Key takeaways

  • Stocks appear stuck in a holding pattern, having recovered from their April lows.
  • Analysts say the headwinds and tailwinds in the coming months are roughly in balance.
  • Bulls say relief on tariffs, strong earnings growth, and a healthy economy could help drive stocks higher.
  • Bears say those say conditions, and others such as rising bond yields, could also worsen and send stocks lower again.

Stocks have made a remarkable recovery over the past few months, but the momentum hasn’t been enough to carry the market to a new high for the year. After an April plunge that took the Morningstar US Market Index to the brink of a bear market, stocks roared back more than 20%—the equivalent of a bull-market gain—before running out of steam in mid-May.

With investors awaiting the outcome of trade talks ahead of a July 9 tariff deadline imposed by US President Donald Trump, stocks have settled into a holding pattern. Analysts say the outlook for the market in the months ahead looks relatively balanced, with bullish signals like strong earnings, a healthy economic, and moderation on tariff policy helping to offset more bearish signals like elevated valuations, deficit risk, and signs of stress. Among market strategists, 2025 forecasts generally call for returns in the midsingle digits, a dramatic slowdown from the double-digit gains of the last two years.

“There is a lot of mixed data and perspectives right now,” says Adam Hetts, global multi-asset head at Janus Henderson Investors. Morningstar chief US market strategist Dave Sekera characterizes the current moment as “the eye of the hurricane” ahead of potential upheaval in the months ahead.

Here’s what investors need to know about the headwinds and tailwinds for the stock market right now, and what could tip the scales either way.

The bull case for stocks

  • The worst-case scenario for tariffs has passed. While import tax rates are now significantly higher than they were at the beginning of the year, market watchers believe the sky-high levies Trump announced on April 2 are no longer in the cards. Negotiations are underway, and both the United States and its trading partners appear willing to make concessions. “For the moment, it seems like we’re out of the woods from that initial Liberation Day scare,” says Hetts.
  • Economic data still looks solid. Despite concerns surrounding sticky inflation and a potential labor market slowdown, the US economy still looks resilient. Forecasters have lowered their odds of recession in the wake of Trump’s reversal on tariffs, and consumers are continuing to spend despite gloomy measures of sentiment. “For the moment, all is clear as far as data in the US,” Hetts says.
  • Earnings are holding up and may keep growing. A surprisingly strong first-quarter earnings season gave investors confidence. Overall, companies in the S&P 500 grew earnings at 13% in the first quarter of 2025, according to data from FactSet. Investors breathed a sigh of relief last quarter after the mega-cap technology stocks that have propelled the market higher these past few years continued to deliver strong results. Morgan Stanley equity strategist Michael Wilson said in a recent note to clients that an upward trend in the earnings outlook for the S&P 500 is “a clear tailwind for the market.”
  • Fiscal stimulus. Despite mounting concerns over a growing deficit, the US government is still spending money. “Hyper-stimulative fiscal policy is still in place,” says Doug Ramsey, chief investment officer at Leuthold Group. Fears such policies would be diminished under DOGE in the first few months of the administration have also faded. That’s a “potential positive” for markets, he says.
  • Momentum. Investors shouldn’t discount the power of positive momentum. Stocks have soared this month, and Ramsey says that action can be self-fulfilling because it can boost investors’ confidence. The wealth effect—wherein consumers feel wealthier and spend more when the stock market is rising—can also help prop up the economy.

The bear case for stocks

  • Valuations are elevated. Back in the early months of the year, many analysts were issuing warnings about a market that looked “priced for perfection,” meaning expectations were so high that any earnings miss or piece of bad news could send stocks tumbling. Right now, strategists say the market is back in this territory—only with more risks this time, thanks to tariffs and policy uncertainty. The S&P 500 is now trading at a forward price/earnings ratio of 21.7, compared with 21.6 at the start of the year. At the market’s bottom in April, that multiple dropped as low as 18. “When you have multiples at these lofty levels, it does create that sense of fragility … that feeling of a skittish market,” Hetts says.
  • Tariffs could still bite. Negotiations between the US and its trading partners are ongoing, and there’s no guarantee that favorable deals will be reached. Negative headlines on tariffs could still rattle a market that seems to expect good news. “The market might be a little bit complacent” when it comes to tariffs, says Jurrien Timmer, director of global macro at Fidelity Investments.
  • Cracks in the economic data could worsen. Strong backwards-looking economic data could obscure a gloomier prognosis for the months ahead. “It’s still our view that the economy is displaying a lot of prerecessionary behavior,” Ramsey says. He points to downward revisions in monthly payrolls data and the rising share of unemployed workers who are searching for jobs. “It’s pretty remarkable that the expansion has remained intact with these two very different indicators of a job market slowdown.” Ramsey also tracks the difference between new manufacturing and service orders and prices, which has become increasingly negative over the past few months as orders fall while prices remain the same. That’s “increasingly bearish for stock prices,” he says.
  • Fiscal risks. With the deficit and longer-term bond yields rising, some strategists have issued warnings about the durability of the market’s most recent rally. Rising bond yields tend to weigh on stocks, since bonds with higher yields offer a less risky alternative to the equity market and higher rates make it more expensive for companies to do business. “You can stop the tariffs if the markets don’t like it, but there’s not a lot you can do here on the fiscal side,” Timmer says. If yields continue to climb, “I think it will be hard for the stock market to ignore.”

The bottom line for investors

With a mixed bag of positives and negatives, it’s no surprise that many analysts are landing on a relatively balanced outlook. They’re not pounding the table for huge gains ahead, but they’re not sounding the alarm about a crisis either.

Timmer argues that the stock market has likely set its upper and lower bounds for the year. “I’m in the camp where this is a very mature bull market,” he says. “There are headwinds that equal the tailwinds.”

Ramsey is also taking a neutral view, though he adds that he expects to take a more defensive approach in the coming months.

Amid an uncertain outlook, Hetts recommends investors stay the course and continue to maintain a diversified portfolio, from stocks to fixed income to international allocations and more. “This year has been another great case study in staying invested … stay diversified between countries, between asset classes, and stay the course and recognize that there’s a lot of policy uncertainty that’s impossible to time.”

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