Market Perspectives- March 2025

March Madness

March 2025 has proven to be a tumultuous period for financial markets, as escalating trade tensions and policy uncertainties have significantly eroded investor sentiment. As the first quarter draws to a close on March 31, the S&P 500 tells a stark story: after reaching a record high on February 19, the index has since reversed course sharply, ending March’s final Friday’s trading day down approximately 5% year-to-date. The swift shift from optimism to anxiety has been driven by a convergence of weakening technical signals, deteriorating economic indicators, and growing political and policy unpredictability.

The University of Michigan’s Consumer Sentiment Index offers a sobering confirmation of the public’s growing unease. The index fell to 57.0 in March, its lowest reading since November 2022, representing an 11% drop from February’s 64.7. The decline spans income levels and political affiliations, with consumers expressing heightened concern about job security, business conditions, inflation, and future income prospects. This deterioration in sentiment comes at a time when households are already feeling the pinch from volatile markets and policy changes that remain difficult to interpret.

Trade policy continues to be one of the most disruptive forces shaping the economic narrative. President Donald Trump’s administration has announced a new wave of tariffs targeting key U.S. trading partners—including Canada, Mexico, and China—while also extending proposed duties on foreign-made automobiles. These measures, part of a broader effort to reassert economic sovereignty, have injected renewed uncertainty into global supply chains and raised the specter of retaliatory actions. The resulting instability has weighed heavily on both business investment and consumer confidence, contributing to the recent market correction.

The industrial economy is also showing visible signs of strain. The Empire State Manufacturing Index fell back into contraction territory in March, marking its steepest decline in two years. Manufacturers are struggling with rising input costs, regulatory uncertainty, and slowing demand—challenges intensified by fears that prolonged trade disputes could trigger deeper structural weakness. The decline underscores how vulnerable the real economy remains to geopolitical and policy crosscurrents and how fragile the post-pandemic recovery is beneath the surface.

Looking ahead, markets are bracing for the next major policy event: the formal rollout of additional tariffs scheduled for April 2—dubbed “Liberation Day” by President Trump. While the administration frames this as a pivotal step toward revitalizing American manufacturing and correcting long-standing trade imbalances, investors and businesses are more concerned with near-term disruptions. There is growing concern that these moves, coupled with a dramatic reduction in government workforce spending, could weigh heavily on consumption and business activity. The combination of inflationary pressures, weakening consumer confidence, and rising policy risk has brought the specter of recession into sharper focus.

Amid this backdrop, Treasury Secretary Robert Bessent has acknowledged that the United States is in a transitional period aimed at addressing the structural overleveraging of the public sector. His remarks, made during public appearances in mid-March, have contributed to the prevailing sense of unease. Although Bessent attempted to downplay the risk of a financial crisis during a March 16 appearance on Meet the Press—stating that while “there are no guarantees” of avoiding a recession, he does not see signs of systemic failure—his comments did little to calm markets already gripped by volatility.

President Trump, for his part, has not dismissed the possibility of economic turbulence. In a March 9 interview with Fox News, he acknowledged that the economy is undergoing a major shift, stating, “I hate to predict things like that. There is a period of transition, because what we’re doing is very big.” That statement, along with the administration’s inconsistent messaging on economic risks, has only amplified investor uncertainty.

As the quarter ends, one theme resonates among investors, consumers, and analysts alike: uncertainty. With technical indicators weakening, sentiment deteriorating, and policy outcomes increasingly difficult to anticipate, the market outlook remains murky. On the other hand, it’s possible that markets have already priced in the shifting economic landscape—with major indexes appearing to have bottomed out in recent weeks. The broader economy, however, may take longer to reflect the expectations set by the new administration.

