July kicks off the beginning of the second half for markets, one likely riddled with ongoing uncertainty and rising risks. Despite recent stock gains, T. Rowe Price urges investors to exercise caution when investing in U.S. equities.
The new U.S. tariff regime drove ongoing market volatility in the first half and changed the economic trajectory for the U.S. and world. The deadline for the 90-day pause on “reciprocal” tariffs looms about a week away. Given the unpredictable nature of U.S. tariffs this year and their seemingly weaponized use on the world stage, July 9 could prove a tumultuous day for markets. Longer term, they remain an elevated risk for markets and the economy.
“While it is unclear how much tariffs ultimately will rise under the Trump administration, the economic effects almost certainly will be negative,” explained Tim Murray, CFA, capital market strategist, multi-asset division at T. Rowe Price, in a Monthly Market Playbook.
Markets appeared to shrug off tariff risk in late May and much of June. Earnings estimates mid-May for the S&P 500 put EPS growth at 10.7% for the next 12 months. What’s more, valuations remain very high looking ahead. The forward P/E of the S&P 500 was 21.4x that of anticipated earnings in the next year as of May 20. “This was close to the highest P/E reached over the past 20 years and almost five points above the 10-year median,” he said.
Tariffs remain a major risk, despite recent market optimism and gains. They will likely have growing impacts on inflation, declining consumer spending, corporate margins, and more looking ahead. “But the U.S. stock market is not currently pricing in a muted outlook. Instead, we see very high earnings multiples being awarded to some extremely optimistic earnings projections,” noted Murray.
Investing Defensively for an Uncertain Second Half
Given these second half risks, T. Rowe Price’s Asset Allocation Committee maintains an underweight to equities. The opportunities it does see within equities include value stocks as well as international markets. Meanwhile, it holds an overweight to short duration bonds.
Investors looking to increase their short duration fixed income exposures would do well to consider the T. Rowe Price Ultra Short-Term Bond ETF (TBUX ). The actively managed fund seeks high levels of income. It does so while investing in a diversified portfolio comprising mainly investment-grade, short-term securities. These include Treasuries and government bonds, corporate bonds, asset- and mortgage-backed securities, municipal bonds, money markets, and bank loans. It also invests in foreign debt.
The fund’s portfolio comprises short-term bonds with a targeted maturity profile of 1.5 years or less. TBUX is also competitively priced for an active strategy, with a management fee of 0.17%.
For more news, information, and analysis, visit our Active ETF Channel.
