Since the market crash triggered by Trump’s “reciprocal tariffs” in early April 2025, U.S. equities have undergone a significant valuation
rebound. From the April 7 lows, the S&P 500 has surged 28.33% in less than three months, while the Nasdaq 100 has jumped an even
sharper 31.9%, adding nearly $10 trillion in market capitalization—marking the fastest recovery on record from a 15%+ drawdown back to
new highs.
Source: TradingView
As of the close on June 30, the S&P 500 stood at 6,204.95 and the Nasdaq at 20,369.73—both notching fresh all-time closing highs. In June
alone, the S&P 500 rose nearly 5%, the Nasdaq climbed more than 6%, and the Dow gained over 4%.
Source: TradingView
For the entire second quarter, the Dow advanced 4.98%, the Nasdaq posted a 17.75% gain—its best quarterly performance in five years—
and the S&P 500 rose 10.57%, its strongest quarter since Q4 2023. All three major indexes ended the first half of 2025 with positive returns.
Easing Trade Tensions
Since the White House announced a 90-day pause on higher tariffs on April 9—maintaining a 10% baseline tariff while initiating negotiations
with trade partners—progress has been limited. So far, the U.S. has only reached a framework agreement with the U.K., reducing steel and
aluminum tariffs to 25% while keeping the 10% baseline in place. The agreement with China lowers tariffs on Chinese imports from 145% to
30%, with China reducing its tariffs on U.S. goods to 10%. However, talks with other major partners including the EU, Japan, and Canada
remain deadlocked as the 90-day window draws to a close.
Still, there have been recent signs of momentum in trade talks. On June 29, Canada announced it would withdraw its digital services tax in
an effort to reach a mutually beneficial comprehensive trade agreement with the U.S. The next day, White House National Economic Council
Director Kevin Hassett confirmed that trade talks between the U.S. and Canada would resume immediately following Canada’s DST reversal.
Meanwhile, the U.S. Treasury Secretary noted that several countries are negotiating in good faith, and that improving trade relations are
contributing positively to market sentiment.
In addition, recent reports indicate the EU is working to reach a deal before the July 9 deadline to avoid the reimposition of up to 50% tariffs
threatened by Trump on May 23. Sources say the EU is willing to accept a 10% baseline tariff in exchange for reductions or exemptions on
key sectors such as pharmaceuticals, alcohol, semiconductors, and commercial aircraft. The bloc is also seeking quotas and exemptions to
mitigate the impact of 25% auto tariffs and 50% tariffs on steel and aluminum—particularly important for auto-exporting countries like
Germany.
These developments have bolstered market expectations that Trump’s tariff policy may moderate, helping restore supply chain stability and
support corporate profitability.
Earnings Growth
Sustained improvement in corporate profitability remains a key foundation of the current market rally. While heightened trade tensions
initially fueled concerns about earnings and led Wall Street analysts to lower 2025 profit forecasts—with Q1 EPS growth estimates revised
down from 13.8% to 5.3%, and Q2 estimates from 14% to 6.7%—actual earnings reports have exceeded expectations, suggesting the tariff
impact has been less severe than feared.
According to FactSet, 78% of S&P 500 companies reported Q1 EPS above expectations, surpassing the five-year average of 74%. Actual Q1
EPS growth came in at 7.2%, well above the 5.3% forecast.
The U.S. government's strategy of negotiating and temporarily pausing tariff hikes has helped ease pressure on corporate margins,
contributing to a gradual recovery in market expectations. Consensus now projects a 15.3% EPS growth rate for the S&P 500 in 2026, led by
strength in the technology and consumer sectors. Tech firms in AI and data center infrastructure continue to report rising capital
expenditures—Nvidia and Microsoft both cited strong demand—boosting investor confidence, as reflected in the outperformance of the
Nasdaq 100.
Although uncertainty around tariff policy remains, ongoing negotiations and corporate adjustments are expected to significantly reduce the
drag on overall earnings growth.
Interest Rate Expectations
Fed rate cut expectations have provided further support for the market rally. Although some tariff policies have sparked concerns about an
inflation rebound, data from the U.S. Bureau of Labor Statistics show that the Consumer Price Index (CPI) increased by only 0.1% month-
over-month and 2.4% year-over-year in May 2025, indicating that inflation remains broadly under control. The core Personal Consumption
Expenditures (PCE) inflation rate— the Fed’s preferred gauge—stood at 2.7% in May, close to the Fed’s 2% target.
Source: BEA
At a June 25 hearing before the Senate Banking Committee, Fed Chair Jerome Powell stated that if inflation pressures remain contained, the
Fed would cut rates sooner rather than later. According to the Fed’s June FOMC dot plot, the median projection for the federal funds rate at
the end of 2025 is 3.9%, while the current target range stands at 4.25%–4.5%.
Source: Federal Reserve
Market bets on a rate cut starting in September remain strong. The Chicago Mercantile Exchange’s (CME) FedWatch tool shows a 75%
probability of a 25-basis-point cut in September. The likelihood of at least one rate cut over the next six months exceeds 70%.
Source: CME
Lower rates reduce borrowing costs for businesses, boosting the present value of future earnings, particularly for tech growth stocks. The
rate cut expectations have driven inflows into equities, with Bank of America reporting $12.3 billion in stock fund inflows during the week
ending June 26—the highest since March.
Shift in Investor Sentiment
At the beginning of 2025, institutional investors generally maintained a cautious stance toward tech stocks, especially reducing exposure to
high-valuation growth names amid concerns over trade tensions and slowing economic growth. However, as earnings reports continued to
beat expectations and emerging sectors driven by AI and other technologies delivered strong performance, capital flowed back into the tech
sector, boosting valuations and share prices.
Data from EPFR Global shows that U.S. tech funds recorded a net inflow of $8.7 billion in Q2, while hedge funds have increased their
allocation to large-cap tech stocks by 15% since April. Leading names such as Nvidia and Amazon helped propel the Nasdaq higher.
Retail investor activity also surged, with TD Ameritrade reporting a 30% increase in average daily trading volume in June compared to April.
Retail interest in tech and AI stocks remains elevated, further reinforcing upward momentum in the market.
Risk and Valuation Concerns
Despite strong gains, elevated valuations remain a potential risk. Based on FactSet’s forecast of $290 in EPS for 2026, the S&P 500’s
12-month forward P/E ratio stands at about 21x. Using the 2025 EPS estimate of $257, the forward P/E rises to roughly 24x, approaching
historical highs. Ned Davis Research notes that since 1983, forward P/E levels have only been higher during the 1999–2000 dot-com bubble
and in 2020. The Nasdaq 100’s forward P/E is 26.8, reflecting even higher valuations for tech stocks.
High valuations increase the market’s vulnerability to adverse events, such as the uncertainty surrounding the July 9 expiration of the tariff
pause. U.S. Treasury Secretary Janet Yellen has warned that the Trump administration’s 90-day suspension of “reciprocal tariffs” will end on
July 9, and if negotiations with trade partners fail due to intransigent positions, the U.S. could reinstate tariffs at the levels imposed on April
2. JPMorgan estimates that a tariff escalation could raise the probability of a global recession in 2025 to 40%, with S&P 500 EPS potentially
falling 8% to 10%.
Geopolitical tensions in the Middle East and ongoing U.S.-China trade frictions add further uncertainty. While the U.S. has reached interim
agreements with the UK and China, talks with the EU, Japan, and Canada remain stalled.
Against this backdrop of lofty valuations, any unexpected macroeconomic or policy risks could trigger significant market volatility.
