An aide displays an operational timeline as Chairman of the Joint Chiefs of Staff Air Force Gen. Dan Caine and Defense Secretary Pete Hegseth hold a Sunday news conference at the Pentagon. – Andrew Harnik/Getty Images
Tariffs and the widening Middle East conflict are casting clouds over the stock market’s June gains, with a potentially turbulent summer ahead after the S&P 500’s recent push toward its record high.
“We’re entering the greater-fool phase,” said Sameer Samana, head of global equities and real assets at Wells Fargo Investment Institute, in a phone interview with MarketWatch. “What we’re telling investors is, ‘Look, don’t play that game,’ ” he said — explaining that, with the U.S. stock market getting back toward all-time highs, “you’re not getting paid to take the risk until maybe later this year.”
The S&P 500 SPX closed modestly lower Friday but remained up 0.9% so far in June after a strong recovery in May from the lows following President Donald Trump’s “liberation day” tariff reveal in early April, according to Dow Jones Market Data. The index ended the trading session 2.9% below its record closing high, notched Feb. 19.
The U.S. stock market appears vulnerable to pullbacks partly because of still uncertain tariff policy, with the White House’s pause on certain levies due to expire in July. On top of that lingering worry, rising tensions in the Middle East kept investors on edge heading into the weekend as Trump publicly weighed a strike on Iran.
On Saturday night Trump announced that the U.S. had launched strikes on Iran’s nuclear facilities, working with Israel in what Trump called a “spectacular military success.”
Joint Chiefs of Staff Chairman Dan Caine, an Air Force general, observed early Sunday at a Pentagon press briefing that damage assessments were ongoing.
Worries over the potential for a broadening of the Israel-Iran conflict helped put geopolitical tensions high on the list of risks faced by the stock market, according to Samana.
Any “illusion of containment” was shattered late Saturday, Stephen Innes, managing partner at SPI Asset Management, observed in a note.
In Samana’s view, the situation in the Middle East poses the threat of a “dual shock” from a potential further spike in oil prices that fuels higher inflation but also risks pushing down the rate of economic growth. U.S. oil prices CL00 have jumped in June to around $74 a barrel on Friday, FactSet data show.
“The Fed probably doesn’t need one more thing that’s stagflationary, because they’ve got enough to kind of work through now with tariffs,” said Samana.
The Federal Reserve has said tariffs risk increasing inflation and weighing on economic activity, with Chair Jerome Powell reiterating those concerns on Wednesday after the central bank wrapped up its latest policy meeting.
Fed governor Chris Waller, though, marked out a different perspective in a cable-news interview on Friday, saying that the higher prices paid for imported goods under Trump’s tariffs were not likely to cause any long-term surge in inflation and suggesting that the central bank should resume lowering rates as soon as next month. Last week’s FOMC vote to stand pat on interest rates was unanimous. Waller is viewed as a candidate to replace Powell, whose term Trump has signaled clearly he would not renew.
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The Fed also released its latest Summary of Economic Projections, which showed Fed officials have forecast that real gross domestic product growth in the U.S. could slow this year to 1.4%, while the unemployment rate may rise to 4.5% and measures of inflation may climb.
For example, the projections showed core inflation, which excludes food and energy prices, may rise this year to 3.1% based on data from the personal-consumption expenditures, an inflation index favored by the Fed.
That all adds up to “stagflationary flavor,” said Kevin Gordon, senior investment strategist at Charles Schwab, in a phone interview. The projections suggest that “the Fed is still of this mindset” that the economy may see “a stagflationary impulse from tariff policy” in 2025, he said.
In the coming week, investors will get a fresh reading on Fed-favored core PCE for May. The U.S. economic calendar for the coming week will also include a revised estimate of first-quarter GDP, flash readings on U.S. services and manufacturing activity in June, and a gauge of consumer confidence for this month.
Also, investors will be listening closely to Powell’s testimony before the U.S. House Financial Service Committee on Tuesday, when he will deliver a semiannual monetary-policy report to Congress. The Fed decided on June 18 to maintain its policy interest rate at the targeted range of 4.25% to 4.5%, as Wall Street expected — citing a low unemployment rate, “somewhat elevated” inflation and economic activity that still appeared to be expanding at a “solid pace.”
Major U.S. stock benchmarks are mostly up in 2025, after rebounding from a tumultuous April that had been sparked off by Trump’s “liberation day.”
But high volatility, coupled with small gains, has weighed on the S&P 500’s risk-adjusted returns this year, according to David Kostin, chief U.S. equity strategist at Goldman Sachs.
“Elevated trade-policy uncertainty has been the main driver of poor risk-adjusted performance, leading to below-average returns and above-average volatility,” Kostin said in a research note Friday morning. “The S&P 500’s risk-adjusted return has been lower than usual so far this year.”
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The S&P 500 has yielded an “annualized risk-adjusted return ratio of 0.1, well below the median annual reading since 1990 of 1.0,” Kostin said.
The S&P 500 ended Friday with a year-to-date gain of 1.5%.
Meanwhile, the Cboe Volatility Index VIX, a gauge of investor anxiety in the stock market, rose 2.4% on Friday to 20.62, according to FactSet data. But that’s well below the levels seen in April, before the gauge dropped after Trump pressed pause on tariffs and his administration began to pursue bilateral trade deals.
On the global trade front, Trump’s initial 90-day pause on the so-called reciprocal tariffs on most countries expires on July 9. Additionally, the White House’s 90-day pause on levies targeting China, in particular, will expire on Aug. 12, according to a Wednesday note from Scott Wren, senior global market strategist at Wells Fargo Investment Institute.
The U.S. and China have a “framework agreement, but the clock is ticking to achieve a comprehensive deal,” said Wren.
He also warned that fiscal concerns in the U.S. are among a pile of risks that potentially could contribute to bigger-than-usual swings in the market.
“Don’t forget that the budget bills in the House and Senate appear to call for large future deficits and [that Congress] must increase the debt ceiling by late July or early August,” Wren wrote. “Otherwise, the U.S. Treasury might run low on cash to the point that it needs to postpone payments starting in early August.”
The U.S. stock market mostly fell Friday — with the S&P 500 declining 0.2%, the technology-heavy Nasdaq Composite COMP dropping 0.5% and the Dow Jones Industrial Average DJIA edging up 0.1%. For the week, the Dow was nearly flat, while the Nasdaq booked a 0.2% weekly gain and the S&P 500 saw a modest weekly retreat of 0.2%.
Wells Fargo Investment Institute has a year-end target of 6,000 for the S&P 500, according to Samana. That’s just above the index’s closing level Friday of 5,967.84.
Now is not the time to “take on a bunch of risk,” said Samana. “The risk-reward just isn’t all that favorable anymore.”
