Tariff Shock Eases, But Risks Linger

Kristian Kerr | Head of Macro Strategy

Last Updated: May 20, 2025

The equity market’s recovery over the past month has been extraordinary in terms of both speed and scale. A turnaround of such magnitude is highly unusual, and the sudden shift in investor sentiment is among the fastest I have observed in my 25-year career. While it may be tempting to interpret this powerful rally as a definitive signal that risks have subsided, the reality is that plenty of uncertainty remains.

Reflecting on the steep market drop in early April, it seems much of the reaction stemmed from a policy shock rather than a clear deterioration in economic conditions. Specifically, the April 2 tariff announcement surpassed even the worst expectations, prompting a broad and forced liquidation of risk due to uncertainty. However, the true economic impact was not possible to accurately assess in real time — leaving the risk that a “growth scare” could still be looming as the actual impacts are better understood.

Growth Scare Following Policy Shock and Forced De-Risking?

Source: LPL Research, Bloomberg 05/19/25
Disclosures: All indexes are unmanaged and cannot be invested in directly. Past performance is no guarantee of future results.

Greater clarity is expected later this summer, as economic data tends to lag, meaning the full impact of tariffs may not be evident until June or July at the earliest. Additionally, the current policy landscape remains in flux, with broader tariffs largely paused until early July and China exempt from significant tariff increases until August 12. If meaningful economic weakness does materialize — confirmed by hard data mirroring the softness seen in leading indicators — or trade negotiations deteriorate, another bout of market volatility could ensue, potentially aligning with historical seasonal patterns where equities often struggle from late summer into fall.

Ultimately, the Federal Reserve (Fed) and the administration will play a critical role in shaping market direction. A swift Fed response via a timely adjustment of rates could keep stocks supported, as could a shift in focus from Trump away from tariffs toward market-friendly policies — especially as the administration begins to concentrate more on the 2026 midterm elections. Conversely, if policy responses are delayed or deemed inadequate, volatility may resurface before lasting stability takes hold. In any scenario, the months ahead will reveal whether this rebound has enduring momentum or if another shift in market sentiment is on the horizon. While the market’s path currently leans higher as investors scramble to re-risk, recent extreme volatility suggests staying open to further potential shifts in the market narrative.

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Kristian Kerr

Kristian Kerr drives the broad, house investment strategy for LPL Financial Research. His career includes over 25 years of industry experience.