The S&P 500's Volatility Amid Tariff Uncertainty: Is the Market Bottoming Out?

The S&P 500 has endured a rollercoaster ride in 2025, shaped by a volatile mix of trade policies, geopolitical tensions, and investor sentiment. After a sharp correction in early 2025, triggered by President Trump's aggressive tariff agenda, the index clawed back to record highs in May following a temporary de-escalation in U.S.-China trade relations. However, the recent passage of the “One Big Beautiful Bill Act” (OBBBA) has reignited uncertainty, leaving investors to question whether the market has bottomed out—or if a deeper correction looms.

Policy Shifts and Sectoral Rebalancing: A Tale of Two Halves

The first half of 2025 was defined by a “tariff pause” and tactical diplomacy. The U.S.-China agreement to reduce tariffs from 145% to 30% on Chinese imports catalyzed a 29.9% rebound in semiconductor stocks, with Nvidia surging 16.9% in June. This de-escalation temporarily restored confidence in growth sectors, particularly AI and clean energy. However, the OBBBA—signed on July 4—reinstated tariffs on China, introduced a 10% universal import tax, and slashed federal spending on Medicaid and clean energy subsidies. These moves have shifted the market's focus back to defensive positioning.

The sectoral realignment is stark. Energy and defense stocks, which benefited from protectionist policies and tax cuts, have outperformed. Conversely, clean energy and healthcare sectors, hit by policy rollbacks, have underperformed. The OBBBA's reversal of Biden-era green tax credits has already led to the cancellation of $270 billion in clean energy projects, while Medicaid cuts threaten rural hospitals and consumer discretionary spending.

Investor Sentiment: Between Optimism and Pessimism

Investor sentiment remains a pendulum. The Michigan Consumer Sentiment Index hit a 10-month low in March but rebounded in May as trade tensions eased. Yet, the OBBBA's fiscal risks—projected to increase the federal deficit by $6 trillion over a decade—have reintroduced caution. The S&P 500's July volatility, marked by a 0.3% decline in the final week, underscores this duality. While the index remains near record highs, the “melt-up” scenario—where optimism drives prices without fundamentals—has not materialized.

The Magnificent 7—dominant tech firms like Tesla and Meta—have driven much of the S&P 500's gains, but their valuations remain stretched. The sector's 21% peak-to-trough drop from December 2024 to April 2025 highlights the fragility of growth stocks in a high-tariff, high-inflation environment. Meanwhile, defensive assets like gold and short-duration bonds have gained traction as hedges against policy uncertainty.

Strategic Positioning for Recovery: Growth vs. Defensive Assets

The question now is whether to rebalance portfolios toward growth or defensive assets. Here's a framework for decision-making:

1. Defensive Sectors as a Foundation:
2. Utilities (XLU) and Consumer Staples (XLP) remain resilient due to inelastic demand. However, utilities face headwinds from rising Treasury yields.

3. Gold (GLD) has emerged as a safe-haven asset amid fiscal strain and currency concerns. The OBBBA's emphasis on tax cuts for the wealthy has fueled fears of inflation, boosting gold's appeal.

4. Growth Sectors with Strong Fundamentals:

5. Semiconductors (XLK) and AI-driven tech (VGT) continue to benefit from innovation cycles, despite short-term volatility. The U.S.-China de-escalation in May has provided a temporary tailwind.

6. Renewables (IYM) face near-term headwinds from policy rollbacks, but long-term demand for energy infrastructure (e.g., AI data centers) could revive the sector if fiscal policies stabilize.

7. Sector Rotation Opportunities:

8. Energy (XLE) and Materials (XLB) have gained from tariffs and inflation, but their performance is tied to global demand.
9. Healthcare (XLV) is a mixed bag: biotech faces valuation risks, while managed care companies could stabilize as Medicaid cuts phase in.

Is the Market Bottoming Out?

The S&P 500's technical indicators suggest a potential bottoming process. The index has held its 200-day moving average and shown strong volume during rebounds. However, the OBBBA's fiscal risks—projected to push U.S. debt-to-GDP to 130% by 2030—remain a drag. A sustainable recovery will depend on three factors:
1. Tariff Resolution: A durable trade agreement with China and the EU could unlock capital flows into growth sectors.
2. Inflation Moderation: The Fed's ability to reduce rates without reigniting inflation will be critical.
3. Corporate Earnings Resilience: The upcoming earnings season will test whether companies can maintain margins amid sticky inflation and shifting trade policies.

Final Advice: Diversify and Stay Informed

For investors, the key takeaway is to maintain a diversified portfolio that balances growth and defensive assets. Allocate 40-50% to defensive sectors (utilities, staples, gold), 30-40% to growth (tech, AI, energy), and 10-20% to high-quality bonds or short-term cash equivalents. Rebalancing should occur quarterly, with a focus on sector momentum and macroeconomic signals.

While the market's near-term outlook is clouded by policy uncertainty, history suggests that volatility often precedes recovery. The 1998 and 2018 rebounds followed similar patterns of policy-driven corrections. For those with a long-term horizon, now may be the time to position for a market that is testing its resilience—and potentially setting up for a breakout.