Deutsche Bank raises S&P 500 forecast: here's why

Deutsche Bank raised its year-end S&P 500 target to 6,550 from 6,150, implying a 10% upside, driven by the "TACO trade" theory (Trump Always Chickens Out) which posits that tariff threats will likely be softened due to economic pressure. This revision reflects a reduced estimate of the tariff drag on corporate earnings, upgrading the 2025 EPS estimate for the S&P 500 to $267 from $240, coupled with a resilient economy and favorable investor positioning.

Analysis

Deutsche Bank has significantly revised its year-end S&P 500 forecast upwards to 6,550, from a previous 6,150, implying a potential 10% upside from current levels as of June 3, 2025. This increased optimism is primarily attributed to the "TACO trade" theory – an acronym for "Trump Always Chickens Out" – which posits that tariff threats, while impactful initially, are often softened or rolled back when faced with significant economic or market pressure. Consequently, Deutsche Bank now estimates the negative impact of tariffs on corporate earnings to be only about one-third of its prior expectations, leading to an upgraded 2025 S&P 500 EPS estimate to $267 from $240. This marks a reversal from April 2025, when the bank had cut its S&P 500 target from 7,000 to 6,150 and lowered its 2025 EPS forecast from $282 to $240 due to tariff concerns. Beyond the tariff reassessment, Deutsche Bank's bullish stance is supported by a resilient U.S. economy, robust corporate earnings, benign inflation data, and favorable investor positioning, noting that discretionary investors are neutral and systematic strategies are underweight, suggesting room for increased equity allocation. Continued solid corporate buybacks further underpin this positive outlook.

Key Decisions for Investors

• Investors may consider adopting a more constructive outlook on U.S. equities, aligning with Deutsche Bank's revised S&P 500 target and upgraded EPS estimates.
• Closely monitor developments in U.S. trade policy and tariff implementations, as the 'TACO trade' theory's realization is a critical assumption underpinning the bank's forecast.
• Evaluate current equity allocations, as potential shifts in positioning by discretionary and systematic investors, alongside continued corporate buybacks, could provide further market support.
• Acknowledge the inherent risk if the anticipated 'relenting' on tariffs does not materialize, which could reintroduce the previously feared earnings drag.