Is the U.S. Equity Market Headed for a Reset?

A market supported by resilience—but riddled with fragility 

The U.S. stock market enters the second half of 2025 facing a volatile mix of macroeconomic, political, and structural uncertainties. While strong consumer resilience, record corporate buybacks, and moderating inflation offer support, headwinds including tariff-driven stagflation, deteriorating CEO confidence, a sluggish labor market, and elevated equity valuations suggest a fragile outlook. A market crash is not inevitable, but the bar for continued gains is uncomfortably high.

Stagflation resurfaces as trade policy weighs on growth 

The economy is grappling with a reemergence of stagflation, driven by aggressive trade policies that have pushed the average effective tariff rate above 15%, the highest since the 1930s. GDP growth is projected to slow to 1.6% in 2025, while inflation remains elevated near 4%. Signs of a softening labor market are mounting, with jobless claims rising and job openings declining. At the same time, student loan delinquencies are increasing, which could impact consumer confidence and spending.

Corporate sentiment dims amid policy uncertainty 

Corporate and business sentiment is weakening, with investment intentions declining sharply, particularly among small businesses. Outside of AI-driven projects, capital expenditure plans have largely stalled. Meanwhile, the Federal Reserve faces limitations in lowering interest rates due to persistent inflation. Fiscal policy remains a source of concern, with potential deficits exceeding 7% of GDP and rising Treasury market fragility.

Valuations remain stretched as earnings stall 

Valuations remain elevated, with the S&P 500’s forward P/E near cycle highs. The earnings outlook for H2 is flat, and gains in the first quarter have not translated into upward revisions. Market concentration is high, with the Magnificent 7 making up nearly 40% of the S&P 500, and retail flows into these names have waned. Record buyback authorizations offer some support, but actual execution may be tempered by rising capex needs.

Sentiment holds, but the margin for error is thin. 

Still, sentiment is not euphoric. Contrarian indicators like the Crowd Sentiment Poll remain in a healthy zone, suggesting the market could continue to climb the wall of worry if key risks don’t materialize. But the margin for error is thin.

Conclusion: Managing risk in a policy-fractured market. 

In conclusion, while a crash is not our base case, the risks are mounting. We recommend that investors embrace diversification, favor quality and defensiveness, reduce speculative growth exposure, and hold more liquidity. The second half of 2025 could deliver surprises, but prudence remains the best strategy in an increasingly unpredictable market landscape.