Epic Rebound After Tariff Fears: What’s Next for U.S Stocks in H2?

U.S. stocks experience a roller-coaster ride. In April, it suffered a sharp drop due to the threat of retaliatory tariffs. However, the market quickly bounced back, reached record highs. Let’s address two key questions: Has the U.S. stock market entered a bubble phase? And, what is a reasonable return expectation for the second half of the year?

Let’s dive straight in, using the Nasdaq 100 Index as an example, which has had the highest return rate. From a short-term perspective, the Nasdaq has indeed entered overbought territory. Here's a chart showing the rolling returns of the Nasdaq 100 Index over any 50-day period since 2015.

Data shows that the probability of the Nasdaq 100 index achieving positive returns within any 50 trading days is 73%, with an average return of 3.4%. Two standard deviation increase results in a 19.5% return, while three standard deviations lead to a 27.5% return.

If the Nasdaq 50-day return exceeds two standard deviation, it can be considered overbought, signaling a potential adjustment; if it surpasses three standard deviations, this indicates a significant overbought situation, likely leading to a larger pullback.

Unfortunately, since the April 8th low point following the tariff fears, the Nasdaq surged by 26.6% over the next 50 trading days, almost hitting a 3x standard deviation (27.5%). But it's important to note that this massive rebound came after a sharp drop (the Nasdaq's largest drawdown of 20.7% due to the tariffs), which is a perfect example of market symmetry. This reinforces the old saying: don’t panic-sell during a sharp drop, as a large rebound is often close behind.

From the chart, we can see that the 50-day return of the Nasdaq is the second-highest since 2015, only behind the special period during the pandemic. This suggests that the momentum of this rally is nearly exhausted, and we shouldn’t expect the Nasdaq to repeat the spectacular performance of 2020. The monetary policies and valuation levels are fundamentally different now.

In the short term, it seems overbought. But what about the long-term? Has the U.S. market entered bubble territory?

Let’s look at the 100-day rolling returns for the Nasdaq, again going back to 2015. Over any 100 trading days, the Nasdaq has a 78% probability of posting positive returns, with an average return of 6.8%. The standard deviation is 10.7 points, with two standard deviation corresponding to a +28.3% return and two standard deviations corresponding to a -14.6% return.

Over the past 100 trading days, the Nasdaq rose by 5.8%, still below its average return of 6.8%. In the 100 trading days leading up to the April 8th low, the Nasdaq fell by 19%, which had already surpassed two standard deviations and should, in theory, lead to a stronger long-term performance.

Here’s another interesting data point: Since 2023, the U.S. stock market has been in a bull market for two years. Historically, after two consecutive years of gains, there’s a 60% chance the Nasdaq will continue to rise in the third year, with an average return of 13.3%.

If historical trends hold true, and if President Trump doesn’t impose aggressive tariff measures, the Nasdaq still has room to grow in the second half of the year (with a YTD return of 4.6% for 2025, which could lead to a further 10% increase, aligning with historical averages).

In summary, from a short-term perspective (50-day returns), the U.S. stock market shows signs of being overbought, but looking at the longer term, there is still potential for further growth.

Have Growth Stocks Entered Bubble Territory?

Let’s examine another question: Have growth stocks, which have been leading the charge in recent years, entered bubble territory?

The following chart shows the relative returns of the S&P 500 Growth Index vs. the Value Index over the past 100 days. Since 2020, growth stocks have outperformed value stocks by 2.7 percentage points. Since 2023, this excess return has risen to 3.3%.

Over the past 100 days, U.S. large-cap growth stocks have outperformed value stocks by 3.1 percentage points, which is consistent with the historical average. In other words, the data does not show signs of a bubble in growth stocks.

A similar backtest using small-cap stocks shows the same pattern. From 2023 onward, over any 100-day period, the Russell 2000 growth stocks outperformed value stocks by 2%.