Review the latest Weekly Headings by CIO Larry Adam.
Key Takeaways
Where does the time go? It’s hard to believe that next week marks the end of the first quarter already. And what a challenging quarter it has been, with the S&P 500 experiencing its first 10% correction since August 2023 amid rising trade and economic policy uncertainty. The good news? Bonds are acting like bonds again, resuming their role as a diversifier to equity risk. As we get ready to turn the page on the first quarter and look ahead to the rest of the year, we were inspired by the professional draft season to articulate our views. Why? While the draft generates a lot of excitement, it's important to remember that it's not just a one-night event. The draft process is a journey, much like the investment process, where selecting the right combination of 'assets' sets you up for success. Please join us on Monday, April 7 at 4 PM EDT for our latest views on the economy and the financial markets. In the meantime, here is a sneak peek into our 2Q 2025 Outlook.
Economic activity hit a soft patch in the first quarter—whether it was fueled by the big pullback in confidence or one-off factors such as cold weather, a harsh flu season and an acceleration of imports ahead of pre- announced tariffs, our economist expects the slowdown will prove short-lived. While the near-term dynamics have dampened our 2025 growth forecasts (we are lowering our GDP target from 2.4% to near-trend growth of 1.8%), the downward revision is far from catastrophic. We remain comfortable in our non-recessionary call as our ‘combine’ analysis suggests the economy remains on solid ground—supported by solid job growth, healthy consumer spending, continued AI investment and a Fed that remains in easing mode (we still see two more cuts this year). And while softening confidence may remain a near-term headwind, we don’t see any signs of a recession developing as they are often triggered by an exogenous event, like COVID, the Great Financial Crisis or an oil crisis—none of which we see on the horizon.
With the Trump administration introducing new policies in Washington, uncertainty for businesses and consumers has surged. Whether it's tariffs or cost-cutting measures, this uncertainty is impacting confidence. While we hope next week will bring some clarity, allowing businesses and consumers to adapt, prolonged uncertainty could pose significant challenges for the economy. The primary concern at the moment is tariffs, which have been more aggressive than anticipated at the start of the year. Our base case projects a final effective tariff rate of ~10%, much lower than the worst-case scenario of 20%. Although higher tariffs have dampened growth (as reflected in our revised forecast), the latter half of the year should bring some positives. These include deregulation, the extension of the 2017 tax cuts, and potentially additional tax cuts, all of which should boost confidence and stimulate growth.
While the start of the year has presented some performance challenges, our enthusiasm for US equities remains strong. We had cautioned that elevated valuations and investor overoptimism could lead to a near-term setback on any disappointing news. However, the recent correction has reset valuations to more reasonable levels and flushed out overly bullish positioning. We believe US equities are now poised to resume their upward climb. We have maintained our S&P 500 year-end target at 6,375, reflecting our confidence in the long-term consistency and dominance of the US equity market. While some interim bumps are to be expected, solid corporate fundamentals, anticipated double-digit earnings growth this year, strong shareholder activity, and favorable seasonality trends support US equities as our top pick for the long haul. If our year-end target is achieved, the S&P 500 will have delivered double-digit performance from now until the end of the year.
Despite a challenging start to the year, we have not made any ‘trades’ in our sector picks. We still favor Technology, Health Care (our ‘sleeper pick’), and Industrials as these three sectors still have the best earnings growth potential in 2025. From a capitalization perspective, we maintain our preference for mid-cap stocks over small caps until macro trends become more favorable. And while international is off to a strong start this year, we are resisting the temptation to switch our preference—as fundamentals (i.e., stronger economy, better earnings growth, superior profitability, less tariff exposure, sector preferences) remain in US equities’ favor.
While an era of ultra-low interest rates has often left bonds as the last draft pick, the rate reset over the last few years has made bonds relevant again. That’s because bonds are back to doing what they do best: generating income and diversifying portfolios against equity risk. And that’s precisely what happened during the recent equity correction—which is good news for balanced fund investors as bonds can smooth out volatility along the way. Looking ahead, Treasury yields should remain rangebound— with resilient growth, rising inflation, and Treasury supply pushing yields higher while weaker growth, further disinflation, and the Fed tapering its Treasury purchases potentially driving yields lower. We reiterate our 4.5% year-end 10-year Treasury yield forecast and maintain our preference for the high-quality bond sectors (i.e., investment grade corporates and municipals) over the lower-rated credit tiers.
All expressions of opinion reflect the judgment of the author(s) and the Investment Strategy Committee, and are subject to change. This information should not be construed as a recommendation. The foregoing content is subject to change at any time without notice. Content provided herein is for informational purposes only. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Past performance is not a guarantee of future results. Indices and peer groups are not available for direct investment. Any investor who attempts to mimic the performance of an index or peer group would incur fees and expenses that would reduce returns. No investment strategy can guarantee success. Economic and market conditions are subject to change. Investing involves risks including the possible loss of capital.
The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Diversification and asset allocation do not ensure a profit or protect against a loss.
