Last week was a relatively quiet week in the market for a change, which is not a bad thing after all the movement of the past few months.
With the midpoint for the year now fast approaching, the recent relative calm provides a good chance to take stock of where the market stands, and what may lie ahead for the rest of 2025.
In short, I believe the market could be looking at limited upside, but also limited downside, for the next 6 to 12 months, which could leave us in a trading range for the rest of the year. Let’s look at both sides of that coin.
Why upside might be capped
After bouncing back from the April lows, the forward price-earnings ratio (meaning price divided by estimated earnings for the next 12 months) on the S&P 500® was recently back near a cycle high of 21. While earnings estimates have been revised downward since the start of the year’s volatility, to 7% growth for 2025 from 12% growth, that only discounts a moderation but nothing worse. This tells me that markets are no longer priced for an adverse outcome. This matters, because the sunnier the market’s expectations, the harder it is to beat them (i.e., the harder it is to find further upside).
At the same time, risks remain on several fronts. Hawkish tariff talk is back, posing continued risks for stocks and the US dollar. And risks from higher bond yields look likely to persist. As I’ve written about before, there’s been upward pressure on bond yields from a rise in the “term premium,” which refers to the additional compensation that lenders, like bondholders, typically require for lending for longer periods. After an unusual decade of negative term premiums—largely due to quantitative easing and zero or near-zero interest rates—this premium has been increasing and could still have further to climb.
Why should stock investors care about higher rates? Because they tend to pressure stock price-earnings (PE) ratios, and therefore pressure stock prices, per the “Fed model.” This theory holds that the interest rate on 10-year Treasurys and the earnings yield on stocks (meaning, earnings divided by price) should be roughly equivalent—or at least correlated—as investors pursue the highest yields.
Bringing all this together, what I see is that there are real risks to the outlook which are not already priced into stocks. In my view, this puts a ceiling on how far the market can rally from here, while leaving us open to some downside risks.
Why downside might also be limited
When the federal government steps in with fiscal stimulus to stop a decline in stocks, it can be called a “fiscal put.” (A “put” is a type of option that can be used to limit losses in a decline.) That’s one way to think about the delay in retaliatory tariffs that was announced in April. Stocks were down close to 20% at the time, but the announcement sparked a V-shaped recovery.
While the market is up quite a bit from the April lows, this suggests to me that the lower boundary for this market correction may have been established.
Rangebound for 2025?
All this puts me firmly in the trading-range camp, in terms of what the next 6 to 12 months could bring.
I suspect that the lower boundary of this range might be defined by the S&P’s intraday April low of 4,835, while recent highs of near 6,000 could prove to be the upper boundary. And of course, even in a trading-range year stock prices could briefly overshoot in either direction. Think 2018 or 2015 as likely analogs.
Don’t fear the bear
If I am right about this rangebound outlook, it suggests that the bull market that started in October 2022 may well have ended in February 2025, and that a new bear market may now be underway.
That said, it might be a modest one. I could see a scenario unfold in which earnings growth stabilizes here in the mid-single digits, while PE ratios decline driven by the Fed model and possibly foreign capital repatriation. In that case, we could be in a bear market that doesn’t correspond with a recession. This would be good news for investors, as non-recessionary bear markets have historically been less severe than recessionary bears.
Could the bear scare already be over?
There’s also the possibility that I’m being too cautious with these expectations, and that all we had was a bear scare.
Indeed, there are plenty of green shoots sprouting. Take credit spreads, which measure the additional yield investors demand for investing in bonds with default risk (such as corporate bonds). Both investment-grade and high-yield credit spreads have staged a nice rebound and are confirming the stock market’s glass-half-full sentiment.
Estimated economic growth for the coming quarters has been recovering a bit, as analysts and economists reduce their estimates of downside risk from tariffs. The same is true for earnings estimates—while estimates are generally down from where they were a few months ago, if you squint you can see some recent upticks in the quarterly earnings-per-share estimates for the remainder of 2025 and into 2026.
I also see evidence of green shoots in sentiment, which remains constructive, buying and selling activity from insiders, and global liquidity.
It’s certainly possible that a bull market could indeed resume, provided that the worst of any news surprises are behind us. However, it’s worth remembering that stock valuations come down to 3 things: earnings, interest rates, and the premiums investors demand in exchange for taking on risk. Earnings may recover from here, but in my view risk premiums remain complacent (and so could rise) in the face of rising bond yields around the world.
Implications for investors
What to do in a rangebound 2025 when risk premiums for both stocks and bonds may be on the rise?
Fortunately, there’s also been no shortage of asset classes in the green for the year. Those include both developed and emerging international stocks, gold, and certain flavors of fixed income and alternatives. Maybe the big winner of 2025 will end up being diversification.
