US H2 2025 Outlook: Record Highs Face Trade & Fed Uncertainty

Market performance in 1H 2025

The first half of 2025 proved exceptionally volatile for US equities. Market turbulence stemmed from trade policy uncertainties, Federal Reserve decisions, and escalating Middle East tensions. The VIX surged to 52 in April following President Trump's country-specific tariff announcements on 2 April. This marked the highest level since the COVID-driven selloff in March 2020.

Despite a maximum 19% drawdown between February and April, the S&P 500 demonstrated remarkable resilience. The index recovered all losses within three months, finishing the half-year at 6205 points, up 5.5%. Both the S&P 500 and Nasdaq 100 achieved new record highs in June. The Nasdaq gained 7.9% to 22,679 points, while the Dow Jones rose 3.6% to 44,095 points.

Sector performance reveals AI expansion beyond tech giants

Industrial stocks led gains with a 15.4% surge, followed by Technology at 11.6% and Utilities at 11.0%. Consumer Discretionary fell 2.3%, whilst Energy declined 0.2%.

The AI rally broadened beyond the Magnificent Seven companies into related sectors. Electrification, data storage, and infrastructure benefited from the artificial intelligence boom.

Policy changes on tariffs and renewable energy created headwinds for underperformers. Declining consumer sentiment further weighed on discretionary spending stocks.

A broadening of the rally is a healthy signal as wider growth participation from more companies could provide more sustainable gains for the market.

Figure 1: Year-to-date performance of S&P 500 index constituents by sector

Figure 2: S&P 500 index top and bottom performers in H1 2025

Corporate earnings expectations for second quarter results

Analysts forecast 5% year-on-year earnings growth for the S&P 500 in Q2, according to FactSet data. This projection appears conservative compared to the 10-year average growth rate of 9.2% and the first-quarter actual growth rate of 13.1%. Recent increases in positive company guidance suggest potential for earnings surprises during reporting season.

Most companies will announce results in late July and early August. Strong earnings could provide crucial support for stock prices during this period. Conservative analyst projections may create opportunities for positive surprises.

Trade negotiations remain critical market driver

The 90-day pause on country-specific reciprocal tariffs will expire on 8 July. The UK remains the only nation to secure a trade agreement thus far, while China has negotiated an extension until August. Other key trade partners including the European Union, Japan, and India are still working hard on negotiations.

Whether deadlines get extended remains uncertain given Trump's unpredictable style. However, bullish stock markets and subdued VIX figures suggest investors have factored in a decent probability of 'TACO' - Trump Always Chickens Out.

Our base case expects several important trade partners to agree on a high-level basis before the deadline. This would provide more time for detailed discussions over the following two months. The other risk factor is sector-specific tariffs covering semiconductors, pharmaceuticals, and materials may also be announced in due course.

Federal Reserve policy poses downside risks

Bond futures currently price in three 25 basis point cuts by year-end. Expectations have turned more dovish as Trump considers the next Fed Chair before Powell's term expires. These expectations fall below the Fed's latest projection of two cuts this year as officials require more time to assess tariff impacts on inflation.

Downside risks dominate as more than three cuts appear unlikely. A firm stance keeping rates above 3.75% by year-end could disappoint investors expecting policy easing. The central bank faces pressure on its independence whilst navigating complex trade and fiscal policy changes. This tension could create additional market volatility.

Valuation concerns temper optimism

Forward 12-month price-earnings ratio of the S&P 500 index stands at 21.9, above the five-year average of 19.9 and 10-year average of 18.4. Valuations appear stretched but not extreme. Conservative analyst earnings projections suggest upside potential remains. Unless price-to-earnings ratios contract sharply, US indices should find support.

Wall Street price targets for the S&P 500 have not fully recovered from April's downward revisions, ranging between 5600 and 7000 by year-end. Mean estimates of 6300 indicate 1.5% upside from current levels. Although this upside appears limited, volatility within the period could present ample trading opportunities. Market swings may offer better entry and exit points than the overall directional move suggests.

Faith in US assets shows concerning decline

Policy flip-flopping, Fed independence concerns, and soaring budget deficits from Trump's 'One Big, Beautiful Bill' have undermined confidence in US assets. The US Dollar index has plunged below 97 to three-and-a-half year lows while the 30-year Treasury yield briefly touched 5.1% before retreating to around 4.8%.

June's Bank of America Global Fund Manager Survey confirms the concerning sentiment shifts. A net 31% of asset managers reported being underweight the US dollar - the lowest reading in 20 years. Additionally, 36% said they were underweight US equities.

This lack of faith in US assets poses significant risks to equity markets. Restoration of confidence will require policy clarity and reassurance of Fed independence.

Technical analysis points to continued upside potential

The US 500 index recently broke above its uptrend channel established in mid-May. The next target sits at 6500 based on a 161.8% Fibonacci extension of the bullish move between Aug 2024's low and February 2025's peak. However, the relative strength index (RSI) above 70 indicates overbought conditions. A technical correction may precede the next upward leg, with support around 5,920.

Figure 3: US 500 index (daily) price chart

US Tech 100 decisively broke above its 18 February all-time high, suggesting potential for testing the next psychological resistance at 23,000. Should price movements from the 21 April low follow Elliott Wave Theory's Wave 3 pattern, a 200% Fibonacci extension of Wave 1 could potentially drive the index to 24,718 before a corrective wave materialises. Immediate support should emerge around 21,500.

Figure 4: US Tech 100 index (daily) price chart