Uncertainty around potential policy changes from President Trump has done little to deter the stock market rally in 2025, with the S&P 500 (^GSPC) sitting just below its record high reached on Wednesday.
But some on Wall Street are growing concerned that much of the positive news surrounding Trump’s impending policies — including tax cuts, lower regulatory scrutiny, and government cost cutting — could be priced in. This leaves more room for disappointment than for an upside surprise once clarity on what’s next in Washington is provided.
“S&P 500 price action signals that investors continue to view a ‘pro-business’ bias to the platform,” Citi US equity strategist Scott Chronert wrote in a note. “We don’t disagree but also argue that related policy disruptions to fundamentals may not yet be priced in.”
Chronert added that there hasn’t been a significant change to their full view, which includes a year-end target of 6,500. For now, his team sees “more near-intermediate term downside risk to Trump policy effects than upside opportunity.”
At this point, Chronert believes investors “seem comfortable that tariff pushouts should lead to a muted eventual impact.”
But the looming question is whether the tariffs are actually enacted.
Trump’s initial tariff deadline of Feb. 1 for 25% duties on Mexicos and Canada shook the market for a brief period before a one-month extension cooled fears less than 24 hours later. Since then, many strategists have viewed those specific tariffs as a negotiating tactic rather than a real policy that investors should price into the market.
Read more: What are tariffs, and how do they affect you?
With the 30-day extension deadline to negotiate with Canada and Mexico quickly approaching in early March and news on additional tariffs flowing in, investors believe there could be a chance of another surprise for markets.
“I think the consensus is [the Mexico and Canada tariffs were] used for certain types of negotiation and those will probably not be implemented,” David Rogal, the lead portfolio manager of the BlackRock Total Return Fund (MAHQX), told Yahoo Finance.
Rogal added that if those negotiations took a “turn for the worse,” there would be a “downside risk” for markets.
In a note to clients in early February when 25% tariffs on Mexico and Canada appeared imminent, Goldman Sachs chief US equity strategist David Kostin noted that such large tariffs pose a “downside risk” to his team’s S&P 500 earnings forecast. Combined with increased policy uncertainty, Kostin argued the S&P 500’s fair value could see a near-term downside of roughly 5% if the market priced “sustained implementation of the newly-announced tariffs.”
This underscores Chronert’s initial point that should tariffs actually come to fruition, the current market narrative of strong earnings growth driving stocks higher could come into question. And in a market that’s already near record levels with valuations hovering near all-time highs, any threat to earnings growth could be a risk to the rally.
“We wouldn’t be surprised to see a 5% to 10% pullback,” Crossmark Global Investments chief market strategist Victoria Fernandez told Yahoo Finance on Thursday. “That doesn’t put us into recession, but it does help the market come back and consolidate a little bit around some of these very lofty expectations that are out there.”
“Although earnings have continued to do pretty well, we need to see them hold up in the next few quarters in order to sustain the valuations that we’re seeing.”
Josh Schafer is a reporter for Yahoo Finance. Follow him on X @_joshschafer.
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