Will the Stock Market Crash as Tariffs Take Effect in 2025? Wall Street Has a Clear Answer for Investors. (Hint: It May Surprise You.)

The S&P 500 (SNPINDEX: ^GSPC) is widely regarded as the best gauge for the overall U.S. stock market. The index briefly dropped into correction territory earlier this month, and it remains at 8% below the record high reached in February. Economic uncertainty created by tariffs has been the driving force behind the drawdown, and the situation may worsen in April.

The White House has already imposed tariffs on goods from China, Canada, and Mexico, as well as steel and aluminum imports. But the Trump administration plans to implement reciprocal tariffs -- meaning imports will be taxed at the same rate as exports -- on April 2. With that policy, the Trump administration hopes to "correct long-standing imbalances in international trade."

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Importantly, numerous experts argue tariffs will increase inflation and slow economic growth, which could certainly cause a deterioration in corporate earnings across the S&P 500. Does that mean the stock market will crash in 2025? Wall Street has a surprising answer.

Most Wall Street analysts think the stock market is headed higher in 2025

The list below shows the year-end targets for the S&P 500 in 2025 set by analysts at Wall Street investment banks and research organizations. It also shows the upside or downside implied by each forecast as of March 21. For context, the S&P 500 last closed at 5,668.

Importantly, while the list is by no means comprehensive, analysts generally think the stock market is headed higher in the remaining months of 2025. The average year-end forecast of 6,551 implies 16% upside.

Source: Yahoo Finance.

Some Wall Street analysts have lowered their year-end targets for the S&P 500 due to economic uncertainty. For instance, Goldman Sachs revised its U.S. GDP (gross domestic product) growth forecast to 1.7%, down from 2.4%, after the Trump administration started imposing tariffs. The bank then lowered its S&P 500 target to 6,200, down from 6,500. RBC Capital and Yardeni Research have made similar downward revisions to their forecasts.

However, even analysts who have lowered their forecasts see upside in the S&P 500 despite the dramatic shift in U.S. trade policy. Of course, no one knows the future, but there is another reason to think the stock market will move higher in the remaining months of the year.

Investor sentiment is unusually bearish (and that's good news)

Weekly surveys from the American Association of Individual Investors (AAII) indicate that bearish sentiment is unusually high. For context, bearish sentiment refers to the percentage of investors who expect the stock market to fall in the next six months, and that number has now exceeded 50% in four straight weeks.

Most recently, bearish sentiment measured 58.1% on March 19. That is nearly the worst reading in the last decade and well above the 10-year average of 33%. That may sound like bad news, but the AAII investor sentiment survey is considered a contrarian indicator. That means high levels of bearish sentiment usually precede upward movement in the stock market.

Indeed, bearish sentiment last measured above 50% on Nov. 2, 2023, and the S&P 500 returned 32% in the next 12 months. Of course, a single measurement does not make a pattern. But the weekly AAII survey recorded bearish sentiment above 50% on 25 different occasions in the last decade, and the S&P 500 returned an average of 22% during the 12 months following those events.

Image source: Getty Images.

The best decision investors can make right now

Nothing I've said should give investors a false sense of security. Many economists have raised their recession probability forecasts since the Trump administration began imposing tariffs, and the situation could worsen when reciprocal tariffs take effect on April 2. But most Wall Street analysts remain upbeat in their outlook for U.S. stocks, and the high level of bearish sentiment among investors portends material upside in the next year.

So, the best decision investors can make right now is to steadily add capital to the stock market, provided they will not need the money for at least three years. Now is a good time to buy high-conviction stocks that trade at reasonable valuations. Alternatively, now is also a good time to buy an S&P 500 index fund. Either way, one secret to making money in the stock market is staying invested through drawdowns.

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