BCA: S&P 500 rally near its limits as tariffs weigh on outlook

Investing.com -- The recent rebound in the S&P 500 may be nearing its end as tariff-related headwinds threaten corporate margins and dampen earnings prospects, according to a new report from BCA Research.

The index has climbed 14% since April 8, recovering from earlier volatility thanks to “falling volatility, negative sentiment, and oversold conditions,” BCA said.

Improved trade policy signals and strong economic data have helped fuel the rally, with investors rotating from defensive and value stocks into cyclicals and growth. Big Tech, or the “Mag 7,” led the way, outperforming the rest of the S&P 500 stocks.

However, BCA warned that the rally is running out of steam. “The S&P 500 is already trading at 20x forward earnings. From here, risks are skewed to the downside,” analysts wrote.

“We don’t expect the S&P 500 to return to February’s highs since that level would not reflect increased tariff rates (even with the new agreements in place) and lower margins,” the firm added.

While first-quarter earnings have generally exceeded expectations, BCA noted that “surprises are modest,” and second-quarter forecasts have been “sharply” downgraded—especially for cyclical sectors. 

Within the Mag 7, all but Tesla (NASDAQ:TSLA) delivered better-than-expected results, though guidance remains murky.

Trade tensions are once again said to be a growing concern. BCA projected that new tariffs will reduce the S&P 500’s net margin by two percentage points, with companies in Consumer Discretionary among the most vulnerable. 

“A margin squeeze is the most likely outcome of the new trade policy as importers lack pricing power,” the firm said.

Despite the potential for further short-term gains—supported by ongoing negotiations with China and possible fiscal stimulus—BCA warned that “most of the recovery is priced in” and emphasized that “over the longer term, risks are skewed to the downside.”