The severity of the Trump tariff announcement in early April was a shock to all, especially the U.S. equity markets, which corrected sharply upon the news. Whether part of the Trump-playbook or a pivot on policy, the markets found support when the Administration put a 90-day hold on the most sever of the proposed tariffs. Though this move may have stopped the freefall of markets and confidence, it only extended the window of uncertainty. Nonetheless, the markets and investors took the timeout to gather their collective breaths.
While the headlines have been dominated by political noise, policy uncertainty, and recessionary anxiety, the underlying fundamentals of the economy are exhibiting more resilience than many anticipated. Yes, Q1 GDP contracted by 0.3% on an annualized basis — the first negative print in three years. But this contraction had less to do with a genuine slowdown in domestic activity and more to do with a record-breaking trade deficit, which was artificially inflated by companies preloading purchases in advance of the anticipated tariffs from the Trump administration. In short, this was a GDP number that was likely due to timing, not trajectory. In fact, the economy continues to show strength.
Labor markets remain strong, even if they are showing some light fraying at the edges. Hiring has understandably cooled, but layoffs remain low. The other pillars of economic activity like the housing market and even consumer spending, all continue to add fuel to the economic engine of the United States. A shock like a stock market correction always has a cooling effect on sentiment. And unknowns lurking ahead for trade policy and prices don’t do much to calm nerves. However, time and a steady drumbeat of reality do. And our economic reality, at least at present, suggests that our worst fears about the future, may have been overblown. [Emphasis on the word “may’]
How the Markets Fared
Interest rates moved modestly lower in Q1, driven in part by growing fears that tariffs could tip the economy into recession thereby necessitating future action from the Federal Reserve. The bellwether 10-year Treasury yield declined from 4.57% at the end of 2024 to 4.25% by quarter’s close. This shift fueled gains across the fixed income spectrum, as modest price appreciation combined with coupon income to deliver broadly positive returns. The longer one’s duration exposure, the better the performance. However, credit sensitive sectors felt more turbulence. With rising recession risks, spreads widened particularly in high yield corporates and emerging market debt. Even so, strong coupon payments helped cushion price declines, resulting in net gains for many of these securities as well.
Equity markets corrected during Q1, with the steepest declines concentrated in the highest-valuation segments. Large-cap and small-cap U.S. stocks were hit hardest, impacted by both a deterioration in sentiment and the present-value discounting of future revenues and earnings. In contrast, cyclically sensitive and lower-valuation companies—particularly outside the U.S.—fared better. International equities were a notable bright spot. Their relative insulation from U.S. tariff policy and substantially more reasonable valuations contributed to their resilience. International large-cap value stocks delivered some of the strongest gains. Commodities also allied, led by a sharp rise in gold prices. Stock markets in export-oriented Latin American countries rebounded sharply after a very challenging 2024.
Manufacturing Malaise Meets Services Stability Business-to-business activity, as reflected in the Institute of Supply Management® (ISM®) Report on Business (ROB)® reports, tells a tale of two sectors. Manufacturing slipped back into contraction territory in April (48.7), continuing a stop and-start pattern we’ve seen for nearly two years. Meanwhile, the services side of the economy remains on steadier footing, with a 51.6 reading — indicating continued, yet modest growth.
The detail within the ISM Manufacturing report highlights ongoing weakness in new orders, which came in at 45.2 in April —a sharp pullback and a clear signal that demand conditions for goods producers are under pressure. In contrast, the ISM Services New Orders Index rose to 52.3% in April, up from 50.4% in March, suggesting renewed strength in demand among service providers.
All eyes will be on the May report, which will be released in early June. That will be the first report that fully flex business sentiment factoring in the proposed and then paused trump’s tariffs. Obviously one of the goals of the Administration is to restore manufacturing, however that will take many months to years. In the meantime, this dynamic reinforces the narrative of divergence between the goods-producing sector and a more resilient services economy that we are faced with in the near-term.
Laboring On The unemployment rate held steady at 4.2% in April and the Nonfarm Payrolls added 177,000 jobs, slightly above expectations. Participation is stable, and wage growth continues, albeit more modestly. Businesses aren’t aggressively expanding headcount, but they’re not shedding it either. (layoffs remain low.)
