Wells Fargo says tariffs to hold back stocks this year, but then sees new highs in 2026

CNBC

11-06-2025

This year could be a washout for the stock market thanks to lofty tariffs, but 2026 could mark a return to new highs, according to the Wells Fargo Investment Institute. President Donald Trump's tariffs will continue to limit upside for equities this year, as corporate earnings come under pressure from higher inflation, constrained profit margins and a slower economy, but investors can start positioning for a recovery that's likely to come next year, wrote Darrell Cronk, president of the investment institute. "Significantly surpassing the equity-market highs reached early this year has likely been delayed by the tariff-related hit to consumer and business sentiment along with the imminent economic slowdown that we expect," Cronk wrote. "Without a recession, we believe the risk of further equity-market downside — beyond lows reached in April — is likely limited while upside reward potential is significant by year-end 2026," he added. .VIX YTD mountain Volatility Index (VIX), year to date. The reasoning behind the Wells Fargo thesis is this: Positive forces expected later this year, such as tax cuts and lower interest rates, in addition to lower oil prices, should offset some of the pressure from higher tariffs, helping the U.S. avoid a recession. What's more, Cronk noted that volatility historically occurs near market bottoms. In 10 comparable periods in the past, he said, when the VIX Index topped 40, the median 18-month forward return for the S & P 500 was 30%. The VIX topped 50 at one point during the April selloff and was last trading above 16. "In real time, the uncertainties can feel so large that it is difficult to look past them, but also in each case households and businesses adjusted, and generally, returns soon followed," he wrote. "In sum, the new tariffs are significant, and uncertainty may persist for some months to come," he continued. "However, we would follow the lesson of history and lean into equities." While near-term returns may remain muted, investors should "lean into the recovery" by allocating toward quality companies, Cronk said. He prefers U.S. large caps and U.S. midcaps, anticipating the U.S. will maintain its status as the global leader both economically and, by extension, in stocks. He also said he favors developed markets excluding the U.S. over emerging markets. "We view further periods of volatility as an opportunity to lean into equities to position for the gains we expect through 2026," Cronk said.