Inflation Remains a Headline Worry

The latest economic data through March 2025 paints a mixed picture of inflation trends and consumer behavior. February’s Consumer Price Index (CPI) rose by 0.2%, easing from January’s 0.5% gain. On an annual basis, the all-items CPI climbed 2.8%, a modest deceleration from the previous month’s 3.0% pace. Core CPI, which strips out food and energy, also increased by 0.2% in February and 3.1% over the past year—both slightly lower than January’s readings. These results are broadly in line with the February Personal Consumption Expenditures (PCE) Price Index, which showed a 2.5% year-over-year rise. While inflation is gradually cooling, underlying price pressures remain elevated relative to the Fed’s 2% target.

On the consumer front, the data showed resilience but also caution. Personal income rose a strong 0.8% in February, with disposable income up 0.9%, yet spending only grew by 0.4%, rebounding from January’s contraction. The personal savings rate climbed to 4.6%, the highest level since July 2024, indicating that many households are still in wait-and-see mode despite income gains. These cautious spending patterns, combined with a sharp drop in consumer confidence—now reflect widespread concern about future income prospects, job security, and the potential economic fallout from persistent inflation and aggressive trade policy.

Against this backdrop, the Federal Reserve is adopting a measured approach. At the March FOMC meeting, Chair Jerome Powell struck a cautious tone, suggesting that tariff-related inflation may be “transitory” and emphasizing the Fed’s readiness to act if economic momentum fades. However, the central bank is in no hurry to cut rates. Recent comments from St. Louis Fed President Alberto Musalem even raised the possibility of rate hikes if inflation expectations become unanchored—highlighting growing divisions within the committee.

For now, the Fed remains in a mode of cautious observation—prepared to respond if conditions deteriorate, but requiring more pronounced economic or market weakness before intervening. While the “Fed put” is still in play—the willingness to cut rates if necessary—the strike price is clearly lower than markets have come to expect.

Diverging Signals: A Shifting Industry Landscape

The U.S. economy closed out 2024 with moderate strength, but early 2025 data suggest that momentum may be fading. Final Q4 GDP figures were slightly revised upward to 2.4% from 2.3%, driven by resilient consumer spending and robust government outlays. However, the slowdown from 3.1% growth in Q3 highlights a broader deceleration. More concerning, the more volatile Atlanta Fed’s GDPNow model is currently projecting a -2.8% contraction for Q1 2025, raising the risk of an economic downturn. The economy is now contending with the combined pressures of elevated interest rates and disruptive trade policies. Additionally, a wave of government labor cuts and lingering uncertainty around tariff implementation remain key wildcards heading into the first quarter.

Despite the negative sentiment, recent industrial and manufacturing data have countered with a few positive signals. February’s durable goods orders surprised the upside, rising 0.9% month-over-month (0.7% ex-transportation), reversing a sharp decline in January —although possibly reflecting a rush in pre-tariff orders. The ISM Services PMI survey also expanded for the eighth consecutive month with a reading of 53.5 percent, representing the 54th time in 57 months of expansion. The Manufacturing Index reported an index level of 50.3, its second month of expansion, following 26 months of continuing contraction. Industries reporting growth in February included petroleum, manufacturing (industrial production up 1.4% year-over-year), chemicals, transportation equipment and appliances.

Despite mounting concerns, corporate America remains a stabilizing force. S&P 500 companies have maintained strong earnings and resilient margins, aided by durable balance sheets and effective cost management. Q4 before-tax corporate profits hit 13.5% of GDP, the highest share of gross domestic income since the 1950s—providing a cushion against external shocks like tariffs or slowing demand. Manufacturing sector profits remain more modest at 2.5% of GDP, comparable to 2015 levels, but still healthy enough to weather moderate disruptions.

Small businesses and CFOs are showing signs of strain, however. The NFIB Small Business Optimism Index fell to 100.7 in February, and Duke University’s CFO Survey showed economic optimism retreating from 66.0 to 62.1, with tariff concerns and political uncertainty dominating executive outlooks. An interesting observation: approximately 76% of U.S. companies expect to increase AI (artificial intelligence) spending next year to replace employees—a corporate signal of more technology investment ahead.

