Written by Erik Laymon
March 31, 2025

Market Update: Navigating Policy Uncertainty in Spring 2025

As we wrap up the first quarter of 2025, financial markets continue to offer a complex mix of opportunities and challenges. U.S. stocks recently experienced a significant pullback, with the S&P 500 briefly entering correction territory in March before showing signs of recovery. Meanwhile, international markets have demonstrated unexpected strength amid growing policy uncertainty, presenting a shifting landscape for investors.

Earnings Strength and Market Dynamics

Corporate earnings have been surprisingly robust, with Q4 2024 U.S. earnings growing by an impressive 1.1% year-over-year, substantially outpacing expectations. This strength in earnings helps support current valuations and suggests solid fundamentals despite recent market volatility. However, a tale of two markets is emerging, with increasing dispersion at the company and sector level.

Approximately 44% of S&P 500 companies discussed tariffs on their recent earnings calls, indicating that trade policy uncertainty is becoming a more prominent concern for corporate America. Certain industries, particularly automobiles, appear more vulnerable to potential tariff impacts than others.

The tech sector, despite recent volatility, still shows the strongest expected growth for 2025. Free cash flow for the sector stands at an impressive 30% of total sales, the highest since 1990, demonstrating underlying strength even as investors have recently rotated away from this crowded trade.

International Markets: A Bright Spot

After years of U.S. market dominance, international stocks are showing signs of life. U.S. companies aren’t the only ones surprising to the upside with earnings—international markets have seen their own earnings beats, which, combined with relatively lower valuations, have driven stronger performance year-to-date.

It’s worth noting that U.S. stocks still outperformed international stocks in 12 of the last 15 years, posting a cumulative return that meets or exceeds 6x that of international stocks over that period. While one strong quarter doesn’t make a trend, the improved performance abroad bears watching as a potential opportunity for enhanced diversification.

The Fed and Fixed Income: Higher for Longer

Recent inflation data has shown mixed signals, with January’s CPI print surprising to the upside across multiple categories, while February showed some improvement. Markets still expect the Federal Reserve to hold rates steady in the near term, with persistent inflation likely limiting how much the Fed will be able to cut rates this year.

This “higher for longer” interest rate environment has significant implications for traditional portfolio construction. Most notably, the standard 60/40 portfolio is approximately 33% riskier today than it was from 2001-2019, due to higher bond market volatility and elevated stock/bond correlations.

Portfolio Implications and Investment Approach

Given these dynamics, our investment approach has been adjusted to manage risk in uncertain markets:

  1. Equities: We’re favoring a domestic bias with flexibility to adjust foreign stock positions. Our portfolios currently exhibit a weighting that balances growth with value.
  2. Fixed Income: We’ve shortened duration and added higher-yielding bonds that can both lower risk and increase yield compared to a traditional core bond portfolio.
  3. Alternative Investments: We’ve incorporated alternatives that have shown their value during this challenging period for traditional assets, providing uncorrelated yield and strengthening our fixed income sleeve.

Looking Ahead: Navigating Uncertainty

The biggest risk to U.S. growth appears to be prolonged policy uncertainty under the new administration and Congress. Market volatility has been exacerbated by this uncertainty and investors moving out of crowded positions. However, this uncertainty should ease over the next six to twelve months as we get more policy implementation details.

While economic data doesn’t currently signal a downturn (job gains remain solid, and consumer health indicators are positive), the longer policy uncertainty lasts, the more growth could potentially suffer. Still, we remain cautiously optimistic about U.S. large caps over a 6-12 month horizon given robust earnings.

Final Thoughts

Market corrections and periods of uncertainty, while uncomfortable, are normal parts of the investment cycle. The current environment requires more nuanced portfolio construction than in years past, but it also creates opportunities for those positioned appropriately.

While we’ll continue to monitor developments closely, maintaining a disciplined, long-term approach remains the best strategy for navigating these complex markets. As always, if you have questions about your specific situation or would like to discuss these themes in more detail, please don’t hesitate to reach out.

Did You Know?
Spring fever is indeed a real phenomenon! As the days get longer and temperatures rise, many people experience increased energy, vitality, and mood. This “spring fever” is thought to be caused by hormonal changes in the body responding to more sunlight and warmer weather. Specifically, the production of serotonin, the “feel-good” neurotransmitter, increases in spring, while levels of melatonin, which makes us sleepy, decrease.

So, if you’re feeling a bit more energetic and cheerful as spring arrives, there’s a biological basis for it. Just be careful not to let that extra energy lead to restlessness or distraction from your work and responsibilities!