Despite tightening conditions, the labor market remains resilient. The unemployment rate has held steady at 4.2%, and April payroll growth beat expectations adding a solid 177,000 jobs. While job openings have declined and wage growth has slowed somewhat (still at +3.5% y-o-y), employers have also been generally hesitant to announce layoffs. This suggests employers remain fundamentally optimistic about demand, even if hiring has become more selective, or perhaps just been put on pause.
Supporting this, the March Job Openings and Labor Turnover Survey (JOLTS) reported that although job openings declined to 7.2 million — the lowest level since 2020, the “quits” rate ticked up to 3.3 million, indicating continued confidence among workers. Hires held steady at 5.4 million, while layoffs and discharges dropped to 1.6 million, reinforcing the narrative that employers are still holding onto talent amid macro uncertainty.
Spending Not Spent While the stock market has wobbled and inflation has lingered, U.S. consumers have continued to open their wallets—though more selectively than in prior quarters. Retail sales rose 1.4% in March 2025, led by a 5.3% surge in auto purchases as buyers rushed ahead of expected tariff increases. Excluding autos, gains were more muted, reflecting a measured consumer posture.
The hardiness in actual spending stands in contrast to the recent declines in consumer sentiment. The Conference Board’s Consumer Confidence Index declined sharply in March to 92.9—its lowest reading in 12 years—driven by concerns over inflation, political uncertainty, and financial market volatility. The more recent University of Michigan Index of ConsumerSentiment final reading for April rose to 52.2 from the preliminary reading of 50.8, but still down significantly from March’s 57.0, and April 2024’s index of 77.2.
Sentiment has a tendency to move much more quickly than actual spending behavior, and sometimes those moves prove to be fleeting. This is especially true after a heavy news cycle like we’ve seen in the last month with stock market volatility and trump tariff fears dominating the headlines. But there may be something more Significant going on beneath the headline numbers. There is a bifurcation between income and wealth categories that has grown more pronounced. Higher-income Americans—buoyed by wage gains, asset appreciation, and job security—have sustained or even increased their discretionary spending. Lower- and middle-income households, on the other hand, are pulling back, with increased reliance on credit and a noticeable decline in discretionary purchases. Credit card balances are rising faster in these groups, and delinquency rates have ticked up (as we reported on last quarter).
This divergence is critical to understanding both the near-term consumer engine and the long-term stability of household demand. The U.S. consumer isn’t broken, but it’s far from monolithic—and increasingly polarized by income and balance sheet health. Some Americans simply can’t withstand another round of price increases. So the inflation fears that have raised by politicians and the media alike may not only keep marginalized households from spending, it may be keeping them from sleeping.
On the other end of the spectrum, strong labor markets and resilient housing prices support fully employed, asset-owning households. If you have a job and own a home, odds are you’re still spending. For those without either, the picture is far more precarious.
Home Tight Home The U.S. housing market continues to provide a stabilizing force for the broader economy—not through booming sales volumes, but via persistent pricing strength underpinned by limited supply. This bodes well for homeowners, but further exacerbates rent inflation for some and entrance-affordability for others.
As of March 2025, the inventory of unsold existing homes rose to 1.33 million units, equating to a 4.0-month supply at the current sales pace. While this marks an increase from earlier months, it’s still well below the five- to six-month range typically associated with market equilibrium. This constrained supply continues to exert upward pressure on home prices. According to the National Association of Realtors, the median existing-home price in March reached $403,700, reflecting a 2.7% increase from a year earlier. Complementing this, the S&P CoreLogic Case-Shiller U.S. National Home Price Index reported a 3.9% year-over-year gain in February, indicating sustained appreciation despite affordability challenges. It does deserve note that these growth rates are decelerating. Nonetheless, these dynamics suggest that, even amidst higher mortgage rates and economic uncertainties, the housing market remains resilient. The tight inventory not only supports home values but also contributes to household wealth stability.
GDP: Contraction with an Asterisk The 0.3% decline in real Q1 GDP spooked some observers, but the devil can’t be found in the details. Nearly all of the drag came from a record trade deficit — net exports subtracted 4.8 percentage points from the headline number. This was driven by a surge in imports as businesses rushed to bring in goods ahead of anticipated tariffs, while exports remained relatively flat.
