The S&P 500 is on a 12-month Fear as Tariffs Threaten the 2025 Outlook for U.s. Stocks

Over the past year, U.S. stocks have experienced significant growth, but this momentum faces potential challenges from inflationary pressures linked to President-elect Donald Trump's trade policies. The S&P 500 index has risen by an impressive 31% over the last 12 months, closing Friday at 5,969.34, according to FactSet data. Despite this performance, the index remains just 0.5% below its record close set on November 11.

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Concerns over tariffs have emerged as a key factor that could disrupt this rally. Solita Marcelli, Chief Investment Officer for the Americas at UBS Global Wealth Management, noted during a Thursday briefing on the firm's 2025 outlook that deregulation could provide a boost to the market. However, she highlighted that tariffs pose a significant risk, potentially altering market dynamics.

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Wall Street analysts are closely monitoring the Trump administration’s potential tariff policies, which could impact stock forecasts for the coming year. Tariffs that increase the cost of imported goods might lead to higher inflation or dampen economic growth, depending on their scope and implementation under the new administration's trade agenda.

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David Kostin, Chief U.S. Equity Strategist at Goldman Sachs, projects the S&P 500 could climb to 6,500 by the end of 2025. However, he identified geopolitical tensions and inflation risks, possibly stemming from policy changes, as key threats to his outlook. Kostin warned that inflation could be driven higher by tariffs, shifts in immigration policies, or adjustments to fiscal strategies. Such increases could push interest rates to levels that negatively affect stock performance.

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The Treasury market has already seen upward movement in rates this month. The yield on the 10-year Treasury note closed Friday at 4.409%, based on 3 p.m. Eastern time data from Dow Jones Market Data. Goldman Sachs’ macroeconomic strategists expect the 10-year yield to end the year slightly above 4%, according to Kostin. Universal tariffs, he cautioned, could significantly hinder economic growth, but Trump might pivot if such policies lead to a sharp rise in Treasury yields or a market downturn.

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UBS expects targeted tariffs to focus on goods from China and specific imports, such as European Union automobiles. Marcelli expressed concern that broad-based tariffs of 10% to 20% could be highly inflationary, severely impacting economic growth. Brian Rose, Senior U.S. Economist at UBS Global Wealth Management, echoed these sentiments, stating that universal tariffs could sharply inflate prices and slow economic expansion. He also noted that potential immigration policies involving large-scale deportations might exacerbate labor shortages and drive up wages, adding to inflationary pressures.

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However, Rose downplayed the likelihood of dramatic deportations, suggesting their impact on inflation would be limited. UBS predicts inflation will remain near the Federal Reserve's 2% target by the end of next year, supported by an anticipated slowdown in shelter inflation.

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The Federal Reserve has recently eased interest rates, marking its first cut since 2020. As inflation has significantly moderated from its 2022 peak, market participants are speculating on additional rate reductions. According to the CME FedWatch Tool, there was a nearly 53% chance on Friday afternoon that the Fed might lower its benchmark rate again in December.

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Marcelli remains optimistic about the U.S. equity market, expressing confidence that the Fed could overlook temporary price increases stemming from potential tariffs. UBS forecasts that the S&P 500 will reach 6,600 by the end of 2025, representing a gain of over 10% from its current levels.

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Friday’s stock market performance reflected this optimism. The Dow Jones Industrial Average surged 1% to a record high, while the S&P 500 added 0.3% and the Nasdaq Composite edged up by 0.2%, based on Dow Jones Market Data. All three major indexes recorded weekly gains, rebounding from last week's declines.

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While the outlook for U.S. equities remains positive, analysts caution that Trump’s trade policies, particularly tariffs, could introduce volatility. Nevertheless, a combination of targeted tariff measures, controlled inflation, and accommodative Federal Reserve policies could help sustain the upward trajectory of the stock market in the years ahead.

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