Summer Market Signals: Tariffs, Tax Cuts and Treasury Yields

by Larry Adam of Raymond James, 5/29/25

Key Takeaways

  • Economic headwinds from trade policies are still ahead
  • Tax cuts not likely to fully offset the impact from tariffs
  • Treasury yields are moving into the danger zone for equities

Sell in May and Go Away? This old market saying tends to resurface around Memorial Day, suggesting investors should scale back their equity exposure ahead of what’s perceived as a seasonally weaker stretch for stocks. While the phrase is catchy and rhymes well, its track record is less than reliable. History shows the S&P 500 tends to deliver solid returns between Memorial Day and Labor Day. Over the past decade, the index has averaged a 3.9% gain (~15% annualized) during this period and finished positive 80% of the time. That said, summer isn’t without risk. The S&P 500 has historically seen an average drawdown of ~7% at some point during these months, often sparked by major global events, like the euro debt crisis, China-related volatility, or the US credit downgrade. With that in mind, here are three reasons we’re cautious heading into summer:

  • Delayed Tariff Impacts On The Economy Are Still Ahead | Despite the soft ‘headline’ GDP print for 1Q25 (-0.3%), underlying economic momentum has remained resilient. However, our economist expects growth to slow through the rest of the year (RJ 2025 GDP forecast: ~1%) as the effects of President Trump’s trade policies increasingly weigh on consumer spending and business investment.
    • Tariffs—Financial markets welcomed the temporary trade truce between the US and China, but it’s too soon to declare victory. While the news is encouraging, trade tensions remain far from resolved—evident by the tariff threats on the EU this morning. Aside from a preliminary deal with the UK, progress on other fronts has been limited—leaving much to be done before the 90-day reprieves expire. Currently, the US is halfway through the 90-day pause on ‘reciprocal’ tariffs for all countries except China, which ends on July 8. Negotiations with China have a bit more runway, with their pause set to expire on August 12. Uncertainty also lingers around the next potential flashpoint, especially as President Trump has signaled plans to move forward with sector-specific tariffs targeting areas like pharmaceuticals and semiconductors. While markets cheered the recent de-escalation and the rollback of some punitive tariffs on China, the economic impact of a 15–17% average effective tariff rate—5x higher than at the start of the year—has yet to be fully felt. This sharp increase is likely to weigh on economic activity and contribute to further softening in the labor market in the months ahead.
    • Earnings— S&P 500 earnings got off to a strong start in Q1 2025, rising +14% year-over-year—double the consensus expectations at the beginning of the quarter. However, since most companies reported results for the period prior to President Trump’s tariff announcements on Liberation Day (April 2), the numbers don’t fully reflect the economic impact of the new trade landscape. While the S&P 500 bounced back on news of a trade truce, expectations for a tougher economic backdrop—marked by slowing sales growth and rising input costs—have caused earnings estimates to trend lower. Full-year 2025 EPS estimates have declined from $272 at the start of the year to $263, still implying 10% YoY growth. However, we believe the consensus remains too optimistic given the mounting economic headwinds and uncertainty around the level and duration of the tariffs. We remain comfortable with our below-consensus EPS forecast of $250–$255 and expect further downward revisions to weigh on equity markets in the near term.