In this article, we review:
- Market reaction to President Trump’s decision to implement tariffs on a wider scale than most had anticipated
- Recent economic data shifting the market’s primary concern from inflation to economic slowing
- The drop in longer-term bond yields that has accompanied recent economic growth concerns
- Federal Reserve policy expectations now discounting a higher probability of rate cuts in the year ahead
- Why we are maintaining our year-end price target of 6,500 on the S&P 500®
The equity markets have turned lower since February 19, when President Trump announced plans to carry out previously delayed tariffs on Canada and Mexico concurrent with an increase on existing tariffs on China. Since that time, stocks have fallen as the market has apparently shifted its primary economic concern from one of inflation to that of slowing or even negative economic growth.
In light of these developments, we believe the following points are important to investors:
- Tariffs move from negotiation to implementation. At the point of the S&P’s record high close of 6,144 on February 19, many still thought that pending tariffs on Canada and Mexico (up to 25% on certain goods) and reciprocal tariffs on various other countries throughout the Eurozone might ultimately prove to be bargaining tools in negotiations. In recent weeks, probabilities of this scenario playing out appear to have diminished, though the ultimate time frames of tariffs now going into effect remain unknown.
- Recent economic data fuels growth concerns. Since late-February, several macroeconomic data points have turned downward, exacerbating concerns of a slowing pace in the economy or potentially even negative growth for the current first quarter. These have included tangible declines in the Institute for Supply Management (ISM) Manufacturing Purchasing Managers Index (PMI), the Conference Board’s Consumer Confidence Index, University of Michigan Consumer Sentiment Index, and the Atlanta Fed’s tracking estimate on 1Q 2025 gross domestic product growth, which has fallen sharply into negative territory. While we would caution that these reports are yet to fully reflect longer-term trends, they do represent material declines from January.
- Predominant economic concern shifts from inflation to slowing growth. Over the past month, it would be our view that the leading cause of economic nervousness in the market has migrated from inflation to fears of slowing economic growth. It is important, however, to recognize that market fears in this regard are far from confirmed by hard data points and that February non-farm payrolls came in at a solid 151,000 new jobs added to the economy, along with a healthy unemployment rate of 4.1%. Nonetheless, market radar is currently on high alert for signs of economic weakness given rising market angst of consumers and corporations potentially pulling back spending.
- Interest rate expectations have moved accordingly. Over the past few weeks, as economic growth concerns have escalated, market expectations of Federal Reserve rate cuts have increased as well. As of March 11, the federal funds futures markets had priced in a total three quarter-point reductions in the federal funds rate for CY 2025, inferring a year-end lower bound of 3.50%. In addition, since mid-January, the 10-year U.S. Treasury yield has fallen sharply from a closing yield of 4.79% to 4.28% (closing yield March 11). All else being equal, we would view this new rate environment as favorable for equities and providing some support for stock prices during any continuing volatility.
- Credit spreads yet to confirm slowing economic growth fears. One of the most important market metrics, historically known to indicate upcoming economic weakness, is yet to flash concerning signals. Specifically, corporate bond credit spreads remain below historical averages as measured by their yield differentials versus U.S. Treasury bonds. This is currently being displayed in the credit spreads of high-yield bonds (ICE BofA US High Yield Index Option Adjusted Spread – March 11) at 3.16% and investment-grade bonds (ICE BofA Single-A US Corporate Index Option Adjusted Spreads – March 11) at 0.77%. We would interpret these spread levels to reflect that the corporate bond market is currently not overly concerned with the existing economic environment.
While we expect market volatility to continue through the remainder of the year, particularly in light of the continuing uncertainty tariffs are creating for consumers and corporations, we are maintaining our 6,500 year-end price target on the S&P 500, as we await more conclusive hard economic data in the weeks and months ahead. We also expect favorable outcomes regarding federal tax legislation and deregulation during the second half of the year, and we continue to believe the Federal Reserve is likely to implement two quarter-point rate cuts perhaps beginning in the summer months, taking the Fed Funds target range down to 3.75–4.00% by year-end.
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Past performance does not guarantee future results. Indexes are unmanaged and an investor cannot invest directly in an index.
Equities are subject to market risk meaning that stock prices in general may decline over short or extended periods of time.
Fixed income investing is subject to credit rate risk, interest rate risk, and inflation risk. Credit risk is the risk that the issuer of a bond won’t meet their payments. Inflation risk is the risk that inflation could outpace a bond’s interest income. Interest rate risk is the risk that fluctuations in interest rates will affect the price of a bond. Investing in floating rate loans may be subject to greater volatility and increased risks.
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