Market Perspectives- April 2025

Economic Morass and Manic Markets

• By April 21, only two sectors—Consumer Staples and Utilities—remained in positive territory as investors sought safety amid the renewed tariff pressures.

• Investor sentiment remains extremely cautious, according to the latest AAII Sentiment Survey—levels that have historically preceded market rallies.

• As of today, just 28% of S&P 500 stocks are trading above their 200-day moving average, slightly up from the recent low on April 8. That level was last seen in October 2022, which marked the beginning of a broad rally through 2023 and into 2024.

• For now, underlying economic fundamentals appear stable—earnings growth remains positive, and corporate profit margins, labor markets, and wage growth are holding up. There are challenges, of course, but that’s always the case.

Market Narrative: Headlines Over Fundamentals

As of mid-April, bond and stock markets remain caught in a volatile crosscurrent, where dramatic swings in asset prices are driven less by economic fundamentals and more by the whims of policy headlines. This marked a stark shift from the optimism that followed President Trump’s re-election, when “animal spirits” lifted investor sentiment and corporate forecasts. That momentum quickly faded as the administration turned its focus toward resetting global trade terms through sweeping tariffs.

The week of April 9 encapsulated this dynamic perfectly: after a sharp selloff, markets staged one of the largest single-day rallies in history. The catalyst? A surprise 90-day pause on reciprocal tariffs for most countries. Still, a blanket 10% tariff remains on all U.S. imports, with even steeper levies still applied to Chinese goods.

This is the essence of an event-driven market—one where investors react to a rapid-fire mix of policy reversals, fragile negotiations, and retaliatory moves. In such an environment, discipline is paramount. Chasing headlines is speculative at best—and destructive at worst. We continue to advocate for a focus on high-quality companies and a diversified, long-term investment strategy that can weather short-term volatility.

Though the tariff pause offered temporary relief, the broader U.S.–China standoff has intensified. Tariff rates continue climbing. China has raised levies on U.S. imports to 84%, while the U.S. has slapped a staggering 145% tariff on Chinese goods. While any signal of de-escalation could trigger another rally, timing such an event is speculative. Investors are better served by staying grounded in fundamentals.

Two recent policy shifts helped calm markets—at least for now. First, the 90-day tariff suspension lowered immediate global trade anxieties. Second, the White House announced over the weekend that some key consumer electronics and semiconductors, such as iPhones and chips, would be excluded from the harshest China-focused tariffs. These steps reinforced the idea that tariffs are more of a negotiation tool than a fixed outcome—and that markets may influence policymaking. With what some are calling both a “Trump Put” and a “Fed Put” in play, markets perceive a short-term backstop.

Yet the deeper concern is policy volatility itself. Despite moves that should support lower yields and a stronger dollar, we’ve seen the opposite—Treasury yields have risen, and the dollar has weakened. These moves reflect growing global skepticism. Inconsistent signals from policymakers are beginning to ripple into foundational markets. The takeaway: headline-driven rallies and selloffs will likely persist, but investors should stay focused on the long-term game.

The Fed’s Balancing Act

As of April, the Federal Reserve, led by Chair Jerome Powell, is navigating one of the most complex policy backdrops in recent memory—marked by unpredictable trade dynamics and rising political pressure. In a recent speech at the Economic Club of Chicago, Powell outlined four key concerns:

1. The Fed underestimated the inflationary impact of the Trump administration’s tariffs.
2. These tariffs are pulling demand forward at an unsustainable pace, as evidenced by March’s retail sales surge.
3. That front-loading of demand may lead to a sharp growth deceleration once the effect fades.
4. The Fed’s dual mandate—stable prices and maximum employment—is now in conflict, raising the risk of stagflation.

Political pressure is compounding the economic challenge. Reports indicate President Trump has considered removing Powell, threatening the Fed’s independence. After Powell’s speech—where he labeled tariffs a dual shock—Trump lashed out, stating Powell “should have lowered Interest Rates long ago” and ominously declaring, “If I ask him to, he’ll be out of there.”

This rising tension has triggered alarm among investors and policymakers. Federal Reserve officials, including Chicago Fed President Austan Goolsbee, have publicly defended the institution’s independence, warning that political interference could severely damage the Fed’s credibility and effectiveness. Market reaction has been swift. Stocks and the U.S. dollar have declined amid concerns about the central bank’s autonomy, while safe-haven assets like gold have rallied. The broader financial community understands that the perception of the Fed as an independent, apolitical body is foundational to the stability of both the debt and equity markets.

