Investors and stock analysts alike are typically optimists where the market is concerned, with a collective tendency to focus on the bright side of the economic outlook.
From a long-term standpoint, this certainly isn’t a bad idea. That said, it’s sometimes helpful to (temporarily) put on a bearish hat and assume a worst-case scenario in order to analyze what could potentially upset an otherwise rosy outlook.
With that in mind, I think now would be a good time to ask ourselves the question that a growing number of analysts are starting to ask, namely: “What could go wrong in the rest of 2025?”
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For starters, the massive broad market rally that began in April was heavily predicated on the temporary suspension of the White House’s trade tariffs. Specifically, the U.S. announced it would suspend its reciprocal tariffs imposed on April 2 for 90 days (although it will retain a 10% tariff during the period of the pause).
While news of the tariff pause was enough to send stocks flying, with the S&P 500 Index rallying nearly 25% from its April low in just over a month, there are still rumblings below the surface that suggest there could be more trouble ahead for the market.
On May 17, the Financial Times said the Trump administration would set tariff rates for “scores of countries in two or three weeks.” While this news didn’t immediately roil the equity market, it did seem to contribute to a slowdown of the rally’s velocity.
What’s more, ongoing discussions with the European Union (EU) have been described as “tense,” with the U.S. pushing for tariff reductions while threatening additional duties if concessions aren’t made, including threats of 50% tariffs made by President Trump via social media on Friday morning. The EU is also reportedly preparing $108 billion in retaliatory tariffs if talks fail.
Elsewhere, the U.S.-China trade truce was said to be “shaky” by a recent Yahoo Finance report, with both sides clashing in the wake of the tariff pause. Both countries were said to be showing a “commitment to continuing talks,” with officials from both countries engaging in a call as recently as May 22.
In view of these developments, both China and the EU remain potential obstacles for the broad market’s continued recovery. So, investors will obviously need to closely monitor this developing situation.
Also a concern is the interest rate outlook, with medium-to-longer-dated U.S. Treasury yields an increasing worry. For instance, the CBOE Treasury Yield Index (TNX) has risen 10% month to date, and it’s not far from its 4.8% peak it hit in January—a level that served as a catalyst for the major broad market decline earlier this year. A continuation of the rising bond yield trend would likely be a major concern for the bullish case.
On that score, the recent uptick in bond yields has caused a corresponding increase in the number of NYSE-listed stocks making new 52-week lows. Specifically, new lows have lately increased above the 40-per-day mark, which historically serves as the dividing line between a healthy and unhealthy market backdrop.
On May 22, for instance, the new lows hit 60 and were more than twice the number of new highs. If this negative development persists in the coming days, we could be in for another broad selling wave.
And while the decline in energy prices in recent months has been a plus for consumers, it’s possible that crude oil prices could experience a major rally in the second half of this year. in a recent post on the social media platform X (formerly Twitter), market analyst Tom McClellan pointed out that in the weekly Commitments of Traders (COT) Report, the small “non-reportable” traders of crude oil futures have swung to a net short position.
Why is this significant? Well, according to Tom, this group of traders “are almost always net long as a group, to varying degrees. When they get up to a big net long position, that is a good marker of a top for oil prices.”
By contrast, he noted that the last time small traders were net short crude oil was in 2019. “When they go short as a group,” he said, “it does not usually work out well for them,” with an oil market rally usually following. He added, “President Trump is talking about getting oil prices down even more, but these data cast doubt on whether that is likely to actually happen.”
If such a rally in the energy market does occur, it could upset the already tenuous consumer sentiment backdrop even further while putting upward pressure on inflation. That, in turn, would potentially be a negative for stocks.
Of course, these are only conjectural scenarios which may not all come to fruition (and to be fair, some of them likely won’t). But keeping them in mind as possible outcomes can help us remain grounded if the recovery rally continues, while keeping us from becoming too complacent and overcommitted to equities should things suddenly go south.
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