Rethinking 2025: AI Stocks, Europe's Bull Market, and the Shifting Investment Landscape

This year could be more punishing than originally expected for U.S. stocks. Donald Trump’s seeming indifference to market selloffs is one reason. It’s no longer enough for him to simply point to the market as a bellwether of success, or even to worry about the uncertainty that the chaotic implementation of his policies is causing with businesses or the average American. Strike two.

Faced with economic disruptions that could boost inflation and hit growth simultaneously, the Fed has acted like a deer caught in some very bright headlights. A hot inflation reading in January had already put the central bank on hold, and even though the financial markets still reflect the possibility of rate cuts this year—CME’s FedWatch tool puts the odds of a rate cut by the June meeting at 57.6%—the talk out of the central bank is anything but dovish. Chicago Fed President Austan Goolsbee said this past week that increasing inflation expectations would be a “major red flag” for the Fed—one that would probably result in hikes, not cuts. Investors can no longer expect the Fed to cut simply because the “neutral rate” is too high; instead, it might take the possibility of a looming recession. Strike three.

The stock market has reacted accordingly. The S&P 500 index has fallen 7.3% from its record high reached in February, while the Nasdaq Composite has dropped 12%. Wall Street’s strategists have been busy cutting their price targets on the benchmark index, bringing it down to 6430 from 6500 at the time of the cover. Barclays, the latest to take its numbers down, now sees the S&P 500 finishing the year at 5900. Retail investors, too, are exceedingly pessimistic: The percentage of bears in the American Association of Individual Investors survey has topped 50% for five consecutive weeks, the longest since a five-day streak ending on Oct. 20, 2022, near the bottom of that year’s bear market.

Normally, such pessimism is a sign that a selloff has gone too far, too fast, and it’s time to buy. But I can’t bring myself to double down on my aggressive market call, as much as I’d like to. Too much has changed, and the changes suggest that the pillars of U.S. outperformance have started to erode. A less aggressive posture toward the stock market is required. To put it plainly, it’s time to sell the rips, not buy the dips.

Tariffs like the new 25% levy on imported cars are proving more problematic for stocks than the tariffs of President Trump’s first term.  We should invest like he means it.