Stocks May Face Headwinds as Valuations Stretch and Trade Tensions Reignite

U.S. equities entered the Independence Day break at record highs—but the road up has been anything but smooth.

Julian Emanuel, strategist at Evercore ISI, likens the market’s 2025 ride to a rollercoaster: thrilling, volatile, and now teetering at a peak.

“We began with a surge fueled by post-election optimism, plunged into worries over trade wars and stagflation, and then rebounded sharply as Trump’s tariff pause cleared the way for fresh highs,” Emanuel wrote in a Sunday note. “Like any true rollercoaster, the recovery was just as violent as the drop.”

What comes next, he says, hinges on which forces take the lead.

On one side is long-term optimism driven by what Emanuel calls a structural AI bull market. On the other: renewed trade friction and sky-high valuations. The S&P 500 now trades at 24.5 times earnings—historically a level that tends to lead to weaker returns in the following years.

“Markets are cresting again,” Emanuel warns, “and the next stretch could bring more turbulence, much like the sector rotation seen last July. Stay strapped in—the ride isn’t over.”

Still, he sees potential for medium-term gains. Emanuel notes that the recent 20% market drop technically qualified as a bear market, but occurred without a recession—a rare pattern. Since 1960, such setups have led to average gains of 26% over the next 18 months.

However, the road ahead won’t be smooth. “A rally doesn’t eliminate volatility,” he says, pointing to past drawdowns of 7.5% to 15% before stocks hit final highs.

Evercore’s year-end target for the S&P 500 stands at 5,600—suggesting optimism, but with a cautious eye on whether history will repeat.