The U.S. equity market has taken investors on a bumpy roller coaster ride, leaving some of us queasy. We discuss what drove the rally, lingering risks, and the market’s potential from here.
May 22, 2025
Kelly Bogdanova Vice President, Portfolio AnalystPortfolio Advisory Group – U.S.
Following an 18.9 percent plunge due to substantial tariffs, the S&P 500 shot up 19.7 percent from April 8 through May 19 after very high tariffs were paused. Since then, it has backed off some but is still above the levels before big tariffs were levied and is now 4.5 percent below the mid-February all-time high, as of midday trading on May 22.
Such a large rally over such a short time frame hasn’t happened since the rebound following the most acute stage of the pandemic crisis in March 2020. And this one has eclipsed a similar move that occurred right after the global financial crisis low in March 2009.
If you’ve had motion sickness along the way that’s understandable, but hopefully the market’s rapid ascent has provided some relief.
The market rallied mainly because the Trump administration blinked twice on ultra-high tariffs: First when it paused the very large reciprocal tariffs for 90 days on April 9, and then when it temporarily rolled back tariffs on China to 30 percent from 145 percent and China responded similarly on May 12.
We doubt ultra-high tariffs will return for the bulk of key U.S. trading partners because a unique coalition that strongly opposes high tariffs effectively vetoed the Trump team’s initial plan. This motley crew included investors in financial markets – especially large U.S. Treasury investors inside and outside of the country – and corporate executives including heads of financial and retail giants, small business leaders, business lobbyists, the bipartisan Washington foreign policy establishment, and foreign governments including key U.S. allies. Even a diverse group of Republican senators who became worried about potential midterm election repercussions joined the fray.
Following the Trump team’s tariff retreat, RBC Economics’ estimate of the average U.S. tariff rate dropped to 13 percent from the 24 percent level where it stood just after the very large reciprocal tariffs were announced.
The tariff U-turn prompted Wall Street economists to ease back from stagflationary and recessionary forecasts.
RBC Economics raised its full-year 2025 GDP growth forecast slightly to 1.3% from 1.0% and lowered its inflation forecast. It now projects core consumer inflation (excludes food and energy) will peak at 3.3 percent in Q3 2025, lower than the previous 4.3 percent forecast for the same quarter.
Better-than-feared April inflation data and, importantly, better-than-expected Q1 corporate earnings also boosted the market.
Furthermore, short-term trading dynamics were upended. The initial strong bounce in April, combined with the U.S.-China tariff de-escalation in May, seemed to prompt a big wave of short covering among fast-money hedge funds. We also detected that the “sell America” mentality dissipated notably, especially among foreign investors, and quickly shifted to a FOMO mentality – fear of missing out on the U.S. equity rally.
Unfortunately, the tariff saga isn’t over yet. The president recently indicated that clarifications on tariff rates for 100+ nations are forthcoming soon, and there have been mixed messages from his team about the pause on reciprocal tariffs. A durable trade/tariff framework with China still needs to be negotiated, and there are risks the U.S. could erect more non-tariff barriers against China. There are also many trade and tariff details to sort out with the EU, America’s largest trading partner.
If the Trump administration reverts to a hard line in any of these directions, we think the same motley crew of high-tariff opponents will push back again.
But even if the average U.S. tariff rate remains near 13 percent, there are still plenty of unknowns about tariff consequences for the economy and corporate profits. This represents the highest average tariff level since the 1930s and is well above the 2.4 percent level of 2024.
RBC Global Asset Management Inc. Chief Economist Eric Lascelles notes that “most of the economic pain associated with tariffs does not immediately appear.” U.S. recession risks have declined but remain elevated (see more about this on page 3). Lascelles also argues that it could be reasonable to assume the negative impact that lower GDP growth typically has on corporate earnings growth could be exacerbated with tariffs.
Also, the tax and budget bill currently working its way through Congress leaves some things to be desired, in our view.
We think the Treasury market is already flashing warning signs about the bill’s projected impact on the federal deficit and is scrutinising the budget deficit issue much more closely than in previous years.
The stock market seems to view the extension of the Trump 2017 tax cuts, pro-business measures, and new tax cuts in the package quite positively; however, it probably wouldn’t be immune from any further bond market discontent about outsized future budget deficits.
At an economic forum in Qatar, Steve Mnuchin, Trump’s treasury secretary in his first term, put it this way: “The budget deficit is a larger concern to me than the trade deficit. So, I’m on the side of, I hope we do get more spending cuts – something that’s very important.”
RBC Capital Markets, LLC’s Head of U.S. Equity Strategy Lori Calvasina acknowledged recently that there are scenarios that could lead to the S&P 500 finishing the year higher than her current 5,550 price target. (She reduced her target for the second time this year after the big reciprocal tariffs were announced on April 2 and is currently evaluating her various models in light of recent developments.) This target is about 5.4 percent lower than the market’s level as of this writing.
Calvasina notes that some of her updated modeling work indicates the S&P 500 could end up around 5,700–5,900 by year end. This is based on RBC Economics’ improved economic forecasts and updated rates estimates following the tariff retreat, and incorporates a range of S&P 500 earnings projections for 2025 – her own $258 per share estimate and the Bloomberg consensus forecast of $265 per share – among other metrics.
The 5,700–5,900 zone represents roughly flat returns for the year and is fairly consistent with the median annual historical return during periods of low GDP growth periods of 1.1 percent–2.0 percent based on analysis by Calvasina and her team.
We think the rally, while stomach-churning for some, has been a gift. We recommend using it to clean out any unwanted equity positions in portfolios.
Our overall positioning advice hasn’t changed: We think the high levels of uncertainty argue for holding U.S. equities in portfolios up to but not beyond a Market Weight level.
We want to talk about your financial future.
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