Wells Fargo sees US markets to washout in 2025, but rise in 26: here’s why

Wells Fargo expects the US markets to have a washout in 2025 while reaching new heights in 2026.

The firm said the tariffs will cause uncertainty in the current year, while a bounce back from a highly volatile environment, backed by historical data, makes a case for high returns in 2026.

Wells Fargo Investment Institute has released its “Midyear Outlook report: Opportunities amid uneven terrain,” presenting a nuanced forecast for the U.S. equity markets. 

While 2025 is anticipated to bring a period of heightened volatility and capped gains, the institute projects a more favorable landscape with new highs in 2026. 

The outlook emphasizes building resilience in portfolios, leveraging historical recovery patterns, and carefully navigating a global economic environment shaped by evolving trade policies and corporate adaptability.

2025: A washout for gains, marked by tariffs and slowdown

Wells Fargo strategists, led by Darrell L. Cronk, President of WFII, view 2025 as a year where anticipated gains in the U.S. equity market will be significantly constrained. 

The primary culprit is the lingering uncertainty surrounding tariffs and trade-policy negotiations. 

These trade frictions are expected to present a “significant obstacle for market growth,” potentially dampening consumer purchasing power and squeezing corporate profit margins as businesses absorb increased costs. 

The ongoing uncertainty has already led some companies to pause capital allocation towards growth projects, impacting overall economic momentum.

The research firm indicates a period of economic slowdown, though not a full-blown recession, cushioned by “steady underlying support and looming tax policy extensions.” 

The economic environment, characterized by moderating job growth and real income gains, temporarily pressures consumer spending. 

The impact of “front-loaded tariffs” and potential immigration policy risks is also cited as factors that could elevate inflation and further dampen economic growth later in 2025, contributing to increased financial-market volatility.

Volatility: a precursor to opportunity

Despite the anticipated turbulence, Wells Fargo maintains an underlying belief in the market’s long-term upward trajectory. 

Their analysis highlights a historical pattern where uncertainty and volatility often create the best opportunities for investors.

Examining 10 periods before the recent past where volatility reached high levels, WFII found a median 18-month forward S&P 500 Index total return of 30%.

This historical context underpins their recommendation for investors to “follow the lesson of history and lean into equities” even amidst current uncertainties. 

The institute suggests that without a recession, the risk of further equity-market downside beyond the lows seen in April 2025 is limited.

Corporate earnings and 2026’s brighter outlook

The trajectory of corporate earnings will be critical. 

While tariffs are expected to squeeze profit margins in 2025, forcing companies to adapt, Wells Fargo’s outlook for 2026 paints a more optimistic picture.

In terms of portfolio strategy for the balance of 2025, Wells Fargo recommends focusing on “quality allocations,” with a preference for U.S. large-cap and mid-cap equities over small-cap options. 

They also favor developed market equities over emerging markets, anticipating a “resilient dollar through 2026.” 

Investors are advised to selectively add exposure to Artificial Intelligence and consider reallocating from defensive sectors like consumer staples to more cyclical sectors such as energy, financials, communication services, and information technology when market pullbacks offer opportunities.

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