Given the current volatility in the market, we wanted to provide a brief update on and analysis of the market and what we expect ahead.
On the heels of 20%+ returns in the S&P 500 in 2023 and 2024, it’s easy to forget that pullbacks are normal, even healthy. Historically, the equity market pulls back 5% three times per year and 10% about every year. Since 1980, if an investor bought the S&P 500 after a 10% decline, the returns were positive 76% of the time over the next six months and 86% of the time if the economy did not end up in a recession
The S&P 500 has been in oversold territory for weeks and recently dropped below its 200-day moving average, marking an ~8% pullback from its 52-week high (as of 3/14/25). Most of the volatility is due to tariff and trade policy uncertainty and concerns that these policies will send us into a recession. Investors like certainty. The volatility is understandable given the uncertainty about trade and tariff policies.
The economic data shows a slowing economy but not a recession. Unemployment remains historically low at 4.1%. Inflation continues its downward trend with the Consumer Price Index (CPI) at +0.2% for February, below the consensus estimate of +0.3%, making CPI +2.8% from a year ago. The market is pricing in a 90% probability that the Federal Reserve will cut interest rates when they meet in June. We expect the Fed to remain cautious until the inflation rate is closer to their 2.0% target, assuming the economy does not slow substantially.
Tariffs have been unrelenting in the headlines and at the forefront of investors’ minds. We encourage everyone to take a broad perspective. The U.S. is an enormous economy (~$30 trillion as measured by GDP), and imports make up approximately $4 trillion of GDP. In other words, the impact of tariffs on the trade deficit tends to have a relatively small impact on GDP; however, their tax-like impact on disposable income and spending is harder to forecast. To be clear, we expect tariffs to slow the economy. The magnitude of the economic impact from tariffs is highly dependent on the level and duration of the tariffs, which is unclear.
Despite the volatility and pullback, the earnings outlook remains strong. The latest FactSet forecasts for the Q1 and full year 2025 S&P 500 earnings growth are 7.3% and 11.6%, respectively. Both are modestly down from the end of 2024. Further setbacks in earnings expectations could hurt investor and consumer confidence, but we believe U.S. businesses are resilient and have proven their ability to adapt to new inflationary and tariff environments.
We believe that we are in a secular bull market underpinned by once-in-a-lifetime technological innovation. When the market is in a secular bull market, stocks return to the previous highs and make new highs after pull backs.
Our client portfolios are built on quality—profitable companies, diversified asset classes, and strategies designed to benefit during periods of growth and, importantly, be resilient during periods of volatility.
Over the next month, we expect continued volatility tied to economic data and trade policy headlines. While uncertainty and market pullbacks are unnerving, patience and discipline reward investors. The stock market’s strongest returns tend to be during the late stages of a volatile market.
We are closely monitoring changes in economic and earnings outlooks and making portfolio adjustments, as necessary.
Thank you for placing your trust in our team. It is a responsibility we do not take lightly. If you have any questions or would like to discuss anything, please do not hesitate to reach out.
