The S&P 500 is still significantly higher

Welcome home. All the twists and turns from the White House will bring about new rally or sale in the S&P 500. But does the market miss the big picture?

Despite signs that the US economy is slowing, Donald Trump’s tariff plans and uncertainty curb, Wall Street analysts still hope that the US major stock index will close on average from 6,000 to just under 6,000. This means that the market will increase at least 5% from now onwards on December 31st.

So this week we’ll outline the case for why the market is wrong and why the S&P 500 is likely to fall significantly below the current level 5,525.

The final stock market forecast is ultimately supported by investors’ annual economic outlook and evaluations of structural drivers such as artificial intelligence and US exceptionalism.

Analysts in 2025 are basically hoping that the S&P 500 level will not change much last year. This is a notable markdown of over 20% of the annual growth of the past two consecutive years. But is that still too optimistic?

Let’s start with the economic fundamentals. Last month I insisted that America was heading towards a recession. (This was based on the economic weaknesses entering Trump’s second term, the uncertainty of his policy, and the possibility that some import obligations could be implemented.) I am grateful that this is not yet a Wall Street view.

Analysts are focusing more on actual tariff announcements. In fact, since the “liberation date,” the consensus growth forecast for 2025 has declined, with the probability of a recession in the next 12 months increasing to 45%. Most people expect the effective US tariff rate (the impact of the previous facility) to settle by about 10-20% this year. It is currently estimated to be around 28%, and it has started to close to 2.5% in 2025.

These predictions appear to be reasonable. Even if there was no recession, tariffs will be particularly high and growth will be slower than last year. However, the market is priced more optimistically.

“Information derived from risk assets does not suggest that the market believes a mild slowdown will be formed this year,” said Daniel von Allen, senior Macross tratheist at TS Lombard, using a simple regression model to estimate US growth forecasts from asset prices.

Expectations for corporate profits this year are too high. Wall Street is easy to buy and sell decisions based on perceived risk-on or risk-off news items. Determining the impact on a company’s revenue can take some time.

“Revenue estimates usually decrease even in mild recessions,” said Peter Berezin, chief global strategist at BCA Research. “However, the market currently expects a 10% increase in revenue over the next 12 months, which is due to a low peak profit margin last year.”

Analysts may be too optimistic about the ability of businesses to pass customs costs to consumers. According to the US Equity Strategy Team at BCA Research, the sectors most imported at the discretion of the industry, materials and consumers also have limited pricing power.

Assuming companies can’t raise prices significantly, this shows that Trump’s tariffs will reduce the S&P 500’s net profit margin by 2.2 percentage points. This means that S&P 500 revenues per share drop by 19.2%, everything else equals (based on a 10% tariff rate in all countries, China’s import duties return 54%, steel, aluminum and car-specific taxes at 25%.)

For measurement, Goldman Sachs estimates that the S&P 500 EPS will fall between about 1-2 percent due to a 5-point increase in US tariff rates.

Whatever the tariff outlook, the consensus of the prominent growth of EPS in 2025 appears in conflict with the current economic environment, high uncertainty, weak consumer and investor trust, and rising import tariffs. (Ships scheduled to be in the Port of Los Angeles are expected to decline significantly over the last two weeks.)

Revenue revisions are coming at a rapid pace now. The number of revenue downgrades by analysts in 2025 is ironically at a recession level, but the actual magnitude of downgrades is relatively insignificant. Prices continue as revenue forecasts drop as analysts adjust their valuations.

For measurement, the future price-to-earning ratio (how willing an investor pays for each future revenue) is currently about 19 years old. In five years five years before the pandemic, it was close to 17.

Using Goldman Sachs’ S&P 500 sensitivity matrix, the EPS has grown by 3% this year, moving forward in the P/E ratio, slightly above the pre-pandemic average, and it’s still modest to get the index closer to 4,550.

Of course, it is possible for the S&P 500 to dodge such a hefty autumn if structural factors provide the driving force for purchase.

But first, the AI ​​story hits obstacles. Deepseek’s low-cost model release in China has highlighted the billions of people US tech companies spend on AI Capital. Trump’s trade announcements include planned obligations on export restrictions on Asian technology manufacturing hubs and chips — adding additional pressure.

“We are still waiting for a ‘killer app’ that justifies the heavy maintenance that is still being done. The low barrier to building a large-scale language model raises further questions that revenue (the grand 7) can generate.” “(They) are only slowly assessing how tariffs affect revenue.”

Stock prices for seven epic tech companies have fallen sharply since Trump took office. However, analysts are unclear as to what the price is. Companies account for one third of the S&P 500’s market capitalization. (They also estimate the net profit margins across the stock market upwards as well.) So selling them is an easy way to reduce risk exposure as a newswhips.

Still, their forward P/E multiples are above pre-pandemic levels (individually and collectively). Prices could go down even further as both tariffs and AI hype revalues ​​profitability.

Second, American exceptionalism. For years, America has attracted capital thanks to its deep liquidity, stability and the security of its assets. This has allowed the S&P 500 to grow beyond its economic foundations.

However, the story is weakened. In March, respondents from the Bank of America’s Fund Manager Survey significantly reduced their US stock holdings in the most records. Tariffs are disproportionately heavy in America. The company is the biggest beneficiary of the “Made in Asia” model, notes Matt King, founder of Satori Insights. (Retaliation measures will also hurt US businesses.)

Rapid policy changes, fundamental uncertainty and increased financial stability make risks and attacks on independent economic institutions (e.g., the recent US Federal Reserve) unreliable locations in the capital.

“The US has gone from being “the cleanest, dirty shirt” to one of the cluttered, yet still the most expensive items,” King says. “Even after this year’s revision, US stocks hold significant exceptional premium trading with a progressive P/ES that is 50% higher than non-US stocks.”

This exposes America to further capital flights, in response to the appeal of overseas opportunities and Trump’s actions. Paradoxically, if the president continues when the term of office begins, the United States will rely more on improving its economic foundations to build buying momentum.

The S&P 500 is vibrating about 10% since its peak in February. However, this newsflow makes it difficult to know what the price is.

Continuous cancellation of policy announcements, exemptions, postponements and rejections means that investors consider the risks they consider to be relevant on the day before each day. This will shift the goalpost for determining growth and profitability forecasts.

However, for all noise, the market still appears to be positioned for hopeful results. Stocks don’t even have mild recession prices. “For the S&P 500 to go where the current consensus is, Trump will need to roll back tariffs immediately,” Berezin believes.

Certainly, recent climbs suggest that the president can improve somewhat. But how much is it? And when? If most investors reasonably expect tariff charges, which rise at least several times more under Trump than where 2025 began, will eventually settle, along with the prolonged impact of economic uncertainty, yet to be fully priced.

Wall Street’s revenue and growth forecasts must go down even further. As they do, the market may also scrutinise the exceptionalist narratives of AI and the US. That’s why I’m worried that the S&P 500 will end the year, not just 5 handles, with four instead of six.

Send your rebuttal, reflection, and end S&P 500 predictions to freelunch @ft.com or x @tejparikh90.

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