Is a market correction coming?

U.S. equity markets remain near record highs, bouncing back from earlier setbacks. Since early April, when the S&P 500 narrowly avoided a bear market (defined as a 20% or greater decline), investors continue to shrug off higher tariffs, new Trump administration policies, and geopolitical conflicts. Instead, investors appear more focused on company fundamentals and mostly stable economic data.

President Donald Trump’s new tariff policies helped precipitate the market’s decline from February to April. “Fundamental factors like aggregate consumer spending and corporate earnings remain solid, allowing investors to look past potential tariff impacts – at least for now,” says Bill Merz, head of capital markets research with U.S. Bank Asset Management Group.

Market breadth expands

2025’s year-to-date results reflect broader industry participation. Unlike 2023 and 2024, when information technology and communication services stocks drove most of the S&P 500’s gains, other sectors are now among this year’s top performers. Year-to-date, the index’s top five performing sectors include industrials, utilities and financials, with all hitting new all-time highs in July. ¹

Sources: U.S. Bank Asset Management Group Research, Bloomberg, as of August 29, 2025.

Recently, investors’ rising Federal Reserve (Fed) rate cut expectations paired with constructive economic data prompted recovering mid- and small-cap stock performance relative to large-cap stocks. ¹

Trump tariffs remain at the forefront

Investors remain focused on President Donald Trump's tariff policies as the administration outlines more specific proposals and rapidly negotiates with other countries. After the administration announced several tariff pauses, markets quickly rebounded. Over the summer, the U.S. negotiated 15% tariff rates with the European Union and Japan and extended Chinese deliberations into November. However, other countries face higher tariff rates, many implemented on August 7, 2025. The effective average tariff rate the U.S. applies to imported goods, barely above 2% at the start of the year, now stands near 10% and generated revenue totaling $88 billion so far this year. ² If negotiations fail to lower current announced tariffs, the Yale Budget Lab estimates the effective rate could nearly double, ³ although some forecasters anticipate effective tariffs will land in the mid-teens after substitution effects. On August 29, a U.S. appeals court ruled some tariffs may be illegal, though delayed enforcement until October 14. President Trump noted his administration would appeal the ruling and ask the Supreme Court for an expedited ruling.

Sources: U.S. Bank Asset Management Group Research, Bloomberg; July 31, 1990 – July 31, 2025. Effective tariff rate = U.S. customs revenue divided by total U.S. goods imports.

“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.”

Along with policy uncertainty, the ultimate tariff-driven economic consequences remain an open question. Markets have long anticipated tariffs will drive higher inflation, though to date, Consumer Price Index (CPI) changes remain 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. “Investors should anticipate some inflation creeping into the data soon.”

Economists saw some early signs of tariffs’ inflationary effects in July’s CPI data, through higher goods prices. Over the prior 12 months, CPI rose by 2.7%, remaining unchanged from June’s 12-month figure. Higher capital equipment costs pushed Core Producer Prices, which exclude food and energy, to a 3.7% annual increase through July, accelerating from June’s 2.6% pace. ⁴ Additionally, Federal Reserve (Fed) surveys of its 12 regional districts report higher tariff cost pressures across all regions. ⁵

Markets reactive 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 reacted favorably to the legislation, but significantly higher tariff prospects, potentially impacting consumers, may temper stimulative tax-cutting policies’ economic benefits.

Companies have been reluctant to project tariff impacts on future earnings, pending more policy clarity. Recently, however, companies have provided investors with more forthcoming earnings guidance. As equity prices drift higher, investors wonder if upward market momentum can continue. “Valuations, as reflected in the market’s recent recovery, were priced for perfection,” says Haworth. “High tariffs are not perfection.” He notes that markets have been trading on a base case of 10-20% tariffs.

Fed interest rate policy a key variable

Markets closely monitor Fed interest rate policy as it influences global borrowing and financing costs. President Trump frequently criticizes the Fed’s recent reluctance to lower the short-term federal funds target rate. After cutting rates three times in late 2024, the Fed held the target rate steady at 4.25% to 4.50% in 2025. The Federal Reserve Summary of Economic Projections anticipates two rate cuts by year-end 2025. ⁶ Fed Chair Jerome Powell recently noted that, “with policy in restrictive territory, the baseline outlook and the shifting balance of risks may warrant adjusting our policy stance,” which bond investors interpreted as indicating a rate cut in September remains likely. ⁷

Sources: U.S. Bank Asset Management Group Research, Bloomberg. June 18, 2025-August 27, 2025. Projected hikes through 2030.

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 is saying they have three jobs – full employment, stable prices, and stable long-term interest rates – and they’re doing their jobs well. It’s a collision of two principles.”

Markets typically react positively to Fed rate cuts. However, inflation risks linked to tariffs remain a significant factor influencing Fed policy.

A time for appropriate diversification

Determining the right asset mix for your portfolio involves making investment decisions that suit your personal situation, not just responding 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.

Sources: U.S. Bank Asset Management Group Research, Bloomberg, Dec. 31, 1989 – Sep. 3, 2025. Past performance is no guarantee of future results. Returns shown represent results of market index and are not actual investments and are shown for ILLUSTRATIVE PURPOSES ONLY. The index is described in the disclosures below.

Eric Freedman, chief investment officer for U.S. Bank Asset Management Group, encourages investors to adopt 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 their risk tolerance level. “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  utilize dollar-cost averaging 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.