Can US Stocks Sustain Their Rally? Rising Valuations & Earnings Uncertainty Loom Post-Tariff Rebound

The U.S. stock market has staged a volatile recovery since President Donald Trump’s sweeping April 2 tariffs rattled global markets. While a robust Q1 earnings season and tempered trade fears fueled the rebound, investors now face a critical question: Can the S&P 500 overcome rising valuations, murky earnings forecasts, and lingering trade risks to sustain its momentum?

This analysis unpacks the challenges confronting U.S. equities in May 2025, including:

• Valuation concerns as the S&P 500 trades at a 20.6x forward P/E ratio
• Mixed earnings signals with strong Q1 results but downgraded future estimates
• Ongoing trade uncertainty ahead of U.S.-China talks in Switzerland
• Technical resistance levels like the 200-day moving average

Let’s dive into the factors shaping the market’s next move.

The Tariff Roller Coaster: From Swoon to Rebound

April’s Tariff Shock & Market Volatility

President Trump’s April 2 tariffs on key trade partners triggered a 7.5% drop in the S&P 500 over six sessions, accompanied by a surge in the Cboe Volatility Index (VIX) to 52.33—a five-year high. Investors feared a prolonged trade war, particularly with China, which accounts for 15% of U.S. goods imports.

The Rebound Drivers

Stronger-Than-Expected Q1 Earnings:

• 73% of S&P 500 companies beat earnings estimates, with overall growth at 13.6% YoY (vs. 8% forecasted).
• Tech and industrials led gains, offsetting tariff-related dips in autos and agriculture.

Trade Optimism:

• News of U.S.-China talks in Switzerland (led by Treasury Secretary Scott Bessent and VP Premier He Lifeng) eased fears of escalation.
• Bessent framed the meeting as a step toward “de-escalation,” boosting sentiment.

By May 7, the S&P 500 had erased its post-tariff losses, but remains 8% below its February 2025 peak.

Q1 Earnings: A Silver Lining with Clouds Ahead

The Good News

• Consumer Discretionary & Tech Shine: Companies like Amazon (AMZN) and NVIDIA (NVDA) posted double-digit profit growth.
• Margin Resilience: Despite wage pressures, net margins held steady at 11.3%.

The Bad News

• Guidance Downgrades: 56% of firms issued below-consensus Q2 forecasts (vs. 51% historical average).
• 2025 EPS Growth Slashed:

• • Q2-Q4 estimates fell to 3.8%, down from 5.2% in March.

  • Goldman Sachs warns tariffs could dent earnings by 4-6% if implemented fully.

“Visibility on the tariff landscape remains very low,” said Allen Bond of Jensen Investment Management. “Companies must reassess their strategies as policies evolve.”

Valuation Concerns: Are US Stocks Overpriced?

Key Metrics Flash Warning Signs

• Forward P/E Ratio: 20.6x (vs. 10-year average of 18.5x)
• Equity Risk Premium: 3.2% (near 10-year lows, signaling weaker compensation for risk)
• 10-Year Treasury Yield: 4.3% (up 10 bps since April 2, pressuring equity valuations)

Why Higher Yields Matter

Rising Treasury yields:

• Increase borrowing costs for companies (S&P 500 debt-to-equity ratio: 1.2x).
• Make bonds more attractive vs. stocks (dividend yield: 1.5% vs. 10-year yield: 4.3%).

“The market embeds too much optimism,” warned Keith Lerner of Truist Advisory. “There’s little buffer for negative news.”

Technical Analysis: S&P 500’s Battle with Key Resistance

The 200-Day Moving Average Test

The S&P 500 faces a critical technical hurdle at its 200-day moving average (4,950), just 2% above its May 7 close of 4,850. Historically, breaking this trendline requires a fundamental catalyst—like a trade deal or Fed rate cuts.

Post-Streak Performance

The index’s recent 9-day winning streak (April 18–30) hints at bullish momentum. Since 1991, the S&P 500 rose in 11 of 12 instances six months after such streaks, per Nationwide’s Mark Hackett.

But Walter Todd of Greenwood Capital cautions: “Without a trade breakthrough, breaking 4,950 will be tough.”

Trade Talks & Market Sentiment: The China Factor

Switzerland Talks: What’s at Stake

• Key Issues: Tariff rollbacks, intellectual property rules, and semiconductor export curbs.
• Market Impact: A deal could lift the S&P 500 by 5-7%, while failure may reignite volatility.

VIX Signals Lingering Anxiety

Though the VIX has retreated to 25 from April’s 52 peak, it remains 42% above its long-term average—a sign investors still hedge against risks.

“We’re past peak uncertainty, but one tariff tweet could change everything,” said Michael Reynolds of Glenmede.

Investor Strategies: Navigating Uncertainty

Sector Opportunities

• Defensive Plays: Utilities (XLU) and healthcare (XLV) for stability.
• Tariff-Resilient Tech: Cloud giants like Microsoft (MSFT) with limited China exposure.

Fed Policy Wildcard

The May 7 Fed meeting could hint at 2025 rate cuts if trade risks escalate. Lower rates would support valuations but may signal economic worries.

Conclusion: Balancing Optimism with Caution

The U.S. stock market’s rebound reflects resilience, but rising valuations and earnings uncertainty pose hurdles. Key takeaways:

1. Trade Developments: A U.S.-China deal is critical for sustained gains.
2. Earnings Revisions: Q2 guidance will test the rally’s durability.
3. Technical Levels: Watch the 200-day MA (4,950) as a momentum gauge.

Investor Action Plan:

• Stay diversified across sectors and geographies.
• Hedge with gold or Treasurys amid volatility.
• Avoid overexposure to tariff-sensitive industrial