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On Monday, Wolfe Research analysts highlighted the significant impact of tariff-related news on stock market volatility. They observed that the previous day's market movements were influenced by unfounded rumors of a tariff pause, which the White House later denied. The S&P 500, currently trading at $504.38, has experienced a sharp 10% decline over the past week, reflecting this heightened volatility. Despite the temporary surge in stock prices, Wolfe maintains a cautious investment approach, emphasizing healthcare, consumer staples, real estate investment trusts (REITs), and utilities.
According to Wolfe, the market's reaction on Monday underscores its current vulnerability to tariff news. The analysts pointed out that leading up to Monday, several market indicators suggested that stocks were heavily oversold, with the potential for a near-term rebound. InvestingPro data confirms this assessment, with technical indicators showing the S&P 500 trading near its 52-week low of $481.80 and RSI suggesting oversold conditions. However, Wolfe believes that ongoing tariff uncertainty is likely to result in weaker economic data in the months ahead.
Wolfe Research advises investors to remain defensively positioned, despite any short-term market rallies. The firm suggests that a more favorable risk-reward balance might be achieved if the S&P 500 index reaches a key threshold of 4,675 points. Wolfe also indicates that another potential market catalyst could be stress in short-term funding markets, which might prompt federal intervention through liquidity injections.
The research firm's strategy is to wait for signs of a softer stance on tariffs from the administration or a significant enough market drop to present better investment opportunities. Wolfe's analysts argue that until there is a change in the current trade policy or market conditions, a defensive investment posture is prudent.
Wolfe Research's analysis underscores the current market's sensitivity to both official announcements and rumors regarding trade policy. Their outlook suggests that investors may need to brace for further volatility, with a keen eye on geopolitical developments and domestic economic indicators.
In other recent news, Bank of America (BofA) has revised its target for the S&P 500 index to 5600, responding to escalating trade tensions between the United States and its major trading partners. BofA analysts noted that US tariffs on Chinese goods, along with China's retaliatory measures, could reduce S&P 500 operating income by approximately 9%. Additionally, tariffs on Canadian goods are expected to further decrease earnings by about 1%. The European Union's potential countermeasures could add more pressure on earnings. In light of these developments, BofA anticipates that the S&P 500 earnings per share (EPS) for 2025 will need to be revised downward, projecting flat growth compared to the current rate.
Goldman Sachs has also adjusted its economic forecasts, now expecting an increase in the average US tariff rate to 15 percentage points by 2025. This revision accompanies a downgraded growth projection for the US, now anticipated to slow to 1.0% by the fourth quarter of 2025. The firm has also increased the probability of a recession within the next two years to 35%. In response to these economic conditions, Goldman Sachs predicts the Federal Reserve will implement three consecutive interest rate cuts later this year. Meanwhile, BofA analysts have observed an increase in short positions on the S&P 500 and NASDAQ-100 indexes by trend followers, indicating a cautious stance as a significant tariff deadline approaches. These developments underscore the ongoing impact of international trade policies on corporate profitability and investor sentiment.
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