The stock market has rallied over the past week following a dramatic drubbing caused by higher-than-expected tariffs announced on April 2. The bounce-back rally is welcome news for investors who have suffered significant losses tied to uncertainty over how the trade war may play out, including whether it will cause a recession.
The S&P 500’s 11% gain since its intraday low on April 7 still leaves it down about 9% year-to-date. The situation is similar for the tech-stock-heavy Nasdaq, which remains down about 12% this year despite a 13% bounce from its intraday low.
This year’s sell-off surprised many, given that Wall Street was forecasting more gains by and large following back-to-back returns above 20% in 2023 and 2024. However, long-time money manager Dan Niles wasn’t caught nearly as off guard by this year’s drop or recent pop.
In early January, Niles, who has been navigating the stock market professionally since 1990, surprised many when he picked “cash” as the biggest holding in his top 5 picks for 2025. And while many were still fawning over the magnificent seven tech stocks, he didn’t pick any of them among his top plays for this year, citing downside risk potential of up to 20%.
Similarly, he correctly predicted an oversold rally when stocks got hit hard after tariffs were announced.
Now that we've experienced a rally, Niles is updating his outlook. Given his recent prescient predictions, it’s worth considering what he has to say about stocks now.
The stock market sold off sharply in 2025 due to fears of stagflation or recession.Bloomberg/Getty Images
The stock market faces a struggling economy, and tariffs don’t help
The S&P 500 gains over the past two years have largely been due to optimism that the Federal Reserve would abandon its hawkish monetary policy and start cutting rates as inflation retreats and job markets slow. Stocks also benefited from a tsunami of spending on artificial intelligence as companies rushed to profit from AI Chatbots and agentic AI apps.
In 2022, the Fed embarked on the most restrictive rate hikes since Fed Chair Paul Volcker battled inflation in the early 1980s. That strategy worked, driving inflation below 3%, but it also caused cracks in the jobs market, given unemployment has increased to 4.2% from 3.5% in 2023.
The drop in inflation did cause the Fed to about-face, as predicted by the market, cutting rates in September, November, and December. However, the Fed unexpectedly paused additional cuts this year amid concerns that inflation was re-exerting itself, a concern that has escalated following President Trump’s tariff announcements this month.
A side-lined Fed has removed a key underpinning of stock market valuations, and absent rate cuts, risks of more job losses have increased, particularly in the wake of significant lay-offs in the Federal Government driven by cuts stemming from efforts by Elon Musk’s Department of Government Efficiency, or DOGE, to crimp Federal spending.
Also, investors are increasingly worried that the AI spending boom may be about to bust, removing another leg of the stool supporting valuations.
In February, the release of DeepSeek, a Chinese AI chatbot competing with OpenAI’s ChatGPT and Google’s Gemini, shook up spending forecasts after its developers said it was created at a cost of just $6 million using cheaper semiconductor chips, rather than the latest Blackwell GPUs sold by Nvidia.
The potential to develop AI apps more cheaply could mean big AI spenders, such as Amazon and Microsoft, don’t need to invest as much money in network upgrades. Those concerns have mounted with reports that Microsoft has begun slow-walking some of its planned data center projects.
Additionally, the growing threat of sticky inflation because of tariffs and job losses could mean the economy suffers stagflation or recession, which may force tech companies to ratchet back spending plans to conserve cash.
Dan Niles reboots his stock market forecast amid rally
Niles is no rookie to stock market pops and drops. He’s been navigating the market for over 30 years, so he’s survived the Internet boom and bust, the Great Financial Crisis, Covid, and 2022’s bear market.
After correctly picking ‘cash’ as his favorite investment idea at the beginning of 2025, he similarly correctly predicted the current oversold rally, noting in posts on X that “65% of the technical 17 metrics I cared about the most signaled oversold. Historically about 48% is what is needed to be near a tradeable short-term bottom.”
Given the recent stock market bounce, Niles updated his outlook this week. His take may frustrate those hoping for more returns.
“It is important to note that this is not the absolute bottom for stock prices necessarily during a bear market,” wrote Niles on X. “I still believe cash is a good pick from here. On a stock basis, I believe in companies that provide networking equipment and getting access to the data that has been created by AI investments over the past two years. But this should be combined with selling 10-14% rallies in the market and buying selloffs that go back to technically oversold levels.”
The current S&P 500 and Nasdaq rally has eclipsed 10%, so while there could be a bit more upside, the pop may soon run out of steam.
Niles thinks earnings and the economy are where the rubber meets the road for what happens to stocks next.
“How much do earnings estimates need to be cut for FY25 that are currently forecast to be up over 10%? I believe closer to flattish growth makes more sense,” said Niles. “What multiple do you want to put on those lower earnings estimates? During recessions the S&P PE on a trailing basis has been at a mid-teens level and during times with CPI between 2.5-3.0% it has been 19x. Today it is 23x… the stock market may not have seen the lows for this selloff yet.”
And don’t necessarily count on the recent tariff pause or short-term technology exemption from tariffs to drive stocks longer term or the U.S. economy to save the day.
“I expect Q3 or Q4 to have negative GDP growth given the current pull forward in demand to get in front of tariffs and potential export controls in future months,” wrote Niles. “Recent comments on Sunday seem to indicate that export control on semiconductors and more tariffs is still likely in the next one to two months despite the tariff relief announced on late Friday. The exemptions from tariffs announced should spark a strong rally in the markets today, but I would be wary of chasing that strength given high market multiples and declining earnings expectations.”