In the meantime, the Fed has opted to keep the federal funds rate steady at 4.5% for a second consecutive meeting, following cuts from a peak of 5.5% in late 2024. Powell emphasized that the committee would remain cautious and wait for greater clarity before making additional moves. However, with inflation risks rising due to tariffs and growth concerns deepening, the Fed faces a delicate balancing act. While they may want to cut rates to support the economy, doing so too soon could stimulate inflation expectations, something the Fed is keen to avoid. The path forward remains uncertain, but one thing is clear: the coming months will test the institution’s resolve and independence.

Consumer Resilience: A Retail Mirage?

The March 2025 retail sales report delivered a surprisingly strong showing, even as economic uncertainty from the global trade war loomed large. Despite deteriorating consumer and business sentiment in the first quarter, retail sales rose by a solid 1.4% month-over-month, the largest monthly increase since January 2023. That’s a notable rebound from February’s modest 0.2% gain. Year-over-year, retail sales climbed 4.6%. But context matters: much of March’s strength likely came from consumers pulling forward purchases to avoid expected tariff-related price hikes in April. Motor vehicles and parts led with a 5.3% surge, followed by electronics, appliances, and even clothing—all reflecting urgency rather than optimism.

Drilling into the details, Motor Vehicles & Parts Dealers led the charge with a 5.3% surge in sales, as buyers scrambled to lock in prices before expected tariff-related increases. Electronics and appliance stores also saw a lift, likely for similar reasons, as consumers rushed to purchase big-ticket items before prices rose. Sales gains extended to other categories as well—clothing and accessories stores posted strong numbers, and building materials and garden equipment sales reflected an uptick in home improvement activity. Food services and drinking places also saw healthy growth, underlining continued consumer willingness to spend on dining out.

Stripping out the more volatile components, the “control group,” which excludes autos, gasoline, building materials, and food services—rose a more modest 0.4% in March, down sharply from February’s revised 1.3% gain. Retail sales excluding autos rose 0.5% vs. expectations of 0.3%, while sales excluding autos and gas increased 0.8%, holding February’s pace. These figures still point to positive underlying momentum, though they reveal that much of March’s strength was concentrated in a few key sectors driven by tariff timing.

Tariff Strategery: Noise vs. Signal

The recent flood of tariff-related headlines has added a layer of chaos to markets, but interestingly, not every trade announcement is moving markets the way it used to. While major policy shifts—like new reciprocal tariffs or broad exemptions—still impact prices, the constant stream of conflicting messages is starting to lose influence. Markets are gradually turning out the daily noise of trade rhetoric and instead focusing on more stable indicators, like Treasury yields and inflation trends.

This shift in focus was evident recently when markets rallied not because of any tariff update, but due to a drop in Treasury yields, signaling easing financial stress. It’s becoming increasingly clear that investors are treating the near-daily trade comments—often contradictory and lacking detail—as “background noise.” Still, the broader uncertainty they create remains damaging, particularly to confidence in business planning and consumer behavior.

That said, the Federal Reserve finds itself in a tricky position. On one hand, the Fed acknowledges the economic drag caused by trade instability and may want to cut rates to cushion growth. On the other hand, they remain cautious about inflation. While recent inflation readings have cooled, tariff-related price hikes—especially if they hit consumer goods—could reverse that progress and raise long-run inflation expectations. That’s the Fed’s primary concern, and it’s what keeps them from acting too quickly.

Complicating things further is the lack of a coherent trade strategy. Tariff announcements have been rolled out, walked back, and then altered again—like the recent series of exemptions and new threats, all within days. This inconsistency undermines policy credibility and weakens America’s negotiating position abroad. It also contributes to market volatility and erodes confidence among foreign partners.

Still, there is an alternate, more optimistic outcome on the horizon. If foreign governments respond by cutting their own trade barriers to maintain access to U.S. markets, the world could be headed toward a global reduction in tariffs—a scenario that would fuel economic growth and ignite global stock markets. But until then, the disjointed rollout and ongoing uncertainty continue to weigh heavily on markets, sentiment, and the Fed’s ability to respond decisively.

