbial fiscal needle by passing a tax-and-spending bill that allows economic growth but doesn't spook the bond market with a massive deficit increase or a debt-ceiling showdown.

"The extension of the 2017 tax cuts, trade deals, and Federal Reserve rate cuts are all likely needed in order for stocks to make meaningful gains beyond their February highs, and that's a lot to ask for right now, said Clark Bellin, chief investment officer at Bellwether Wealth of Lincoln, Neb.

However, Bellin also argues that "it's prudent to remain invested as trying to time a headline-sensitive market like the one we're in now only increases an investor's chances of missing out on long-term market returns."

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

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June 11, 2025 03:30 ET (07:30 GMT)

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