Financial Forum April 2025
Market Commentary – How Quickly Things Can Change
Investors started the quarter on a euphoric note with high hopes that the new administration would slash taxes and regulations, cut government waste, and promote pro-growth policies, including making the 2017 tax cuts permanent. They also assumed the U.S. economy would experience a soft-landing, allowing the Federal Reserve to gradually lower rates. By quarter’s end, they were singing a different tune, as tariffs, stubborn inflation, slower economic projections, and lowered profit guidance from companies sent consumer confidence and stocks plunging. The major U.S. stock averages finished in the red as the uncertainty was too much for investors to bear. Let’s look at some of the major items affecting markets.
The Fed:
Unless something really bad happens, the Fed is not going to be as accommodative as Wall Street originally expected. Chairman Powell has stated that the central bank is in no rush to cut rates, preferring to monitor the policies coming out of Washington, D.C. Additionally, inflation has remained elevated. Both the CPI and the Core CPE, which is the Fed’s preferred inflation measure, rose in the first quarter and remained stubbornly above the Fed’s two percent target. Couple that with tariffs, which could be both inflationary and growth-inhibiting, along with inflated corporate earnings estimates, means the Fed is unsure how to proceed. If things slow down, companies could start laying off workers, which only adds to the confusion, because that would put the Fed’s two mandates (price stability and full employment) in direct competition. To combat inflation, the Fed needs rates to remain high. To spur growth and employment, they need to lower rates. In other words, if stagflation happens in 2025, the Fed doesn’t really have the tools to properly deal with it.
Bottom Line: If you believe that any rise in inflation is transitory, then the central bank can come to the rescue of the economy and, in turn, will help US bond markets and even equity valuations. But if you're still worried about a cycle of inflation amid broader economic weakness, central banks are much less powerful.
Corporate Earnings:
At the end of the day, markets care about profits. With the S&P 500 starting the year selling at 22 times forward earnings and concentration risk (Magnificent Seven represents 31% of the S&P 500) still near record highs, there was little room for disappointment. Unfortunately, disappointment came in the first quarter, mostly in the form of forward earnings guidance. Many companies, in many different industries, gave cautious guidance for the rest of the year. For example, FedEx, Walmart, Target, Nike, and Lululemon all expressed concerns over slower consumer spending. The three major airlines reported limited business travel, as companies are reining in expenses. Also, business confidence is down, as seen in layoff announcements and/or slower hiring. This loss in both consumer and business confidence has caused analysts to lower their price targets on the S&P 500 and reduce S&P 500 aggregate profits to $268/share, from $272/share. The market earnings multiple has also declined from 22 to start the year to 20.8, per Barrons. To put this in perspective, last year’s S&P 500 aggregate earnings came in at $244/share, so $268/share may still be too optimistic. Also, if we get stagflation, the multiple will surely drop from the current 20.8. On Monday, Goldman Sachs lowered their price target again on the S&P 500, citing rising inflation expectations and lower earnings and multiples on corporate profits. The bank lowered their 2025 earnings to $253/share and their market multiple to 19 ($253 x 19 = 4807 price target). Goldman also increased their inflation expectation to 3.5% and the odds of a recession in 2025 to 35% (from 20%).
Uncertainty:
At the end of the day, the items we discussed above are causing major UNCERTAINTY and there is nothing investors hate more than uncertainty. Whatever the news is, they just want to know. For example, if investors and analysts know the extent of tariffs and what the ultimate goal of the tariff/trade strategy is, they can model the effects and plan accordingly. Essentially, the new market logic is this: Whiplash tariff headlines will continue, while similar policy chaos can be expected on 1) Averting a government shutdown, 2) Extending the debt ceiling and 3) Tax cut extensions. All of that uncertainty will cause consumers and businesses to essentially “hole up” and wait for clarity. That restraint on spending and investment will then cause an economic slowdown and a decline in S&P 500 earnings.
According to the Kobeissi Letter, economic policy uncertainty is now at the highest point in history. The five-day moving average of the U.S. Uncertainty Index hit ~634 in March. This is a whopping 270 points above the 2008 financial crisis high and the April 2020 pandemic high. Barclays estimates that President Trump is about to impose new, reciprocal tariffs on 25+ countries on April 2. While this is mostly priced into markets, uncertainty continues to cause consumer and business confidence to drop. According to the University of Michigan, inflation expectations are at their highest level since 1993 and consumer confidence looks like Wiley Coyote running off a cliff. Expect volatility to continue…
Bottom Line:
Watch the data! The best thing to do in times like these is to stay focused on actual data because, in the end, that will tell us if growth is truly slowing. This pullback in stocks is a combination of policy volatility impacting investor and business sentiment and investors worrying about what could happen in the future, not what is happening now. Fear is currently driving the market, not the data. Economic data is still holding up. Even Fed Chair Powell said the economy remained on solid footing, even if there is a slight loss of momentum. Corporate earnings are holding up “fine” as we are not seeing wholesale cut to earnings estimates yet. Also, the bond market, which is considered the “smart money,” is not sending recession signals. Bonds rallied in Q1. Don’t get me wrong. It is certainly appropriate to be more cautious on this market and brace for more volatility. However, that negative scenario is not a forgone conclusion and the actual facts on the economy and earnings are not nearly as bad as sentiment indicates. For example, although the S&P 500 had its worst quarter since 2022, the majority of the market traded higher. Seven of 11 sectors were positive, and two others only saw fractional losses. According to Stephanie Link, the Magnificent 7 stocks accounted for 96% of the S&P’s decline. Chipmaker Nvidia has seen its shares tumble 28% from its January peak. Microsoft, Amazon, Alphabet and Meta have all fallen 20% or more from their own records. If Wall Street could get some clarity on tariffs and the passage of some pro-growth policies, Washington could quickly go from a headwind to a tailwind. Rest assured, we are monitoring this and more.
Quarterly thought…Uncertainty
In keeping with this newsletter’s theme…
"Maturity of mind is the capacity to endure uncertainty," - John Finley
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Work Cited
Levisohn, John. “My 2025 Market Prediction Has Already Soured. Why It’s Time to Rethink Stocks.” Barron's, Up and Down Wall Street ed., 30 March 2025,
The Kobeissi Letter (@KobeissiLetter). “Economic policy is now at its most uncertain point in recent history. The 5-day moving average of the US economic
uncertainty index hit ~634 in March. This is ~270 points ABOVE the 2008 high and above the April 2020 pandemic high. Uncertainty is
driving today's drop.” X, March 31, 2025, 10:33 AM, [https://.x.com/KobeissiLetter/status/1906716565816357130]
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*The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
* The economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
