Further near-term upside in the S&P 500 is likely limited: Wells Fargo

Investing.com -- The recent rebound in U.S. equities may be running out of steam, according to analysts at Wells Fargo (NYSE:WFC), who caution that unresolved trade tensions and economic uncertainty likely constrain further near-term upside in the S&P 500.

“One can make a reasonable argument that at least some of the recent stock bounce higher can be attributed to anticipation that some trade deals will be announced in the near term,” Wells Fargo wrote. 

However, they added that until concrete deals materialize—particularly with major partners like China, Europe, Mexico, and Canada—the bank expects “more downside volatility.”

The impact of tariffs is said to already be visible, with retailers warning of reduced inventory in the coming months. 

“Prices/inflation tend to rise and then the economy tends to slow,” the analysts noted, adding that persistent tariff levels could hit sectors such as clothing and toys.

Wells Fargo also flagged potential interest rate cuts later this year, contingent on a further economic slowdown and rising unemployment. 

“We do have three interest-rate cuts penciled in this year if the economy slows in coming quarters and the unemployment rate rises as we expect,” the firm said, but added that current data has not yet justified immediate action by the Federal Reserve.

Despite near-term headwinds, the bank sees room for recovery by 2026, with improving earnings and macro conditions. 

In the meantime, Wells Fargo advises a cautious approach, favoring quality large- and mid-cap U.S. equities and sectors like Energy, Communication Services, Information Technology, and Financials.

For fixed income investors, Wells Fargo recommends focusing on “investment-grade corporates and essential-service municipals” in the three- to seven-year range. “Quality and selectivity should lead the way,” the firm added, suggesting these strategies may help investors weather ongoing market volatility.