Investors seem comfortable with tariffs for now, but 'we're going to see volatility,' says chief investment strategist

The market experienced significant volatility in the first half of the year, with the S&P 500 seeing a 19% peak-to-trough decline following April tariff announcements, but it has since recovered to be up over 8% year-to-date. Despite new tariffs slated for August 1, bringing the effective rate to around 21%, investors currently appear confident that U.S. firms can absorb these costs. This resilience, alongside strong corporate earnings, projected Federal Reserve rate cuts, corporate deregulation, and stimulative tax policies, supports a positive outlook for the second half. However, experts anticipate continued volatility due to ongoing tariff uncertainty and the unresolved question of who ultimately bears the cost of these import taxes.

Analysis

The US equity market has demonstrated notable resilience in the first half of the year, recovering from a sharp 19% peak-to-trough decline in the S&P 500 to post a year-to-date gain of over 8% and reach new highs. This recovery occurred despite significant trade policy uncertainty, with investors seemingly pricing in the ability of US corporations to absorb higher import costs. The current market buoyancy is supported by several fundamental tailwinds, including corporate earnings that have surpassed expectations, a projected shift to a more accommodative stance by the Federal Reserve, and stimulative fiscal policy through a new budget bill. However, significant risks persist. New blanket tariffs are scheduled for August 1, which could elevate the effective rate to 21%, a level not seen since 1910. Strategists from BlackRock and LPL Financial explicitly warn of continued volatility driven by policy headlines. A critical uncertainty remains regarding who will ultimately bear the cost of sustained tariffs—corporations, consumers, or international suppliers. Any evidence that these costs are eroding corporate profitability or consumer spending could trigger a sharp market reversal, challenging the current optimistic sentiment.

Key Decisions for Investors

• Given the supportive fundamental backdrop of strong earnings and accommodative policy, maintain a constructive outlook on US equities but prepare for heightened volatility stemming from trade policy headlines.
• Investors should closely monitor upcoming corporate earnings calls for commentary on tariff impacts to margins and pricing power, as this will be a key indicator of whether profitability is being eroded.
• Consider the potential for sharp, headline-driven drawdowns as an opportunity to rebalance or add to core positions, but be cautious of a fundamental shift if tariffs begin to tangibly impact consumer and business performance.
• Given the explicit warnings of market jumpiness, it may be prudent to review portfolio hedges and maintain some liquidity to navigate potential downside and capitalize on dislocations.