Consumers, Jobs, and Housing: A Closer Look at Economic Stability Amid Headwinds

The economic data through February and March 2025 reveals a picture of cautious but underlying resilience in U.S. labor markets, consumer behavior, and housing—despite mounting concerns about sentiment, overbuilding, and the possibility of slower growth.

Private sector job growth has shown a notable rebound, supported by broad-based gains and upward revisions in household income and savings. In February, the U.S. economy added 151,000 jobs, continuing a steady monthly trend. Notably, what might be called the “core private sector”—payroll growth excluding government, education, and healthcare—contributed 67,000 of those jobs. The government’s share of job creation over the past year has declined to 68%, a meaningful improvement from the peak in October 2024, when government employment rose by 40,000 while total payrolls increased by just 12,000. Over the past three months, private sector jobs have accounted for nearly 48% of all new payrolls. While this remains below the typical healthy range of 60–80%, the trajectory is improving.

The unemployment rate remained steady at 4.1% in February, with no major shifts in the number of permanent job losers—a category that provides a reliable measure of structural joblessness. Weekly jobless claims also remained historically low, rising slightly to 224,000, just below expectations of 225,000. These figures remain far from the 250,000–300,000 range that would typically suggest a softening labor market. Job openings have stabilized, both in absolute terms and relative to the number of unemployed workers, and labor income continues to grow at a rate sufficient to support ongoing consumer activity.

On the housing front, February brought a surprising rebound. Housing starts jumped 11.1% from the prior month, led by an 11.4% rise in single-family homes and a 10.7% increase in multifamily units. Activity was strong across the country, suggesting a broad-based recovery in residential construction. However, new concerns about overbuilding are beginning to emerge. With complete but unsold inventory remaining elevated and buyer demand showing signs of softening, homebuilders may be overextending. Sentiment among builders has cooled, and if demand remains tepid, residential construction activity is likely to moderate in the coming months. Builders may be better served by focusing on selling their existing inventory rather than launching new projects.

Overall, while the U.S. economy may be losing some momentum compared to the post-pandemic highs, the underlying data in February and March does not currently support fears of an imminent recession. Consumer spending, income growth, and job creation all remain intact, albeit at a slower pace. Risks remain—particularly if sentiment continues to deteriorate or if inflation reaccelerates—but so far, the hard data continues to show an economy that is cooling, not collapsing.

Market Volatility Persists Amid Earnings Growth and Investor Caution

As of March 28, 2025, U.S. equity markets have experienced notable year-to-date declines. The S&P 500 is down approximately 5.0%, the Nasdaq Composite has fallen 10%, and the Russell 2000 has declined by 9%. One of the few bright spots is gold, which is up over 17% year-to-date.

Overseas markets, by contrast, have held up relatively well—despite ongoing trade tensions, particularly with Mexico. As of the same date, Mexico (EWW) is up 10.2%, China (GXC) has gained 13.3%, Germany (EWG) is up 17.5%, and Emerging Markets (EEM) have risen 4.6%. A timely reminder that diversification continues to play a crucial role during periods of market volatility.

When we expand the lens to full-year returns, the performance picture shifts considerably after removing the shorter-term impact of the tariff uncertainty. Gold is still on a tear, up 38% over the prior 12-month period. The domestic markets were mostly positive, up single-digit returns with the exception of the small-cap market stocks.

As an aside, the full-year returns for the same overseas markets were mixed: Mexico (EWW) ended the year down 22.5%, while China (GXC) posted a strong gain of 34.9%, Germany (EWG) rose 20.7%, and Emerging Markets (EEM) climbed 9%.

