Markets have faced increased volatility as investors reassess economic growth, corporate earnings, and shifting policy dynamics. While trade policy uncertainty has contributed to a pullback, economic fundamentals remain stable, and earnings trends continue to support markets.

In our 2025 Outlook, we noted that elevated U.S. equity valuations, historically high market concentration, and policy uncertainty could contribute to heightened volatility. While markets began 2025 with optimism over potential pro-growth policies, early trade actions and shifting investor sentiment have led to a sharp rotation away from the market's most expensive stocks.

In this update, we cover recent market moves, the latest economic data, and how our investment approach remains well-positioned.

At the same time, capital has flowed into international markets as investors seek alternatives to U.S. policy uncertainty and potential dollar weakness. Many have remained structurally underweight non-U.S. equities, and with global growth expectations stabilizing, this shift appears to be a broader trend rather than a short-term move.

Concerns about a slowdown have risen, with the Atlanta Fed’s GDPNow model pointing to a potential Q1 contraction. However, this model is highly sensitive to short-term fluctuations, and recent weakness stems from temporary trade data distortions rather than broad economic deterioration.

Other indicators suggest continued resilience:

• The New York Fed’s GDP Nowcast model projects ongoing economic expansion.
• The Dallas Fed’s Weekly Economic Index remains at levels consistent with steady growth.
• Real final sales to private domestic purchasers—a key measure of economic strength—grew 3% year-over-year in Q4 2024.

With household balance sheets stronger than in prior periods of trade policy uncertainty, the economy is better positioned to absorb near-term shocks. While downside risks have increased, a trade-induced slowdown would more likely return growth to its long-term average rather than lead to a contraction.

Corporate earnings remain strong. The S&P 500 posted 17% year-over-year earnings growth in Q4, supported by broad revenue growth. Some 2025 estimates have been revised lower, but this was expected given high forecasts.

Twelve-month forward earnings and sales estimates continue to rise, providing support for equities. While trade risks have increased, they have not yet reached a level warranting a cautious stance on earnings.

Despite recent volatility, our portfolios remain well-positioned in areas that have held up well year-to-date:

• Industrials, materials, and energy have outperformed the S&P 500, benefiting from strong fundamentals and pricing power.
• International equities have been a key driver, supported by broad-based earnings growth and more attractive valuations. Multiple regions—including Europe, Japan, and Emerging Asia—are experiencing a durable profit cycle.

At the same time, we maintain a significant underweight to the most expensive areas of the market, including the Magnificent Seven stocks, which have struggled amid tightening financial conditions and trade uncertainty.

Our factor-based investment approach naturally avoids the most overvalued areas of the market, as value is one of the key factors we screen for. Additionally, our equal-weight approach mitigates concentration risks, ensuring more balanced exposure across sectors and companies. These disciplined strategies have helped us navigate shifting market conditions while maintaining broad exposure to fundamentally strong companies.

As a result, our primary equity portfolios have held steady for the year, demonstrating resiliency amid the market’s decline.

While periods of market volatility can be unsettling, they are a natural part of investing. Historically, the market has averaged a 14% intra-year drawdown yet has delivered a 13% annualized return since 1980.

Investor sentiment has turned notably pessimistic, with the AAII U.S. Investor Sentiment Index registering its highest bearish reading since October 2022. Historically, such extreme negativity has often preceded market rebounds, serving as a contrarian indicator.

Additionally, the administration may need to recalibrate its stance in response to market conditions. The potential repercussions of restrictive trade policies—such as lower stock prices, weakening sentiment surveys, and slowing economic growth—could prompt a more measured approach as political and economic pressures mount ahead of the 2026 midterm elections.

We continue to monitor these developments closely and remain focused on managing risk while identifying new opportunities. As always, we encourage clients to stay focused on their long-term objectives and not let short-term market swings drive investment decisions. If you have any questions about your portfolio or how current market conditions may impact your financial plan, please don’t hesitate to reach out.