Stay the Course: Tariff Angst | 2025 Market Insights with James Ragan

Equity market gains met resistance beginning in mid-February and equity index weakness extended into early March. Over the two weeks from February 19th to March 4th, the widely followed S&P 500 declined 6% using closing prices. While this decline percentage represents a relatively common market pullback, it's still uncomfortable for investors. And the concern is natural because it raises two big questions. Number one, what's driving the weakness? And number two, will the market continue to go lower? We attribute the market pullback to tariff uncertainty, which at least in January has led to disruptions in consumer and business activity. You know, January consumer spending data from the Bureau of Labor Statistics was lower than expected. Consumer confidence was also weaker, partially attributed to concerns about a return of inflation. And in addition, preliminary January U.S. trade data reflected a large increase in imports to a record level that's attributed to U.S. companies importing parts, materials, and finished products ahead of expected tariffs. This means that companies are altering supply chains already and contributes to investor uncertainty. Now, will the market go lower? Well, that's hard to say as it's impossible to predict market bottoms. I will say that a 6% peak to trough pullback is relatively minor by historical standards. Just six months ago, in July, August of 2024, the S&P 500 dropped 8.5% before resuming a move higher. And in 2023, the largest pullback during the year was 10.5%. In fact, over the past 45 years, back to 1980, the average intra-year S&P 500 pullback in any given year was more than 14%. So this suggests that the index could still move lower, especially as we expect tariff uncertainty to linger, at least for the next couple of months. But long-term investors should stay the course. Evaluate portfolios to ensure that weightings are in line with your preset goals, and market weakness often leads to opportunity to rebalance into high-quality companies at lower prices. As we evaluate the investment landscape in early 2025, we highlight several market factors for investors to consider. You know, the S&P 500's valuation, if you look at price-to-earnings or PE ratio, remains elevated, but the equal weight S&P 500, which is representative of the average large company stock, is more in line with its historical valuation average. Also, sector rotation has continued in 2025. While the average technology and growth-centric Magnificent 7 stock has traded lower in 2025 through early March, many S&P 500 stocks have produced gains year-to-date, and 8 of the 11 S&P macro sectors are higher-to-date in 2025. The most recent earnings trends are positive. For the fourth quarter of 2024, 98% of S&P 500 companies have reported financial results, and year-over-year earnings growth was 18%, above 11% expected and the best year-over-year growth rate in three years. The U.S. economy grew 2.3% annualized in the fourth quarter of 2024, and 2.8% for all of 2024. While both earnings and economic growth are expected to slow in 2025, the strong trends to both to end 2024 provides a solid base. And interest rates have moved lower in 2025, especially U.S. treasury yields. We actually expected interest rates to remain a bit higher, but lower rates, if sustained, can benefit housing, vehicle sales, and credit markets. Challenges remain. Not only tariffs, but Congress must pass a budget, which includes pushing for tax cuts and reduced spending. This will be no easy task. Investors should scale back return expectations, but we believe as the year progresses, equity indices will be higher than the levels today. For specific recommendations and strategies, please contact your D.A. Davidson financial professional.