Uncertainty in the Market as Policy Changes Loom
Uncertainty surrounding potential policy shifts from President Trump has had minimal impact on the ongoing stock market rally in 2025. The S&P 500 (^GSPC) has hovered near its all-time high reached on Wednesday.
However, concerns are rising on Wall Street that the positive sentiment surrounding Trump's anticipated policies, including tax cuts, deregulation, and government cost reductions, may already be reflected in stock prices. This leaves less room for upside surprises when the administration's plans become clearer.
According to Citi US equity strategist Scott Chronert, "S&P 500 price movements indicate that investors perceive a pro-business bias in the administration." However, he also warns that "related policy disruptions to fundamentals may not yet be factored into valuations."
Chronert believes there is more potential for near-term downside risk from Trump's policies than upside opportunities. He notes that investors appear to be unconcerned by potential tariff increases, but the looming question remains whether they will actually be implemented.
The initial tariff deadline for 25% duties on Mexico and Canada shook the market before a one-month extension eased fears. Many strategists now view these specific tariffs as a negotiating tactic rather than a serious policy.
With the deadline for negotiating with Canada and Mexico approaching in early March, investors are wary of another potential market shock. David Rogal, lead portfolio manager of the BlackRock Total Return Fund, believes the Mexico and Canada tariffs were used for negotiations and will likely not be implemented. However, he warns that if negotiations worsen, there could be downside risk for markets.
Goldman Sachs chief US equity strategist David Kostin has cautioned that large tariffs would pose a "downside risk" to his team's S&P 500 earnings forecast. Combined with increased policy uncertainty, Kostin believes the S&P 500's fair value could see a near-term decline of around 5% if the market anticipates "sustained implementation of the newly-announced tariffs."
Chronert emphasizes that if tariffs materialize, the current market narrative of strong earnings growth driving stock prices higher could be challenged. In a market near record highs with valuations approaching all-time peaks, any threat to earnings growth could pose a significant risk to the rally.
Crossmark Global Investments chief market strategist Victoria Fernandez suggests a potential 5% to 10% pullback, which could allow the market to consolidate around lofty expectations. She stresses the need for continued strong earnings performance to sustain current valuations.