Beneath the headlines, core domestic demand was stable. Personal consumption expenditures rose at a 2.2% annualized rate, reflecting ongoing household spending strength. Business fixed investment increased by 1.6%, led by equipment and intellectual property. And despite DOGE, government spending contributed modestly to growth, rising 1.2% (primarily at state and local levels).
Most forecasts from the Fed, World Bank, and major Wall Street firms still call for ~1.7% real GDP growth in 2025, implying a back-loaded recovery in the second half of the year. That forecast assumes the drag from trade reverses and consumer momentum holds.
Hot and Sticky, or Cooling Off? Inflation pressures remain at the heart of the economic debate in 2025. The headline Consumer Price Index (CPI) rose 2.4% year-over-year in March, but Core CPI, which strips out volatile food and energy prices, rose by 2.8% over the same period, driven largely by shelter and sticky service categories.
Of most concern is that prices that the producer level (PPI) rose 2.1% year-over-year, Core PPI — which excludes food, energy, and trade services — rose by 0.1% in March, enough for a 3.4% year-over-year increase, reinforcing that inflationary pressures persist further upstream. PPI increases, if sustained, will certainly make their way to the consumer eventually. If any meaningful amount of tariffs endure, these producer prices will likely swell even further.
Pause, Patience, or Pivot? The Federal Reserve has held short-term interest rates steady since late 2024, maintaining the target range at 4.25% to 4.50% amid ongoing inflation concerns. While many expected the Fed to continue cutting in early 2025, a combination of sticky core inflation and still-resilient labor markets has kept policymakers cautious.
However, recent developments may open the door for change. The Q1 GDP contraction, cooling job openings, and the continued downtrend in core CPI suggest that monetary policy may no longer need to remain as restrictive. While the Fed has been deliberate in avoiding premature moves, the combination of weakening forward indicators and subdued inflation could provide justification for a mid-year or late-year pivot—should economic momentum falter further.
Global Market Gains vs. Valuation Pains Developed market international equities are making a comeback — and not just in performance. They’re also catching the attention of allocators rediscovering the appeal of valuation and diversification. Europe and Japan remain priced at substantial discounts, not just to the U.S., but also to their own long-term norms. The recent outperformance of these markets reflects both a bounce from underappreciated levels and the growing appeal of diversification in uncertain times. As of Q2 2025, the forward P/E ratio for the MSCI Europe Index stands at approximately 13.1x, while Japan trades around 14.2x. In contrast, the S&P 500’s forward P/E remains elevated near 20.5x. These valuation spreads are not merely cosmetic — they represent multi-decade extremes in relative pricing.
This isn’t necessarily a call for the beginning of international dominance. Rather, it’s a reminder of the importance of strategic positioning. Portfolios anchored too heavily in U.S. mega-caps risk missing out on the mean-reversion and volatility-buffering benefits that international allocations may offer. If U.S. equities rebound strongly in the second half — perhaps driven by policy clarity — internationals may lag once again. But if turbulence continues, these undervalued markets may prove their worth.
Piering Ahead We find ourselves in a moment of extraordinary opacity. Trade policy, especially in the context of the Trump administration’s evolving stance, remains a major wildcard. The 90-day tariff suspension offered a reprieve, but not a roadmap. And yet, markets have already discounted much of this uncertainty. If history is any guide, the fog will lift — and when it does, it may not matter as much what it reveals as the fact that visibility has returned.
In this environment, swinging for the fences is no wiser than running for cover. The prudent course is to ensure portfolios are aligned with long-term objectives, built to weather both expansion and contraction. This isn’t the moment to radically reposition — unless, of course, portfolios are substantively misaligned. For those under- or over-exposed to risk or lacking diversification, this period of relative calm may be the opportunity to recalibrate.
The consensus among economists and strategists is a return to growth later this year, and if that plays out, the second half of 2025 could see a robust recovery in both economic activity and market sentiment. But should trade tensions escalate into full-scale wars, the damage wouldn’t be limited to U.S. equities. Risk assets globally — including credit — would likely reprice sharply.
Now is the time to confirm you’re invested appropriately for the road ahead — not the one behind. The fog will lift. The question is not whether it clears, but how well one is positioned when it does.
