Is a market correction coming?

U.S. equity markets modestly retreated from record highs after rebounding strongly from an early 2025 downturn. ¹ Since early April, when the S&P 500 narrowly avoided a bear market (a 20% decline or worse), investors have dismissed concerns about higher tariffs and the ongoing government shutdown. Instead, they have concentrated on company fundamentals and steady economic indicators, such as robust consumer spending.

President Donald Trump’s new tariff policies sparked 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 concerns about artificial intelligence spending and uncertainty over another Federal Reserve interest rate cut in December.”

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, the restart of Fed rate cuts and positive economic data fueled a recovery in mid- and small-cap stocks. Investors anticipate lower borrowing costs will ease debt burdens, while the “One Big Beautiful Bill Act's” business stimulus measures have lifted earnings expectations. After trailing large cap stocks in 2023 and 2024, mid- and particularly small-cap stocks have nearly closed the performance gap in 2025. ¹

Investors monitor 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 has set higher rates on other nations and recently announced another round of sectoral tariffs, targeting softwood lumber, timber, kitchen cabinets and vanities.  

After escalating U.S.-China trade tensions introduced additional market volatility, the two countries reached a one-year trade agreement on November 1. The U.S. reduced Chinese fentanyl-related tariffs and suspended other trade restrictions for one year, while China will resume regular U.S. soybean purchases and pause rare earth mineral export controls on. This agreement stabilizes trade relations, but negotiations will continue, with President Trump stating, “we have a deal now, every year, we’ll renegotiate the deal.”

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. For the fiscal year ending September 30, 2025, the U.S. generated $195 billion in customs duties, a 250% increase over fiscal 2024 tariff revenues. ² If negotiations fail to lower announced tariffs, the Yale Budget Lab estimates the effective rate could reach 17%. ³ However, 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 threaten 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. On November 5, 2025, the Supreme Court heard arguments in the administration’s appeal, consolidating two separate tariff lawsuits. The court will ultimately rule on President Trump’s unilateral tariff strategy, likely early in 2026.

Inflation outcomes remain uncertain

Higher tariffs’ economic consequences remain unclear. Many investors expect tariffs to 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 previous 12 months ending in September, CPI rose 3.0%, trending higher. Core consumer prices (which exclude food and energy) also rose 3.0% over the same period, decelerating from August’s 3.1% 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 most regions. ⁵

The government shutdown complicates the economic outlook

The Federal government shut down for the 11th time since 1980 after lawmakers failed to reach a spending deal. Spending on critical services, including the postal service, Social Security and Medicare, air travel, and the military continue, but most other government workers are furloughed. The shutdown 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 remain cautious in projecting how tariffs will impact future earnings, pending additional policy clarity. However, some companies have provided investors with more forthcoming earnings guidance, factoring in the OBBBA’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 upward-trending 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% at September and October 2025 meetings to 3.75% to 4.00%. Investors project high odds of another rate cut at the December meeting. At his October 29^th press conference, Fed Chairman Jerome Powell expressed caution with respect to future cuts, emphasizing inflation remains above their 2% target while acknowledging softer labor market conditions.

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 continue to influence Fed policy and equity prices.

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.