Inflation and the Fed: Encouraging Signs, Lingering Doubts

Inflation data from early 2025 continues to show steady progress, offering reassurance that the disinflationary trend has resumed after temporarily stalling late last year. The latest Consumer Price Index (CPI) report revealed that headline inflation rose just 2.4% year-over-year in March, below expectations of 2.6%. Core CPI, which excludes food and energy, also cooled to 2.8%, its slowest pace since March 2021—beating the consensus forecast of 3.0%. On a month-over-month basis, headline CPI declined by 0.1%, the first such drop in nearly five years, driven primarily by notable price decreases in gasoline and used vehicles.

Ordinarily, this string of favorable inflation readings would help set the stage for a rate cut, potentially as early as June. Fed Chair Jerome Powell has acknowledged the “significant progress” on inflation and continues to describe the labor market as “strong, but not overheated,” reinforcing the Fed’s cautiously optimistic tone.

However, market reaction has been notably subdued due to growing uncertainty surrounding trade policy. The imposition of aggressive tariffs—particularly on Chinese imports—has shifted investor focus toward the potential inflationary effects of those trade measures, which could complicate the Fed’s path forward.

In short, recent inflation reports show meaningful improvement and would otherwise support a more dovish monetary policy stance. Yet, as long as trade tensions remain unresolved, markets may hesitate to price in rate cuts with confidence—even in the face of encouraging economic fundamentals.

Job Market: Resilience Amid Uncertainty

The U.S. labor market in March 2025 continued to exhibit resilience despite mounting economic uncertainties stemming from trade tensions and inflationary pressures. Total nonfarm payroll employment rose by 228,000, well above the 12-month average of 158,000 jobs per month. Growth was primarily driven by the private sector, which added 209,000 jobs, while government employment saw a modest gain of 19,000 positions.

The unemployment rate ticked up slightly to 4.2%, affecting approximately 7.08 million individuals. This modest increase is attributed to a 232,000 rise in the labor force, a signal that more people are actively seeking employment. The labor force participation rate also increased to 62.5%, underscoring broader re-engagement in the job market.

Initial jobless claims for the week ending April 5 came in at 223,000, aligning with expectations and signaling continued stability. Meanwhile, continuing claims rose to 1.89 million, suggesting that layoffs remain limited and that job seekers are finding work relatively quickly.

Sector-specific data shows that health care and social assistance led to job gains, contributing significantly to the overall increase. The transportation and warehousing sector added 23,000 jobs, buoyed by growth in couriers and messengers, as well as truck transportation. Retail trade employment also rose—partly due to the return of workers following a strike. Conversely, federal government employment declined by 4,000 positions, reflecting ongoing restructuring efforts.

Despite concerns about a potential economic slowdown, the labor market remains strong. The rise in labor force participation, steady hiring across multiple sectors, and low unemployment claims all point to a labor market that is expanding, albeit cautiously. While trade policy and inflation remain headwinds, the data as of April 2025 provides a reassuring picture of economic health.

Q1 2025 GDP: Estimates or Just Guesses?

Markets were jarred last month by a sharp and unexpected revision to the Atlanta Fed’s GDPNow forecast for Q1 2025. What had previously been a healthy 2.3% annualized growth projection was abruptly slashed to -2.8%. While it has since recovered modestly to -2.2%, the swing from expansion to contraction raised eyebrows and fueled concern.

It’s worth noting that first-quarter GDP often disappoints due to seasonal factors. In addition, recent distortions—such as a surge in imports ahead of anticipated tariffs—may have artificially weighed on growth. Since imports subtract from GDP, front-loading demand can create a temporary drag.

Still, a revision of this magnitude shouldn’t be brushed off. It highlights genuine softness in certain areas of the economy and has driven up recession fears. A recent Reuters poll revealed that recession odds within the next 12 months have jumped to 45%, up from 25% in March, due largely to the chilling effect of tariffs on business confidence.

That said, it’s crucial to separate short-term disruptions from longer-term trends. The recent Employment Situation report showed the economy added 228,000 jobs, surpassing expectations and reflecting continued labor market strength. Fed Chair Jerome Powell described the labor market as “strong but not overheated.” Commerce Secretary Howard Lutnick went further, declaring there will “absolutely not” be a recession.

