Navigating the Tariff Storm: Where Will U.S. Stocks Bottom?

The U.S. stock market has weathered a tempest of tariff policies in early 2025, with President Trump’s aggressive trade measures and national security investigations reshaping investor sentiment. As sectors like tech, pharmaceuticals, and critical minerals face unprecedented regulatory headwinds, the question looms: Where is the bottom for U.S. equities?

The Tariff Tsunami: Key Developments

The administration’s actions in April 2025 marked a turning point. Section 232 investigations targeting semiconductors, pharmaceuticals, and processed critical minerals have created uncertainty about supply chains and production costs. Meanwhile, reciprocal tariffs on China—escalating to 125%—have triggered retaliatory measures, with lithium-ion batteries now facing 173.4% total tariffs (combining multiple levies).

The 10% baseline tariff on all trading partners, paired with sector-specific hikes, has further strained global trade. While the suspension of tariffs on 57 countries (except China) for 90 days offers temporary relief, the path to a durable market bottom remains fraught with geopolitical and economic risks.

Market Reactions: Volatility and Sector分化

The S&P 500 plunged 4.27% in Q1 2025, entering correction territory, while the Nasdaq 100 fell 8.07%, its worst quarter since 2022. Tech giants bore the brunt:

- Nvidia (NVDA) lost $600 billion in market cap due to export restrictions on AI chips to China, with its stock dropping 6.87% in a single day.
- The “Magnificent 7” tech stocks (including Apple, Microsoft, and Alphabet) fell nearly 16% YTD, while the equal-weight S&P 500 declined only 1%, signaling a shift toward smaller, less tariff-exposed firms.

Defensive sectors thrived: Healthcare, utilities, and consumer staples outperformed, buoyed by investor flight-to-safety. Energy stocks also rose amid expectations of restricted Russian crude imports.

Valuation Metrics: Finding Value Amid the Chaos

Morningstar’s analysis reveals significant discounts across undervalued sectors:
- Communications (e.g., Alphabet, Meta) trade at a 32% discount to fair value.
- Technology is undervalued by 22%, with opportunities in AI-driven stocks that have overcorrected.
- Energy (e.g., Exxon Mobil) offers a 19% discount, despite lower oil price assumptions.

Meanwhile, consumer defensive and utility stocks remain overvalued, skewed by large-cap names like Walmart and Procter & Gamble.

The market’s price-to-earnings ratio dropped from 22x to 20x, reflecting investor skepticism about growth amid tariffs. However, Crestmont Research’s metrics suggest the market is still overvalued by 110-189% relative to historical averages—a cautionary signal for overexposure to growth stocks.

Analyst Consensus: The Bottom Isn’t Here Yet

Analysts project a mixed but cautiously optimistic outlook:
- GDP Forecasts: The Atlanta Fed’s GDPNow model slashed 2025 growth to 1.2%, citing tariff-driven import distortions.
- Recession Risks: A 40-50% probability of a recession looms, with inflation projected to hit 3.3% in 2025.
- Sector Priorities: Morningstar recommends overweighting energy, real estate, and communications, while underweighting consumer cyclicals and tech until policy clarity emerges.

Where to Find the Bottom?

The stock market’s bottom is unlikely to form until three conditions are met:
1. Tariff Negotiations: A 90-day suspension of tariffs (except for China) ends July 8, 2025. A resolution with Beijing or broader tariff reductions could alleviate pressure on sectors like tech and industrials.
2. Valuation Reversion: The S&P 500’s P/E ratio must stabilize near 18x, its historical average, to attract long-term investors.
3. Earnings Resilience: Companies must demonstrate tariff absorption strategies (e.g., cost-cutting, localization of supply chains) without sacrificing profit margins.

Conclusion: The Bottom Lies in Resilience and Value

The U.S. stock market’s bottom in 2025 hinges on navigating tariff-driven uncertainty. Historically, intra-year drawdowns of -13% are common, and the S&P 500’s Q1 decline of -4.27% suggests further volatility ahead. However, defensive sectors, undervalued tech stocks, and energy plays offer opportunities for patient investors.

Key data points reinforce this view:
- The equal-weight S&P 500’s -1% decline highlights resilience in smaller, less exposed firms.
- Morningstar’s 4- and 5-star rated stocks (e.g., Campbell Soup, IFF) provide dividend-driven stability.
- Corporate cash reserves and fiscal policy shifts (e.g., Germany’s infrastructure spending) could offset U.S. trade headwinds.

While the storm rages, the bottom will likely form where two forces converge: valuations return to earth and tariffs subside. Until then, investors should prioritize diversification, defensive allocations, and a long-term horizon.

The market’s median intra-year decline of -13% suggests current turbulence is within historical norms—a reminder that corrections are temporary in the face of compounding growth.

Final Note: Stay nimble, focus on quality, and remember—every storm eventually clears.