Is a market correction coming?

U.S. equity markets softened from record highs after rebounding decisively from an early 2025 setback. ¹ Since early April, when the S&P 500 narrowly avoided a bear market (a 20% decline or worse), investors have shrugged off higher tariffs and the ongoing government shutdown. Instead,  market participants have focused on company fundamentals and generally stable economic data, including robust consumer spending.

President Donald Trump’s new tariff policies triggered the market’s February to April decline. “Stable consumer spending and improving corporate earnings enabled investors to look past potential tariff impacts over the summer,” says Bill Merz, head of capital markets research with U.S. Bank Asset Management Group. “However, market volatility has picked up with increased tariff rhetoric between the U.S. and China.”

Market breadth expands

In 2025, a broader range of industries are driving year-to-date results. Unlike 2023 and 2024, when information technology and communication services stocks led most of the S&P 500’s gains, other sectors now rank among this year’s top performers. Financials reached a new all-time high in September, while industrials and utilities both set new records in October. ¹

Recently, investors’ rising Federal Reserve (Fed) rate cut expectations and constructive economic data fueled a recovery in mid- and small-cap stocks. Investors are hoping for lower borrowing costs to ease debt burdens and business stimulus measures in the One Big Beautiful Bill Act lifted earnings expectations. After lagging large cap stocks in 2023 and 2024, mid- and particularly small-cap stocks have closed much of the 2025 performance gap. ¹

Investors are monitoring tariff negotiations

The administration continues to negotiate tariff and trade deals with many countries. Over the summer, the U.S. negotiated 15% tariff rates with the European Union, Japan and South Korea. The administration set higher rates on other nations, while extending Chinese negotiations into November.

On August 7, 2025, the Trump Administration raised tariff rates on other countries and announced new tariffs on pharmaceuticals, household furnishings and heavy trucks on September 25. More recently, on October 10, U.S.-China trade tensions escalated when the President responded to China’s rare earth export restrictions by threatening a 100% tariff rate and announcing software export controls starting November 1.

Currently, the U.S. applies an effective average tariff rate of over 10% on imported goods, up from 2% at the start of the year, and has generated $192 billion in tariff revenue so far. ² If negotiations fail to lower announced tariffs, the Yale Budget Lab estimates the effective rate could nearly double, ³ though some forecasters project effective tariffs could settle in the mid-teens as consumers and businesses substitute purchases to avoid higher costs.

“Tariffs in place now address specific sectors, trade fairness issues and even geopolitical concerns,” says Rob Haworth, senior investment strategy director with U.S. Bank Asset Management Group. “Rising tariff rates for major trading partners, such as China, Canada, Mexico and the European Union, significantly affect U.S. import costs.”

Legal challenges could disrupt President Trump’s tariffs. In late August, a Federal Circuit appeals court upheld the Court of International Trade’s May decision that certain tariffs exceed presidential authority, but the tariffs remain in effect during the appeal. The Supreme Court has agreed to hear the administration’s appeal, consolidating two separate tariff lawsuits. Oral arguments begin November 5, and the court will ultimately rule on President Trump’s unilateral tariff strategy.

Inflation outcomes remain uncertain

The ultimate tariff-driven economic consequences remain unclear. Many investors  anticipate tariffs will drive higher inflation, but Consumer Price Index (CPI) changes have been thus far modest. “Investors want to know when higher tariff rates will translate into higher prices,” says Tom Hainlin, national investment strategist with U.S. Bank Asset Management Group. “We’ve seen modest acceleration in core goods prices, and investors should expect some additional inflation in coming months.”

Over the past 12 months, CPI rose 2.9% in August, picking up pace recently. Core Producer Prices (which exclude food and energy) rose 2.8%, decelerating from July’s 3.4% pace but remaining above the Fed’s 2% inflation target. ⁴ Additionally, Federal Reserve (Fed) surveys of its 12 regional districts report higher tariff cost pressures across all regions. ⁵

Government shutdown clouds the economic picture

The Federal government shut down for the 11th time since 1980 after lawmakers failed to reach a spending deal. Critical services, including the postal service, social security and Medicare payments, air travel and the military continue, but most other government work stops. This is delaying important economic data releases such as weekly unemployment claims, monthly retail sales, and the Bureau of Labor Statistics’ employment report.