Spring 25 Market & Economic Commentary:
The severity of the Trump tariff announcement in early April was a shock to all, especially the U.S. equity markets, which corrected sharply upon the news. Whether part of the Trump-playbook or a pivot on policy, the markets found support when the Administration put a 90-day hold on the most sever of the proposed tariffs. Though this move may have stopped the freefall of markets and confidence, it only extended the window of uncertainty. Nonetheless, the markets and investors took the timeout to gather their collective breaths.
While the headlines have been dominated by political noise, policy uncertainty, and recessionary anxiety, the underlying fundamentals of the economy are exhibiting more resilience than many anticipated. Yes, Q1 GDP contracted by 0.3% on an annualized basis — the first negative print in three years. But this contraction had less to do with a genuine slowdown in domestic activity and more to do with a record-breaking trade deficit, which was artificially inflated by companies preloading purchases in advance of the anticipated tariffs from the Trump administration. In short, this was a GDP number that was likely due to timing, not trajectory. In fact, the economy continues to show strength.
Labor markets remain strong, even if they are showing some light fraying at the edges. Hiring has understandably cooled, but layoffs remain low. The other pillars of economic activity like the housing market and even consumer spending, all continue to add fuel to the economic engine of the United States. A shock like a stock market correction always has a cooling effect on sentiment. And unknowns lurking ahead for trade policy and prices don’t do much to calm nerves. However, time and a steady drumbeat of reality do. And our economic reality, at least at present, suggests that our worst fears about the future, may have been overblown. [Emphasis on the word “may’]
How the Markets Fared
Interest rates moved modestly lower in Q1, driven in part by growing fears that tariffs could tip the economy into recession thereby necessitating future action from the Federal Reserve. The bellwether 10-year Treasury yield declined from 4.57% at the end of 2024
to 4.25% by quarter’s close. This shift fueled gains across the fixed income spectrum, as modest price appreciation combined with coupon income to deliver broadly positive returns. The longer one’s duration exposure, the better the performance. However, credit sensitive sectors felt more turbulence. With rising recession risks, spreads widened particularly in high yield corporates and emerging market debt. Even so, strong coupon payments helped cushion price declines, resulting in net gains for many of these securities as well.
Equity markets corrected during Q1, with the steepest declines concentrated in the highest-valuation segments. Large-cap and small-cap U.S. stocks were hit hardest, impacted by both a deterioration in sentiment and the present-value discounting of future revenues and earnings. In contrast, cyclically sensitive and lower-valuation companies—particularly outside the
U.S.—fared better. International equities were a notable bright spot. Their relative insulation from U.S. tariff policy and substantially more reasonable valuations contributed to their resilience. International large-cap value stocks delivered some of the strongest gains. Commodities also allied, led by a sharp rise in gold prices. Stock markets in export-oriented Latin American countries rebounded sharply after a very challenging 2024.
Manufacturing Malaise Meets Services Stability
Business-to-business activity, as reflected in the Institute of Supply Management® (ISM®) Report on Business (ROB)® reports, tells a tale of two sectors. Manufacturing slipped back into contraction territory in April (48.7), continuing a stop and-start pattern we’ve seen for nearly two years. Meanwhile, the services side of the economy remains on steadier footing, with a 51.6 reading — indicating continued, yet modest growth.
The detail within the ISM Manufacturing report highlights ongoing weakness in new orders, which came in at 45.2 in April —a sharp pullback and a clear signal that demand conditions for goods producers are under pressure. In contrast, the ISM Services New Orders Index rose to 52.3% in April, up from 50.4% in March, suggesting renewed strength in demand among service providers.
All eyes will be on the May report, which will be released in early June. That will be the first report that fully flex business sentiment factoring in the proposed and then paused trump’s tariffs. Obviously one of the goals of the Administration is to restore manufacturing, however that will take many months to years. In the meantime, this dynamic reinforces the narrative of divergence between the goods-producing sector and a more resilient services economy that we are faced with in the near-term.
Laboring On
The unemployment rate held steady at 4.2% in April and the Nonfarm Payrolls added 177,000 jobs, slightly above expectations. Participation is stable, and wage growth continues, albeit more modestly. Businesses aren’t aggressively expanding headcount, but they’re not shedding it either. (layoffs remain low.)
