The optimism that permeated Wall Street at the start of 2025, fueled by two consecutive years of remarkable stock market gains, has been significantly dampened. The S&P 500, after delivering returns exceeding 25% in both 2023 and 2024 – a feat only paralleled during the height of the dot-com boom – was widely expected to continue its upward trajectory.
However, the introduction of substantial tariffs on imported goods by a prominent national leader has injected considerable uncertainty into the market. These levies, impacting a broad range of America’s trading partners, immediately sparked concerns among investors about potential inflationary pressures and a deceleration of economic activity.
Consequently, a shift towards safer assets ensued, triggering a sharp decline in the S&P 500, which at its nadir, registered a 19% drop from its record peak. While the index has since recouped some of these losses, it remains approximately 8% lower than its recent high.
In response to this market upheaval, numerous major financial institutions have revised their year-end forecasts for the S&P 500 downwards.
Analysts from HSBC, Oppenheimer, Yardeni Research, Goldman Sachs, RBC Capital Markets, Barclays, and UBS have all significantly reduced their targets for the index in 2025. Notably, projections from HSBC, Goldman Sachs, RBC Capital Markets, and UBS now suggest the S&P 500 will conclude the year at a level below its 2024 closing price of 5,881.
The imposition of these widespread tariffs – a blanket 10% levy on nearly all physical goods entering the country, coupled with higher “reciprocal tariffs” on nations with substantial trade surpluses (excluding the ongoing elevated tariffs on imports from China, which remain in effect) – aims to incentivize domestic manufacturing. However, the realization of this objective is likely a long-term process.
In the interim, American consumers face the prospect of increased prices for a wide array of goods, potentially creating ripple effects across businesses and supply chains, and raising the specter of an economic downturn. Such a scenario would invariably pressure corporate earnings, a fundamental driver of stock valuations, thus justifying the more cautious outlook from Wall Street analysts.
Despite the current anxieties, it’s crucial for investors to recognize that market corrections are an inherent aspect of the investment landscape. The recent near-bear market decline in the S&P 500, while unsettling, is not an anomaly.
Historically, the index has experienced a 20% or greater drop roughly every six years, with corrections of at least 10% occurring even more frequently, approximately every two and a half years.
Interestingly, historical analysis suggests that the specific catalyst for a market downturn is often less significant than the downturn itself. While tariffs are the current cause for concern, the S&P 500 has weathered four distinct bear markets in the past quarter-century, each triggered by different economic shocks: the dot-com bubble burst, the global financial crisis, the COVID-19 pandemic, and the subsequent inflation surge.
Even a near 20% decline in 2018 was attributed to earlier tariff actions, highlighting the market’s sensitivity to such trade policies. However, the market ultimately recovered, with the S&P 500 posting a strong gain the following year.
Ultimately, the S&P 500 has demonstrated remarkable resilience, delivering an average annual compound return of over 10% since its inception, even after accounting for all market downturns.
While the present tariff-induced volatility is undoubtedly creating short-term headwinds, long-term investors may view this period of decline as a potential opportunity to acquire quality assets at more attractive valuations.
Historical trends would suggest the fundamental growth trajectory of the market is likely to persist beyond the current turbulence. Of course, in unprecedented times we perhaps shouldn’t rely too much on precedent.