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By  Timothy C. Murray, CFA®
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Caution: Stocks could face speed bumps ahead

U.S. equities have rallied due to decreased tariff fears. But we remain cautious.

June 2025, Monthly Market Playbook

Key Insights
  • Reduced fears of major U.S. tariff hikes have powered a sharp rebound in U.S. stock prices from their April lows.
  • While it is not clear how high tariffs might rise under the Trump administration, the economic effects still are likely to be negative.
  • Earnings forecasts appear very optimistic and valuations are high. Our cautious approach underweights equities and tilts toward value and non-U.S. markets.

The U.S. stock market has rallied sharply since early April due to reduced fears of large U.S. tariff hikes. However, forward earnings estimates remain extremely optimistic and valuations are historically high. We believe caution is warranted.

After peaking in early April, trade concerns eased significantly in subsequent weeks as talks with some U.S. trading partners made progress and the Trump administration suspended the worst of its threatened tariff hikes. Then, in late May, federal judges ruled against most of the tariff increases the administration had implemented or proposed.

These developments triggered a sharp rebound in the S&P 500 Index, reflecting the reality that tariff policy has been the driving force behind U.S. stock market performance ever since President Trump was elected last November. In fact, if we invert the Bloomberg U.S. Trade Policy Uncertainty Index and overlay it on the S&P 500 Index (Figure 1), we can see that the two have moved nearly in lockstep since the election.

U.S. trade policy has been driving stock prices

(Fig. 1) Bloomberg U.S. Trade Policy Uncertainty Index vs. the S&P 500 Index
U.S. trade policy has been driving stock prices

January 1, 2024, to May 20, 2025.
Past performance is not a guarantee or a reliable indicator of future results.
Sources: Bloomberg Finance L.P. and Standard & Poor’s (see Additional Disclosures).

Tariffs remain a key economic risk

Positive trade news may continue to boost U.S. stock prices over the near term. But that trend could prove short-lived.

While it is unclear how much tariffs ultimately will rise under the Trump administration, the economic effects almost certainly will be negative. Consumer spending could fall. Inflation could accelerate. Corporate profit margins could be squeezed. And small businesses that have little or no pricing power and must operate on thin profit margins might be forced to lay off employees or shut down permanently.

Earnings expectations and valuations are high

Despite lingering tariff risks and signs of a slowing U.S. economy,  as of late May equity investors were not pricing in a cautious outlook. In fact, the opposite appeared true.

As of May 20, consensus estimates projected that S&P 500 earnings per share would grow 10.7% over the following 12 months—even though they rose only 9.1% over the previous 12 months. Even if the Trump tariffs ultimately prove to have a relatively limited economic impact, such a robust level of earnings growth seems very unlikely.

Similarly, investors are placing an extremely elevated valuation multiple on those estimated earnings. As of May 20, the forward P/E for the S&P 500 was almost 21.4 times the expected level of earnings 12 months ahead (Figure 2).

U.S. equity valuations are historically high

(Fig. 2) S&P 500 Index estimated and trailing price-to-earnings ratios (P/E)
U.S. equity valuations are historically high

January 1, 2005, to May 20, 2025.
Past performance is not a guarantee or a reliable indicator of future results.
Actual future outcomes may differ materially from estimates.
Source: Standard & Poor’s via FactSet. 

This was close to the highest P/E reached over the past 20 years and almost five points above the 10-year median.

Conclusion

While trade concerns have eased considerably since early April, they could still impose a considerable drag on U.S. economic activity in 2025. But the U.S. stock market is not currently pricing in a muted outlook. Instead, we see very high earnings multiples being awarded to some extremely optimistic earnings projections.

In light of these issues, T. Rowe Price’s Asset Allocation Committee is taking a cautious approach. We currently have an underweight position in equities, while maintaining overweight positions in short duration fixed income. Within equities, we also favor areas that feature less challenging valuations, including U.S. value stocks and non-U.S. markets.

Timothy C. Murray, CFA® Capital Markets Strategist
By  Eric L. Veiel

Additional Disclosures

CFA® and Chartered Financial Analyst® are registered trademarks owned by CFA Institute.

The S&P 500 Index is a product of S&P Dow Jones Indices LLC, a division of S&P Global, or its affiliates (“SPDJI”) and has been licensed for use by T. Rowe Price. Standard & Poor’s® and S&P® are registered trademarks of Standard & Poor’s Financial Services LLC, a division of S&P Global (“S&P”); Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”); and these trademarks have been licensed for use by SPDJI and sublicensed for certain purposes by T. Rowe Price. T. Rowe Price’s products are not sponsored, endorsed, sold, or promoted by SPDJI, Dow Jones, S&P, their respective affiliates, and none of such parties make any representation regarding the advisability of investing in such product(s) nor do they have any liability for any errors, omissions, or interruptions of the S&P 500 Index.

Important Information

This material is being furnished for general informational and/or marketing purposes only. The material does not constitute or undertake to give advice of any nature, including fiduciary investment advice, nor is it intended to serve as the primary basis for an investment decision. Prospective investors are recommended to seek independent legal, financial and tax advice before making any investment decision. T. Rowe Price group of companies including T. Rowe Price Associates, Inc. and/or its affiliates receive revenue from T. Rowe Price investment products and services. Past performance is not a guarantee or a reliable indicator of future results. The value of an investment and any income from it can go down as well as up. Investors may get back less than the amount invested.

The material does not constitute a distribution, an offer, an invitation, a personal or general recommendation or solicitation to sell or buy any securities in any jurisdiction or to conduct any particular investment activity. The material has not been reviewed by any regulatory authority in any jurisdiction.

Information and opinions presented have been obtained or derived from sources believed to be reliable and current; however, we cannot guarantee the sources’ accuracy or completeness. There is no guarantee that any forecasts made will come to pass.

The views contained herein are as of June 2025 and are subject to change without notice; these views may differ from those of other T. Rowe Price group companies and/or associates. Under no circumstances should the material, in whole or in part, be copied or redistributed without consent from T. Rowe Price.

The material is not intended for use by persons in jurisdictions which prohibit or restrict the distribution of the material and in certain countries the material is provided upon specific request. It is not intended for distribution to retail investors in any jurisdiction.

Australia—Issued by T. Rowe Price Australia Limited (ABN: 13 620 668 895 and AFSL: 503741), Level 28, Governor Phillip Tower, 1 Farrer Place, Sydney NSW 2000, Australia. For Wholesale Clients only.

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EEA—Unless indicated otherwise this material is issued and approved by T. Rowe Price (Luxembourg) Management S.à r.l. 35 Boulevard du Prince Henri L-1724 Luxembourg which is authorised and regulated by the Luxembourg Commission de Surveillance du Secteur Financier. For Professional Clients only.

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© 2025 T. Rowe Price. All Rights Reserved. T. ROWE PRICE, INVEST WITH CONFIDENCE, the Bighorn Sheep design, and related indicators (see troweprice.com/ip) are trademarks of T. Rowe Price Group, Inc. All other trademarks are the property of their respective owners.

202506-4529235

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