US equity markets are showing signs of fatigue in the second half of 2025 as rising tariff pressures threaten corporate profitability. Despite touching record highs earlier in the year, ClearBridge Investments sees limited upside for stocks through year-end, with attention shifting toward a more favourable 2026.
Scott Glasser, CIO at ClearBridge Investments, highlighted tariffs as the central risk for the remainder of 2025. “We believe tariffs remain the key risk to corporate profits in the second half of the year and are less concerned about geopolitical events or the outlook for fiscal and monetary policy,” he says.
The US equity market, coming off strong returns in 2023 and 2024, is now trading near fair value. According to ClearBridge, this leaves little room for further gains unless macro risks, especially trade tensions, begin to resolve.
While geopolitical tensions and fiscal policy debates remain in focus globally, it is the unresolved trade negotiations, particularly with the EU and China, that pose the most immediate concern. “Tariffs on our biggest trading partners in the European Union and China are likely to stay high and take longer to resolve, while tariffs on secondary trading partners will remain in place for extended periods,” says Glasser.
ClearBridge projects that the average effective tariff rate could climb to between 14% and 15%, a substantial increase from the 2.5% level recorded in 2024. This spike, the firm warns, will pressure margins and prompt downward revisions to corporate earnings, particularly as companies exhaust existing pre-tariff inventory and pass on higher costs.
“Prices are likely to rise in the coming months as pre-tariff inventory is absorbed,” Glasser notes.
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Despite these pressures, inflation expectations remain relatively well anchored. A slowdown in housing, easing oil prices and muted investment spending (outside of AI) are seen as counterbalances to tariff-related inflation.
“While higher tariffs are likely to lead to higher goods inflation, lower oil prices and a slowing housing market should help to offset those pressures, keeping 10-year Treasury yields rangebound,” Glasser says.
However, the broader macro outlook isn't entirely bleak. ClearBridge sees current credit trends and market breadth as strong indicators that the current equity rally has solid footing.
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“Credit trends and market breadth support the thesis that the current advance is both healthy and sustainable,” Glasser says. Bond spreads, particularly for BBB-rated corporate debt relative to Treasuries, remain tight—a sign that markets do not foresee significant financial distress ahead.
Sector leadership in technology, industrials and financials also reinforces the view of a resilient equity environment, even as near-term catalysts remain absent.
Looking beyond 2025, ClearBridge is increasingly optimistic about the earnings landscape in 2026. “While we are more neutral on the near-term outlook for equities based on tariff uncertainty and valuations, we are more bullish on the outlook for 2026 when we believe that S&P 500 Index profits can return to double-digit growth,” says Glasser.
That optimism is rooted in assumptions of resolution across most trade disputes, resulting in one-off price adjustments rather than sustained inflationary impact. Further, ClearBridge expects increased investment beyond AI, aided by deregulation, renewed capital market activity and policy support.
“Finally, we expect both monetary stimulus from lower Fed Funds rates in the next year, and fiscal stimulus from the front-loaded impact of the OBBB to support profit growth,” Glasser adds.
The One Big Beautiful Bill (OBBB) is a large-scale fiscal stimulus package passed earlier this year that has yet to show up in reported deficits, but markets are expected to begin pricing in its long-term implications by late 2025.
While risks persist, including longer-term concerns about deficit levels and policy shifts, ClearBridge maintains that the structural underpinnings of the equity market remain intact for now. As Glasser sums up: “We are more focused on the outlook in 2026 when multiple catalysts could drive an acceleration in corporate profits and many of the current risks are likely to dissipate.”