However, high-frequency alternative data continues to show resilient consumer activity. Movie theatre box office receipts, airport checkpoint traffic, and restaurant bookings highlight robust discretionary spending, while private sector retail sales gauges like Johnson Redbook reflect normal spending levels at department stores.

Markets react to Trump administration policies

In early July, lawmakers passed comprehensive tax and spending legislation, extending 2017’s tax cuts, adding other tax breaks and raising the debt ceiling. Markets responded favorably, and some corporate executives cited the policy change for boosting profit expectations. However, higher tariff prospects, potentially impacting consumers, may temper the tax-cutting policies’ economic benefits.

Companies have hesitated to project how tariffs will impact future earnings pending more policy clarity. However, recently some companies have provided investors with more forthcoming earnings guidance, factoring in the One Big Beautiful Bill Act’s corporate tax relief. As equity prices climb, investors wonder if upward market momentum can continue. “Valuations are elevated,” says Haworth. “But companies remain nimble.” He notes that analysts are raising earnings forecasts into next year, supporting equity prices.

Fed interest rate policy remains a key variable

Markets closely watch Fed interest rate policy, which influences global borrowing and financing costs. President Trump has frequently criticized the Fed’s reluctance to lower the short-term federal funds target rate throughout most of 2025. After cutting rates three times in late 2024, the Fed held rates steady before lowering the target rate by 0.25% again in September 2025 to 4.00% to 4.25%. The Federal Reserve Summary of Economic Projections anticipates two additional rate cuts by year-end 2025. ⁶ Fed Chair Jerome Powell recently noted, “The Committee is attentive to the risks to both sides of its dual mandate and judges the downside risks to employment have risen”. ⁷

President Trump has even suggested firing Fed Chair Jerome Powell, whose term as Chair ends next May, although investors don’t anticipate a change this year. “The President is saying what every borrower wants to hear: that we want lower interest rates,” says Hainlin. “At the same time, the Fed continues to emphasize their three jobs – promoting full employment, ensuring stable prices, and enabling stable long-term interest rates – and that they’re doing their jobs well. It’s a collision of two principles.”

Markets typically react positively to Fed rate cuts, but inflation risks linked to tariffs remain an important factor influencing Fed policy and the equity market.

A time for appropriate diversification

Determining the right asset mix for your portfolio involves making investment decisions that suit your personal situation, not just reacting to market and economic trends. The current market environment reflects lessons from history – stay invested and diversified, despite market volatility and uncertainty. Significant market swings like those experienced in 2025 are nothing new.

Eric Freedman, chief investment officer for U.S. Bank Asset Management Group, encourages investors to take a long-range view and avoid the temptation to time the market. “Stay invested, but make sure you are in the right asset allocation.” Freedman notes that volatile markets, like those in 2025, help focus investors on realistic conversations about risk tolerance. “If you determine you need to adjust your portfolio positioning, utilize a prudent transition plan.” Additionally, Freedman recommends, “If you have extra cash, consider incrementally staging in some of that cash.”

Haworth advises those who held cash as a precaution and missed the recent market rally to use a dollar-cost averaging approach to invest over time. While markets at new all-time highs sometimes present risks, Haworth also notes, “New all-time highs are often followed by new all-time highs.”

Now is an important time to check in with a wealth planning professional to ensure you are comfortable with your current investments and that your portfolio aligns with your time horizon, risk appetite and long-term financial goals.

The S&P 500 Index consists of 500 widely traded stocks that are considered to represent the performance of the U.S. stock market in general. Diversification and asset allocation do not guarantee returns or protect against losses. The Russell MidCap Index provides investors with a benchmark for mid-sized companies. The index, which is distinct from the large-cap S&P 500, is designed to measure the performance of mid-sized companies, reflecting the distinctive risk and return characteristics of this market segment. The Russell 2000 Index refers to a stock market index that measures the performance of the 2,000 smaller companies included in the Russell 3000 Index.