Investors could expect another 20% stock market slump this summer

[UNITED STATES] The S&P 500’s recent rebound amid trade negotiations with China and the EU may be short-lived, warns strategist Bianco, who predicts a “June gloom” correction. He argues that despite the index hovering near 5,900, valuations remain unsustainably high at 23 times earnings, exacerbated by lowered earnings estimates and elevated tariffs. “Valuations are right back to where they were before Liberation Day… almost everybody’s cut their earnings estimate for the year by at least a few percentage points,” Bianco notes, highlighting a disconnect between prices and fundamentals.

Trade tensions and rising Treasury yields further cloud the outlook. Bianco links reduced international trade to weaker demand for U.S. Treasurys, which could push yields higher and stall equity gains. DWS Group estimates average tariffs have surged to 14% from 2.5% earlier this year, adding cost pressures for businesses and consumers. Despite optimistic year-end S&P 500 targets of 5,800–6,000, Bianco cautions that the summer will test investor confidence in economic resilience.

Investors are advised to brace for volatility by focusing on long-term strategies. Bianco recommends underweighting sectors like consumer discretionary, energy, and industrials—most exposed to tariffs—while favoring technology, financials, and healthcare. “We need at least six months to figure out… what the cost of goods are going to be at big retailers,” he says, emphasizing uncertainty around inflation and consumer behavior.

Implications

For Businesses

Companies in tariff-sensitive sectors face mounting pressure to absorb costs or raise prices, potentially squeezing margins. Supply chain diversification and hedging strategies will be critical, particularly for industrials and retailers. Technology firms, seen as less rate-sensitive, may attract capital as investors seek shelter from volatility.

For Consumers

Higher tariffs could translate to steeper prices for imported goods, testing household budgets amid already elevated inflation. Sectors like autos and electronics may see demand soften if pass-through costs accelerate, reshaping spending patterns toward services or domestically produced goods.

For Public Policy

The U.S. must reconcile trade policy with fiscal stability. Rising Treasury yields and a debt downgrade signal stagflation risks, complicating the Fed’s rate path. Strengthening trade alliances—or incentivizing domestic Treasury purchases—could mitigate funding gaps but may require concessions in ongoing negotiations.

What We Think

Bianco’s warning underscores a market at odds with macroeconomic realities. While the S&P 500’s resilience reflects optimism around soft-landing scenarios, earnings revisions and tariff impacts have yet to fully materialize. The tech sector’s perceived safety may be overextended, given its reliance on global supply chains and borrowing costs.

Stagflation remains a underappreciated risk: rising yields paired with sticky inflation could derail consumer spending and corporate investment. Investors prioritizing financials and utilities may be hedging against prolonged rate pressures, but sector rotations could amplify volatility.

Long-term, the U.S. must address structural issues—trade dependencies, fiscal deficits—to restore market confidence. For now, a defensive stance seems prudent, though opportunities may emerge in sectors leveraging AI or reshoring trends. The summer’s volatility will test whether current valuations are a bet on recovery or a bubble waiting to deflate.