JPMorgan delivers blunt warning on S&P 500

Wall Street loves a great comeback.

The S&P 500 marked its 10th record close recently, and investors feel invincible again.

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However, beneath the cheers, one major variable could rattle what has been a welcome rally.

A heavyweight analyst just sounded the alarm on what’s lurking in the background, which might hit harder than traders think.

JP Morgan says the S&P 500’s record run faces a hidden risk this summer

Image source: Triballeau/AFP via Getty Images

Tariffs keep the S&P 500 on a tight leash

Tariffs stole the spotlight this year, gutting stocks in April before bulls came out with a vengeance.

It all started with President Trump's infamous “Liberation Day” tariffs on April 2.

A fresh 10% levy on all imports and steep reciprocal duties on key partners led to a four-day slide, shaving a frightening 3.2% off the S&P 500.

The plunge resulted in over a $3 trillion erosion in market value.

By April 8, the benchmark was down roughly 1.6%, marking its worst four-day stretch since the Covid fiasco.

Tariffs effectively function as a tax on businesses and consumers alike. Higher import costs eat into the already thin margins for manufacturers, retailers, and companies that rely on global supply chains.

That uncertainty typically leads to delayed expansions, inflationary pressures, and hiring freezes, while chilling broader growth.

For markets, the sudden tariff hikes bring a shock, hitting earnings forecasts and sending stocks lower.

Fortunately, the damage didn’t last for long. Markets started to rebound through May, hoping for a White House pause on more tariff hikes, along with positive signs of progress with China.

After a mid-June trade truce, the U.S. slapped a China 55% tariff on key imports, while Beijing countered with a 10% duty.

Moreover, the Trump tariff deadline was moved from July 9 to August 1, a fresh catalyst that led to eventual stock market highs.

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From its mid-April lows, the S&P soared nearly 20% higher by early June, pulling back into the green for the year.

By late June, with a 90-day freeze on new tariffs in place, the S&P climbed to fresh all-time highs.

Nevertheless, the risk is far from over at this point.

Tariffs cloud the market’s second-half outlook

Tariffs remain a key wild card that could shake up Wall Street’s cautious rally. President Trump’s 90-day pause on new reciprocal tariffs runs out soon, and the S&P 500 could soon feel the effects.

Morgan Stanley says the base case is for modest tariff bumps, but warns new “noise” could spark investor fear if negotiations stall.

Treasury Secretary Bessent talked about how Tariffs could snap back to April 2 levels for countries without a deal.

Strategist Michael Zezas feels that the White House could stretch the pause for allies, citing “progress” with countries like Vietnam.

For some countries, the threat of future hikes is well and truly alive, including the EU and Japan.

Any sharp hike could dent consumers and growth fast.

Morgan Stanley feels an aggressive tariff reset might drag the U.S. GDP down to 1% year-over-year by year-end, as sticky inflation and rich stock valuations test investor nerves.

Despite plenty of bumps, U.S. stocks are still in the green halfway through 2025. The S&P 500 is up 6.8% year to date, while the Nasdaq Composite, boosted by Nvidia’s massive 19% YTD surge, is tracking a 6.7% gain.

Similarly, the Dow Jones Industrial Average, with a more cyclical-heavy makeup, is up a steady 5.4% YTD.

The DJIA’s performance highlights robust earnings from industrials and financials, even as rate-sensitive sectors lag.

June, in particular, was strong for bulls. The S&P jumped almost 5% last month, its best monthly move since late 2023.

Nonetheless, the rally has pushed valuations above historical averages, with some analysts cautioning that the S&P trades near 24.5× forward earnings, leaving little room for disappointment.