So, while the GDPNow model has raised valid concerns, current employment data and historical context suggest the slowdown could be temporary. Investors should remain cautious but not lose sight of the broader economic momentum.

Investment Markets: Volatility on the Surface, Strength Beneath

As of April 19, the investment landscape is marked by sharp contrasts—between policy uncertainty and earnings resilience, between investor anxiety and solid corporate fundamentals. Markets continue to digest a barrage of macro developments, including escalating tariffs, shifting geopolitical currents, and volatility across asset classes like Treasuries and currencies. Yet underneath the noise, the earnings picture remains constructive.

Volatility has taken center stage in 2025. The VIX—Wall Street’s so-called “fear gauge”—started the year at subdued levels, dipping as low as 15 on January 24, shortly after President Trump’s inauguration. But by early April, fears over a fresh round of tariffs sent it spiking to 60.13 on April 7, but closed at the end of the day at 46.98, its highest point this year. Though it has since moderated to just under 30, these elevated levels suggest investors are still bracing for more turbulence. Historically, VIX spikes of this magnitude have often aligned with market bottoms (as in 2008 and 2020), prompting some analysts to wonder if we’re approaching another inflection point.

The S&P 500 has had a wild ride. After briefly dipping into bear-market territory in early April, the index rebounded dramatically—posting a 10% single-day gain following the announcement of a 90-day pause on reciprocal tariffs (excluding China). Still, as of mid-April, the index remains approximately 12% below its all-time high, showing that investor confidence remains fragile.

Earnings, however, tell a more optimistic story. The S&P 500 is on pace for 10% earnings growth in 2025, only slightly below 2024’s 10.6% rate. First-quarter earnings are up 7.2% year-over-year, with revenue growth tracking at 4.3%. Analysts expect this strength to build, with Q3 forecasted to post 15.6% EPS growth, the highest of any quarter this year. Net profit margins are projected to reach 13.0%, significantly above the 10-year average of 10.8%, reflecting enhanced operational efficiency and pricing power.

At the sector and stock level, a bifurcation is emerging. The “Magnificent 7” mega-cap tech names are forecast to grow earnings by 14.8% in Q1 and 15.9% for the full year—a notable slowdown from 2024’s 36.5%. Meanwhile, the other 493 companies in the S&P 500 are expected to raise earnings by 8.3%, up from 4.9% last year. This broadening of market leadership hints that cyclical sectors may be poised for recovery after a prolonged earnings slump.

The S&P 500 currently trades at a forward P/E of 20.2—slightly above its five-year average of 19.9 and well above its 10-year average of 18.3. The trailing P/E sits at 23.7. While these valuations appear elevated, they are supported by strong earnings expectations, high margins, and durable balance sheets.

Sector rotation has emerged as a defining theme. Defensive sectors like healthcare and consumer staples have outperformed amid recession worries, while interest in cyclicals—especially financials and industrials—is returning as earnings revisions turn positive.

For investors looking to diversify into small-cap stocks, this segment is beginning to attract renewed attention. Currently trading at a significant discount to large caps and benefiting from the Fed’s rate cuts in late 2024, small caps are well-positioned to capitalize on domestic reshoring trends and a potential uptick in M&A activity. While dividend and value stocks are currently favored by retail investors, small caps remain under owned—suggesting potential opportunities for contrarian investors.

Meanwhile, international equities—particularly in Europe and Japan—are seeing a resurgence in investor interest. These markets offer more attractive valuations and lower direct exposure to U.S.-China trade tensions. Many high-quality global companies are viewed as undervalued relative to their long-term potential. After years of being overlooked, several foreign markets are now seeing increased government focus on infrastructure, defense spending, and expanded trade initiatives—all of which are supportive of long-term investment appeal.

Despite all this, investor sentiment remains deeply cautious. The latest AAII Sentiment Survey shows bullish sentiment at just 25.4%, far below the historical average of 37.5%, while bearish sentiment has climbed to 56.9%, its eighth consecutive week above 50%-the longest streak on record. Notably, fears of recession have not translated into significant downward earnings revisions.

