U.S. stock market hardens after economic volatility, but some threats remain

How far the stock market has come without traveling very far is remarkable.

As we near the midway point of 2025, the major U.S. equity benchmarks sit less than 2% from where they began on Jan. 1, which has led some to joke nothing much has happened this year.

Nothing, of course, could be further from the truth. Unexpectedly severe tariff policies sent shockwaves down Wall Street in early April, and while the waters have calmed since a 20% selloff, equities today are behaving quite differently. Once hypersensitive to the daily news flow, this market has become hardened and resistant.

In the past two months, we have seen only two trading days when the S&P 500 fell 1% or more. There were 16 such days in the two months prior. It’s a welcome change for investors still dealing with the trauma from the historic volatility earlier this year.

But the market’s resilience remains a bit curious. It’s not as though the economic uncertainty is totally gone. Several challenges remain and many of them are familiar. The market needs more resolutions to push through all-time highs and continue its bullish path forward.

Here are some remaining challenges:

You might remember a 90-day pause to President Donald Trump’s reciprocal tariffs was the catalyst that triggered this stock market recovery. That pause expires July 9, but markets are pricing in very little risk of a second “Liberation Day” and minimal negative impact from tariffs overall. The S&P 500 is actually 5% higher than it was April 2 when Trump first announced “reciprocal tariffs."

As for the 10% baseline tariffs imposed on all foreign goods (excluding Canada and Mexico), it’s possible the courts deem those unlawful. A federal judge already ruled as such in late May, and a Supreme Court ruling could be coming, but in the meantime, those tariffs remain in place.

The biggest economic dent from tariffs could come from the general cost of uncertainty. The lack of a clear, long-term U.S. economic policy has led CEOs to eliminate projects, cut costs and generally delay spending. Importantly, the impact from this reduced spending has yet to manifest itself in the economic data. Trade deals would be helpful, but they remain elusive.

We’re still a month away from Q2-earnings season, but companies are already revising their estimates lower. Consensus expectations for S&P 500 companies suggest 4.9% year-over-year earnings growth in Q2. That’s down from forecasts of 9.3% growth as of March 31. Lower expectations create an easier bar to clear, but since stock prices have not fallen with earnings estimates, that means valuations have risen. The forward Price-to-Earnings (P/E) ratio of the S&P 500 is approaching 22. That’s well above the 10-year average of 18.4.

U.S. Gross Domestic Product (GDP) fell by 0.2% in the first three months of 2025 compared to a year earlier. If GDP contracts again in Q2, it will signal an economic recession. The market is largely ignoring this possibility, which seems strange considering the impact from tariffs and lower corporate spending will likely be greater in April, May and June than it was in the prior quarter. A recession is by no means a worst-case scenario, especially if short-lived, but it would lead asset prices to recalibrate.

One of the only 1%-down days since mid-April occurred June 13 after Israel bombed nuclear facilities and military bases in Iran. The market pessimism lasted exactly one day as equities immediately bounced back despite Iran’s retaliation. Military conflict in the Middle East is nothing new, but further destabilization in the region could present larger challenges to global trade.

Ben Marks is chief investment officer at Marks Group Wealth Management in Minnetonka. He can be reached at ben.marks@marksgroup.com. Brett Angel is a senior wealth adviser at the firm.