Despite tightening conditions, the labor market remains resilient. The unemployment rate has held steady at 4.2%, and April payroll growth beat expectations adding a solid 177,000 jobs. While job openings have declined and wage growth has slowed somewhat (still at +3.5% y-o-y), employers have also been generally hesitant to announce layoffs. This suggests employers remain fundamentally optimistic about demand, even if hiring has become more selective, or perhaps just been put on pause.
Supporting this, the March Job Openings and Labor Turnover
Survey (JOLTS) reported that although job openings declined to 7.2 million — the lowest level since 2020, the “quits” rate ticked up to 3.3 million, indicating continued confidence among workers. Hires held steady at 5.4 million, while layoffs and discharges dropped to 1.6 million, reinforcing the narrative
that employers are still holding onto talent amid macro uncertainty.
Spending Not Spent
While the stock market has wobbled and inflation has lingered, U.S. consumers have continued to open their wallets—though more selectively than in prior quarters. Retail sales rose 1.4% in March 2025, led by a 5.3% surge in auto purchases as buyers rushed ahead of expected tariff increases. Excluding autos, gains were more muted, reflecting a measured consumer posture.
The hardiness in actual spending stands in contrast to the recent declines in consumer sentiment. The Conference Board’s Consumer Confidence Index declined sharply in March to 92.9—its lowest reading in 12 years—driven by concerns over inflation, political uncertainty, and financial market volatility. The more recent University of Michigan Index of ConsumerSentiment final reading for April rose to 52.2 from the preliminary reading of 50.8, but still down significantly from March’s 57.0, and April 2024’s index of 77.2.
Sentiment has a tendency to move much more quickly than actual spending behavior, and sometimes those moves prove to be fleeting. This is especially true after a heavy news cycle like we’ve seen in the last month with stock market volatility and trump tariff fears dominating the headlines. But there may be something more Significant going on beneath the headline numbers. There is a bifurcation between income and wealth categories that has grown more pronounced. Higher-income Americans—buoyed by wage gains, asset appreciation, and job security—have sustained or even increased their discretionary spending. Lower- and middle-income households, on the other hand, are pulling back, with increased reliance
on credit and a noticeable decline in discretionary purchases. Credit card balances are rising faster in these groups, and delinquency rates have ticked up (as we reported on last quarter).
This divergence is critical to understanding both the near-term consumer engine and the long-term stability of household demand. The U.S. consumer isn’t broken, but it’s far from monolithic—and increasingly polarized by income and balance sheet health. Some Americans simply can’t withstand another round of price increases. So the inflation fears that have raised by politicians and the media alike may not only keep marginalized households from spending, it may be keeping them from sleeping.
On the other end of the spectrum, strong labor markets and resilient housing prices support fully employed, asset-owning households. If you have a job and own a home, odds are you’re still spending. For those without either, the picture is far more precarious.
Home Tight Home
The U.S. housing market continues to provide a stabilizing force for the broader economy—not through booming sales volumes, but via persistent pricing strength underpinned by limited supply. This bodes well for homeowners, but further exacerbates rent inflation for some and entrance-affordability for others.
As of March 2025, the inventory of unsold existing homes rose to 1.33 million units, equating to a 4.0-month supply at the current sales pace. While this marks an increase from earlier months, it’s still well below the five- to six-month range typically associated with market equilibrium. This constrained supply continues to exert upward pressure on home prices. According to the National Association of Realtors, the median existing-home price in March reached $403,700, reflecting a 2.7% increase from a year earlier. Complementing this, the S&P CoreLogic Case-Shiller U.S. National Home Price Index reported a 3.9% year-over-year gain in February, indicating sustained appreciation despite affordability challenges. It does deserve note that these growth rates are decelerating. Nonetheless, these dynamics suggest that, even amidst higher mortgage rates and economic uncertainties, the housing market remains resilient. The tight inventory not only supports home values but also contributes to household wealth stability.
GDP: Contraction with an Asterisk
The 0.3% decline in real Q1 GDP spooked some observers, but the devil can’t be found in the details. Nearly all of the drag came from a record trade deficit — net exports subtracted 4.8 percentage points from the headline number. This was driven by a surge in imports as businesses rushed to bring in goods ahead of anticipated tariffs, while exports remained relatively flat.