While geopolitical and policy risks continue to dominate headlines, the underlying economic fundamentals remain sound. Even as market fears of a recession rise, key economic indicators suggest otherwise. Earnings growth is expected to accelerate—albeit at a more moderate pace—and profit margins remain near attractive. The market’s current “Catch-22,” however, lies in the uncertainty surrounding the on-again, off-again tariff threats. Volatility may persist, but it only underscores the importance of diversification, quality, and discipline in navigating uncertain markets—a reminder that long-term investors are best served by staying focused on fundamentals.

Closing Thoughts: A Turning Point or a Trapdoor?

Markets have taken a beating lately, much of them tied to tariff headlines and rising fears of a recession. The reciprocal tariffs between the U.S. and China remain in full force—with the U.S. imposing duties as high as 145%, and China responding with tariffs up to 125%. While carve-outs for key electronics like smartphones and semiconductors have softened the blow, the broader impact on sentiment is unmistakable.

Investors are looking closely for a resolution. If tariffs are meaningfully scaled back, it could set the stage for a powerful upside surprise in both the economy and markets.

China, which exports five times as much to the U.S. as the U.S. exports to China, has strong incentives to make a deal. Yet market behavior suggests investors are reacting first and analyzing later. Through last Friday, the major indices reflected the damage, as all the major indexes either fell into or flirted with “correction or bear market territory.”

Safe-haven assets are flashing mixed signals. The U.S. Dollar Index has dropped 4.5% over the past week, even as long-term Treasury yields rise—an unusual combination that may reflect weakening foreign demand for U.S. assets, a dynamic policymakers would prefer to avoid as borrowing costs creep higher.

Yet, amid the noise, the economic data still tells a more balanced story. Last week’s numbers confirmed that the U.S. economy continues to hold up. Job growth, while not explosive, once again exceeded expectations, with 228,000 new positions added. And while fears of stagflation and recession dominate the headlines and sentiment surveys remain dismal, the hard data doesn’t yet support a narrative of an imminent downturn. Commerce Secretary Howard Lutnick even stated there will “absolutely not” be a recession.

The market’s recent volatility may feel unsettling, but it’s not unprecedented. Pullbacks (declines of 5–10%) typically occur three to four times a year. Corrections (declines of 10–20%) happen about once a year. Bear markets (declines of 20% or more) are rarer, occurring roughly every five years—though we’ve seen two in just the last five. Still, history shows that every bear market eventually gives way to a bull market. The sharp drops in 2020 and 2022 were both followed by swift and substantial recoveries.

Right now, we may be approaching the emotional low point of the cycle, the stage where fear dominates, headlines drive sentiment, and investors begin to panic. But this is often when markets begin to reset and prepare for the next move higher. If a tariff resolution is reached, inflation remains in check, and economic growth proves resilient, markets could rebound just as quickly as they decline.

Today, only 28% of S&P 500 stocks sit above their 200-day moving average, a slight improvement from the recent low of 17% on April 8. The last time breadth fell to that level was October 2022—right before a rally that lifted the S&P from the 3,500 range to the current +/- 5,200 level. A similar pattern is seen with the Volatility Index (VIX). According to Bespoke Investment Group, large spikes in VIX have historically been followed by rebounds: the S&P 500 has risen 75% of the time over the one-, three-, and six-month periods after such spikes. One year later, it’s up 80% of the time. The two major exceptions since 1997? The 2008 financial crisis and the 2021 pandemic-driven downturn.

Now is a good time for investors to reexamine their risk tolerance—not to abandon strategy, but to ensure alignment with long-term goals. If market volatility is unnerving, some portfolio adjustments may be appropriate. But exiting entirely can be an emotional misstep. The hardest part isn’t knowing when to get out—it’s knowing when to get back in. And by the time it feels safe, much of the recovery may already be in the rearview mirror.

With a few decades of experience under my belt, I can attest that I’ve looked in that rearview mirror many times, and market anxiety is always close at hand. But these unsettled moments are also opportunities—to put sidelined cash to work, or to upgrade current holdings for ones better aligned with your investment goals. Fortunately, these market dislocations don’t come around often—but when they do, they’re buying or reallocation opportunities for the next move forward.

Not Investment Advice or an Offer -This information is intended to assist investors. The information does not constitute investment advice or an offer to invest or to provide management services. It is not our intention to state, indicate, or imply in any manner that current or past results are indicative of future results or expectations. As with all investments, there are associated risks and you could lose money investing.