Despite recent market volatility, corporate earnings have remained resilient. In the fourth quarter of 2024, S&P 500 companies delivered earnings growth of approximately 11%. Looking ahead, analysts project full-year earnings growth of about 14% for 2025. The forward 12-month price-to-earnings (P/E) ratio for the S&P 500 currently stands at 19.7 times earnings. Despite these more reasonable valuations, investor sentiment remains cautious. According to the American Association of Individual Investors (AAII) survey, only 27.42% of respondents reported a bullish outlook—marking the lowest level since November 2023 and well below the historical average of 37.5%. This decline in optimism is largely attributed to escalating trade tensions and persistent geopolitical uncertainty. Notably, bearish sentiment has risen to 52%, a level similar to those seen ahead of market rebounds in 2021 and 2023.

Market Outlook: Climbing the Wall of Worry

Over the past month, there has been a notable spike in recession-related media coverage and online searches. Mentions of “recession” in the press have tripled, and Google Trends data shows a sharp increase in interest around the term.

There are valid concerns stemming from data and policy developments that warrant caution—particularly around tariffs, trade, and federal government restructuring. At the same time, the growing fear and pessimism itself may represent the kind of “wall of worry” that markets have historically climbed.

• Investor sentiment has deteriorated sharply, and consumer sentiment has followed a similar path. Confidence among small businesses has softened, and the Conference Board’s data shows more consumers now expect markets to fall rather than rise over the next year.
• Market volatility has also been fueled by rising uncertainty over tariff policy, the sudden restructuring of federal agencies, and openly acknowledged recession risks from within the administration.
• Major institutions like the Department of Education and the CFPB are facing deep cuts or closures, and the lack of clarity on trade policy has created volatile headlines. All of this has contributed to a collapse in both investor and consumer confidence. The concern is that elevated uncertainty could drive a pullback in consumer and business spending, pushing the economy down or, worse, causing recession.
• Still, it would be premature to conclude that the bull market is over. First, the impact of tariff policy is still largely hypothetical. It’s not guaranteed that proposed tariffs will be enacted, or that they’ll be as disruptive as feared. There remains a possibility that the negotiations will ultimately result in lower global tariffs for U.S. exports.
• Despite the swirling uncertainty, key indicators of economic activity remain solid. Industrial production just hit a new high not seen since the 2010s, and ISM manufacturing and services PMIs have both edged above 50, signaling expansion across both sectors. Inventory levels that were elevated through 2024 began to normalize, creating potential tailwinds for GDP growth and corporate earnings in the first quarter.
• Factory construction and durable goods orders have also surprised to the upside, and the manufacturing sector appears to be weathering tariff-related uncertainty better than expected—at least for now.
• The economy is proving resilient. Employment remains strong, and while the policy chaos may weigh on growth, it hasn’t derailed it. As long as labor markets hold up, the odds of a recession remain low. Third, looking further ahead, potential extensions to tax cuts and ongoing deregulation efforts could provide a pro-growth backdrop later in the year.
• The market itself has become deeply oversold. During the recent sell-off, the S&P 500 moved more than three standard deviations below its 50-day moving average—levels that, historically, have often marked the beginning of strong multi-month recoveries. April, seasonally one of the strongest months for markets, could offer some near-term relief as well.
• And despite several technical indicators now signaling more bearish trends across various markets, Wall Street analysts continue to project a more optimistic outlook. Looking ahead, industry analysts forecast a 21.3% increase in the S&P 500 over the next twelve months. This projection is based on a bottom-up target price of 6,904.84, compared to the March 27 closing price of 5,693.31.
• Sector-specific forecasts point to expected gains in Information Technology (+30.4%), Consumer Discretionary (+27.0%), and Communication Services (+25.1%), while more modest increases are anticipated for Consumer Staples (+11.1%), Energy (+12.0%), and Financials (+12.2%).
• And when market expectations are low, even modestly positive surprises can trigger powerful rallies. For now, the economic foundation appears solid enough to prevent a downturn. The burden remains on policy clarity and investor sentiment to catch up.

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