Current Market Outlook
Posted on April 4, 2025
As the calendars turned from 2024 to 2025, exuberance over the new administration’s pro-growth agenda and continued optimism over a seemingly insurmountable lead by our largest U.S. firms in AI design and adoption, propelled equity markets to new highs. The S&P closed at a record on February 19, after advancing by almost 5% to that point.
Subsequently, the index has recently retreated by more than 10%, the common threshold for a “correction.” On average, U.S. markets experience one correction every calendar year, but the last one was in October 2023, conditioning many to expect the low volatility and remarkable returns of the recent period to persist indefinitely.
What’s been driving this shift in sentiment? In a word, uncertainty. Uncertainty in markets is not unusual. It is the basic condition of investing. But the unprecedented pace, scope and scale of the administration’s executive actions, and reversals of these actions, have created currents, and crosscurrents, that are overwhelming even the most seasoned investors. The mantra of “move fast and break things” is taking hold in an administration influenced by Silicon Valley innovators and disruptors. But this approach is not compatible, at least in the short term, with markets that thrive on quite the opposite – stability and predictability. Not surprisingly, increased uncertainty has resulted in increased volatility, with the S&P’s daily up or down movements averaging just shy of 1%, almost twice the level of last year.
One key source of this uncertainty are the discussions surrounding the potential for sweeping tariffs applied to the U.S.’s trading partners, whether they be friend and ally (Canada, Japan, Europe), or geopolitical foe (China). Tariffs on Chinese goods have increased by 20%, and by 25% on many Canadian and Mexican goods, over the course of just 6 weeks. By contrast, the USMCA, the successor to NAFTA signed in December 2019, took over 2 ½ years to negotiate and adopt.
Trade policy uncertainty in turn is flowing into concerns over the possible knock-on impacts on this year’s economic growth, inflation, and interest rate trajectory. Accordingly, in its March 19 meeting, the Federal Reserve lowered its projections for 2025 GDP growth to 1.7% (from 2.1%) and increased its core inflation expectations to 2.8% (from 2.5%). Chairman Powell repeatedly acknowledged how this uncertainty is making the monetary path increasingly difficult to chart.
This brings us to another key factor in the downdraft – valuation. Valuation in of itself is rarely a leading driver – rather, it can be considered an accelerant once momentum has taken hold and the path of least resistance, in the absence of valuation support, is down. Entering this year, stocks were very expensive, in the highest decile of historical valuations. The highest of those valuations has been the IT sector, which is also where the largest price declines are centered. Headlines in late January that the Chinese AI model DeepSeek had outperformed U.S.-based models at a fraction of the development cost further dented sentiment. To illustrate: the “Magnificent 7” of top technology-driven firms in the U.S. accounted for about 60% of the market’s returns in 2023 and 2024. Six of seven are down in 2025. In fact, the “S&P 493” excluding them, would have been up slightly for the year.
This underscores the essential value of diversification: to realize your investment goals over the cycle, which is often achieved by some assets performing when others are not, or when the low probability event occurs, such as the “Mag-7” becoming the “Lag-7”, while energy and healthcare outperform this year.
Diversification, and disciplined, fundamental security selection, remain central to our work as Portfolio Managers, each and every day. We remain nimble and vigilant to the opportunities, and risks, should they arise along with the rising uncertainty.
Kristian R. Jhamb, MBA, CFA
Chief Investment Officer
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