The second Trump administration began a little over a month ago, and in that time, markets have seen heightened levels of volatility. When volatility shows up in markets, it can be uncomfortable for investors and easy to become focused on the day-to-day movements in asset prices. In environments such as today’s, it’s important to focus on the fundamentals of the U.S. economy. Before getting into the market outlook, it’s central to remember President Trump is a “deal guy” and he frequently uses the media while negotiating. Whether that’s directly from his social media accounts or his public appearances on various news and entertainment outlets, you can expect to hear a lot from President Trump. Many of the policy-related remarks will be aimed at negotiating a compromise that he can point to as a win instead of a strong policy shift directed by the Executive branch. Further, history has proven that not every policy the administration talks about will take hold. Some policy points have proven to be spoken about hyperbolically to create leverage in negotiations, while others, such as the pause on all federal funding, have been struck down by courts. While many of the headlines around the administration have focused on market negatives, it’s important to note that not every policy position the administration holds is negative for markets. While tariffs and spending cuts are growth-negative, other cornerstones of the Trump policy are growth-positive, such as tax cuts and deregulation.
In the past few days, the implementation of tariffs, specifically against our allies Mexico and Canada, has caused market participants to be concerned about the impact on the U.S. economy and American businesses. Tariffs are a headwind for economic growth and the market is adjusting expectations for future growth as uncertainty increases. As investors, we position portfolios for the long term and focus on fundamentals. Despite some emerging headwinds for growth, we still see a lot of underlying strength in U.S. consumers and businesses.
President Trump utilized tariffs in his first term and has been a central negotiating tool to start his second term. We view President Trump’s use of tariffs, especially those on Canada and Mexico, as a short-term negotiating strategy. We think both sides will come to a deal, and tariffs will be reduced.
We think there are a few reasons that the administration will dial back tariffs and not hold onto all of them in the long run. We view President Trump as sensitive to consumer sentiment, his approval ratings, and financial markets. If any, or all three of these, decline, it will push the administration to strike a deal.
The market’s reaction to tariffs will help dissuade the long-term implementation of growth-negative policies like tariffs. Another disincentive on the use of tariffs will be countries retaliating. Retaliatory tariffs will be a headwind for American farmers, an important voter base for President Trump.
Tariffs create noise and short-term uncertainty, but investors should focus on diversification and take a long-term perspective. Diversification is key to effective portfolio management. The market adjusting growth expectations lower has resulted in a decline in equity valuations as well as bond yields. Importantly, as bond yields fall, fixed income prices increase. Bonds are playing their defensive role in the portfolio today; bonds have rallied in response to increased uncertainty. It is important to look at your entire portfolio and not just the equity markets that dominate headlines.
From a fundamental standpoint, things still look good. Earnings growth for the S&P 500 companies in 2025 is expected to come in at 12%, according to FactSet, which is well above the 10-year trailing average of 8.14%. Wage growth has been higher than inflation on a monthly basis since May 2023, which has led to a resilient consumer, and while consumer spending has seen a slowdown in growth, it is still seeing growth. Unemployment remains at a low level of around 4%, and business investment is sitting near an all-time high level, coming in at over $800 billion dollars in the fourth quarter, which is well above its pre-pandemic high of just over $700 billion. Productivity gains in the U.S. have outpaced the rest of the world. AI and other innovations will continue to drive increases in the productivity of the American worker. If the economy were to slow materially, the Federal Reserve is in a good position to stimulate if needed. Following the 2022-2023 rate hiking campaign, interest rates are at levels not seen since the mid-to-late-2000s, leaving plenty of room for rate cuts should the economic data warrant them.
While the short-term volatility has increased and the current environment is noisy, and unpredictable at times, we are focused on the signal of the economy and corporate fundamentals in 2025. We focus on medium- to long-term market trends and believe it is prudent to stay invested, even through times of increased uncertainty.
