Investing.com -- Despite improved trade policy sentiment and a rebound in equities, BCA Research warned in a note Wednesday that the U.S. market may struggle to sustain its upward momentum due to elevated valuations and tariff-related headwinds.
“The market is busy pricing out the worst trade policy news. We concur – the economic outlook has improved,” BCA Research wrote.
The S&P 500 has surged 18.1% from its April 7 low, fully recovering its losses from Liberation Day, driven by optimism surrounding tariff negotiations and the temporary reduction in U.S. duties on Chinese imports.
Still, BCA said “the market is expensive and is unlikely to continue making new highs.”
They explained that its fair-value model suggests the S&P 500 should trade at roughly 17.6x forward earnings, given falling margins and rising Treasury yields.
The firm notes that currently, earnings forecasts are being revised downward, with 2025 growth expectations declining from 14% to 8.7% since the start of the year.
Although there has been an easing of recession fears, BCA said tariffs remain a structural burden.
“Tariffs are here to stay,” analysts said, calling them “a tax hike split among exporting nations, U.S. importers, and consumers.”
Even with a 90-day tariff cut on Chinese goods, BCA said the weighted tariff rate has climbed from 2.4% to 16.4% under Trump’s second term.
The firm expects this will reduce profit margins by 1% and earnings growth by 10%.
While a Fed backstop may soften the blow, the firm remains cautious. “Tariffs will weigh on margins and earnings growth,” BCA wrote.
As a result, it adjusted its sector positioning to reflect a continued rotation: downgrading Value and Consumer Staples while upgrading Growth, Semiconductors, and Transportation.
BCA concluded that despite short-term optimism, the long-term outlook remains clouded by elevated valuations and ongoing structural pressures.