S&P500 Forecast: Tariffs, Volatility, and Rebalancing Challenge Q2 Stock Market

Q2 2025 Outlook: Trade Tensions, Tech Weakness, and Sector Rotation Redefine Market Strategy

Markets closed Q1 2025 under pressure as U.S. trade policy rattled global investors. The S&P 500 declined 4.6%, while the Nasdaq shed 10.5%—its worst quarter since 2022. A wave of new tariffs announced by the Trump administration, with broader measures due Wednesday, has heightened fears of a global trade conflict. Investors are bracing for retaliatory responses from key partners like China and the EU, while reassessing exposure across vulnerable sectors.

How Are Tariffs Repricing Risk?

Markets are reacting not just to the presence of tariffs, but to their sweeping scope. Aluminum, steel, and auto tariffs are already in place, and the next round is expected to hit all trading partners. The potential impact on inflation and supply chains has triggered concerns over corporate margins and consumer demand. As investors await specifics, uncertainty remains the key driver of near-term risk.

Are Tech Stocks Losing Their Leadership?

The “Magnificent Seven” tech stocks, long seen as market anchors, led the Q1 downturn. Tesla fell 36%, and Nvidia dropped nearly 20%, dragging the Nasdaq into correction territory. Pressure stems from tariff-related supply disruptions, lofty valuations, and rising regulatory scrutiny. With a rotation underway, growth-heavy sectors like tech and consumer discretionary are facing capital outflows as investors reassess risk-adjusted returns.

Where Is Capital Moving Instead?

Energy was Q1’s top performer, rising 9.3% on the back of geopolitical risk and supply concerns. Consumer staples also gained traction as investors sought safety in defensives.

Financial stocks saw selective interest, driven by M&A speculation—Discover and Capital One rose 7.5% and 3.3% respectively. The rotation hints at a shift in leadership, with value and cyclicals regaining ground after years of tech outperformance.

Are Recession Risks Increasing?

Goldman Sachs raised its U.S. recession odds to 35%, citing slowing growth and tariff-driven inflation risks. The investment bank also cut its S&P 500 year-end target to 5,700. This week’s ISM and jobs reports, along with Fed commentary, will be critical for gauging whether rate cuts are back on the table. The Fed faces a complex tradeoff: combat inflation without stifling already-fragile growth.

What’s the Market Outlook for Q2?

With the VIX rising to 22.28, volatility appears entrenched. Traders should focus on quality names with domestic revenue, strong balance sheets, and limited tariff exposure.

elective exposure to energy, staples, and healthcare may offer relative strength. M&A and regulatory headlines could add idiosyncratic risks and opportunities.

In this environment, nimbleness and selectivity may outperform index-level strategies as markets contend with evolving trade and economic pressures.

More Information in our Economic Calendar.