Following positive performance years in 2023 and 2024, the chief investment officer at ClearBridge Investments, Scott Glasser, said US equity markets now face a mixed bag of short-term risks and long-term opportunities.
“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,” he said.
According to Glasser, tariffs pose the biggest risk to corporate profits in the second half of the year, noting slow progress on tariff deals, with only a few broad “frameworks” announced despite extended deadlines.
T. Rowe Price portfolio manager Toby Thompson said while equity markets have reached near‐record levels, they could be vulnerable should President Donald Trump hold firm on implementing the new tariff levels on the new 1 August deadline.
He believes markets may become more sensitive if little progress is made on trade deals over the next few weeks.
ClearBridge expects that tariffs will remain high and unresolved with major trading partners like the European Union and China for a long time, while also persisting for extended periods with secondary trading partners.
The firm also noted that the impact of tariffs on both economic growth and inflation has not been fully realised due to existing inventory levels, as well as apprehension among companies to raise prices and risk consumer backlash.
With this week marking the start of Q2 earnings season, Thompson believes incoming data will shed light on the effects of current tariffs and how recent escalations, particularly in targeted sectors, are set to influence future guidance.
ClearBridge estimates the average effective tariff rate will settle in the 14 to 15 per cent range, a significant increase from approximately 2.5 per cent last year.
“While the overall economy can absorb that impact without recession, we believe that current profit estimates are too high and likely to weaken,” Glasser said.
He anticipates earnings estimate revisions to begin declining more significantly from around September.
He also noted that rising deficits from the “One Big Beautiful Bill” (OBBB) are also not yet fully visible to investors.
“Housing, autos and investment spending excluding AI are all weakening and should become more pronounced in the months ahead,” Glasser said.
However, he said the firm’s outlook extends more positively into 2026.
“Despite our near-term caution, we acknowledge that credit trends and market breadth support the bull thesis that the current advance is both healthy and sustainable,” he said.
ClearBridge also assumes that most global tariff negotiations will resolve, resulting in a “one-time price adjustment” causing short-term volatility before subsequently stabilising.
As well as this, the firm foresees a sustained and robust surge in investment across various sectors, particularly in tech: We expect continued strong investment in all things related to AI.”
President Trump’s expanded AI initiatives have been a topic of discussion this week following his announcement of a multibillion-dollar AI hub to be built in Pennsylvania, as well as the administration’s recent regulatory changes backtracking on restrictions implemented during the Biden era.
Several fund managers view these changes as eliminating barriers to innovation and global competitiveness for American technology companies, promising exciting investment opportunities.
Glasser said he expects both monetary stimulus from lower Fed Funds rates in the next year and fiscal stimulus from the impact of the OBBB to support profit growth.