Beneath the headlines, core domestic demand was stable. Personal consumption expenditures rose at a 2.2% annualized rate, reflecting ongoing household spending strength. Business fixed investment increased by 1.6%, led by equipment and intellectual property. And despite DOGE, government spending contributed modestly to growth, rising 1.2% (primarily at state and local levels).
Most forecasts from the Fed, World Bank, and major Wall Street firms still call for ~1.7% real GDP growth in 2025, implying
a back-loaded recovery in the second half of the year. That forecast assumes the drag from trade reverses and consumer
momentum holds.
Hot and Sticky, or Cooling Off?
Inflation pressures remain at the heart of the economic debate in 2025. The headline Consumer Price Index (CPI) rose
2.4% year-over-year in March, but Core CPI, which strips out volatile food and energy prices, rose by 2.8% over the same
period, driven largely by shelter and sticky service categories.
Of most concern is that prices that the producer level (PPI) rose 2.1% year-over-year, Core PPI — which excludes food,
energy, and trade services — rose by 0.1% in March, enough for a 3.4% year-over-year increase, reinforcing that
inflationary pressures persist further upstream. PPI increases, if sustained, will certainly make their way to the consumer
eventually. If any meaningful amount of tariffs endure, these producer prices will likely swell even further.
Pause, Patience, or Pivot?
The Federal Reserve has held short-term interest rates steady since late 2024, maintaining the target range at 4.25% to
4.50% amid ongoing inflation concerns. While many expected the Fed to continue cutting in early 2025, a combination of
sticky core inflation and still-resilient labor markets has kept policymakers cautious.
However, recent developments may open the door for change. The Q1 GDP contraction, cooling job openings, and the
continued downtrend in core CPI suggest that monetary policy may no longer need to remain as restrictive. While the Fed
has been deliberate in avoiding premature moves, the combination of weakening forward indicators and subdued inflation
could provide justification for a mid-year or late-year pivot—should economic momentum falter further.
Global Market Gains vs. Valuation Pains
Developed market international equities are making a comeback — and not just in performance. They’re also catching the
attention of allocators rediscovering the appeal of valuation and diversification. Europe and Japan remain priced at
substantial discounts, not just to the U.S., but also to their own long-term norms. The recent outperformance of these
markets reflects both a bounce from underappreciated levels and the growing appeal of diversification in uncertain times.
As of Q2 2025, the forward P/E ratio for the MSCI Europe Index stands at approximately 13.1x, while Japan trades around
14.2x. In contrast, the S&P 500’s forward P/E remains elevated near 20.5x. These valuation spreads are not merely
cosmetic — they represent multi-decade extremes in relative pricing.
This isn’t necessarily a call for the beginning of international dominance. Rather, it’s a reminder of the importance of
strategic positioning. Portfolios anchored too heavily in U.S. mega-caps risk missing out on the mean-reversion and
volatility-buffering benefits that international allocations may offer. If U.S. equities rebound strongly in the second half —
perhaps driven by policy clarity — internationals may lag once again. But if turbulence continues, these undervalued
markets may prove their worth.
Piering Ahead
We find ourselves in a moment of extraordinary opacity. Trade policy, especially in the context of the Trump administration’s
evolving stance, remains a major wildcard. The 90-day tariff suspension offered a reprieve, but not a roadmap. And yet,
markets have already discounted much of this uncertainty. If history is any guide, the fog will lift — and when it does, it may
not matter as much what it reveals as the fact that visibility has returned.
In this environment, swinging for the fences is no wiser than running for cover. The prudent course is to ensure portfolios
are aligned with long-term objectives, built to weather both expansion and contraction. This isn’t the moment to radically
reposition — unless, of course, portfolios are substantively misaligned. For those under- or over-exposed to risk or lacking
diversification, this period of relative calm may be the opportunity to recalibrate.
The consensus among economists and strategists is a return to growth later this year, and if that plays out, the second half
of 2025 could see a robust recovery in both economic activity and market sentiment. But should trade tensions escalate
into full-scale wars, the damage wouldn’t be limited to U.S. equities. Risk assets globally — including credit — would likely
reprice sharply.
Now is the time to confirm you’re invested appropriately for the road ahead — not the one behind. The fog will lift. The
question is not whether it clears, but how well one is positioned when it does.
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