Market Volatility: Call Replay
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Market News
Market analysis
March 17, 2025
Number of the week:
2.8%
The increase in the Consumer Price Index in February compared to the previous year. That is down from 3.0% in January.
Term of the week:
Non-agency mortgage-backed securities
Securities backed by a pool of mortgages that are issued by entities other than government agencies.
Quote of the week:
Tariffs and associated risks to economic growth are impacting investor sentiment, expectations for earnings and company guidance. Our risk-on (more aggressive) bias remains intact, bolstered by inflation, interest rates and earnings, which remain directionally consistent with higher equity prices.
― Terry Sandven, Portfolio Manager, Chief Equity Strategist, U.S. Bank
Global economy
Quick take: Slowing U.S. inflation bolstered expectations for the Federal Reserve (Fed) to restart interest rate cuts later in 2025, while consumers remain unhappy about elevated prices and policy uncertainty.
Our view: The U.S. economy appears likely to achieve a soft landing in 2025, aided by slowing inflation and solid domestic demand growth. Tariffs pose some risks to slow but improving growth in developed markets, including the eurozone, the United Kingdom and Japan.
- President Trump signed a short-term funding bill, averting a government shutdown. The House passed the Republican proposal along party lines while the Senate approved it with 10 Democrats voting yes. The six-month spending bill includes modest increases in military spending offset by decreases in non-defense spending. Attention now turns to a broader budget package including spending cuts and proposals to extend or enhance 2017 tax cuts set to expire at year-end.
- Despite cooler inflation data, U.S. consumers remain concerned. The Consumer Price Index rose just 2.8% year-over-year in February, down from January, helped by lower oil prices and airfares and slowing growth in shelter costs. In contrast, the Michigan Consumer Sentiment Index saw one-year inflation expectations jump to 4.9% in its preliminary March data from 4.3% in February; the headline index fell to 57.9, its lowest level since November 2022. Sentiment has now declined for three months in a row, with consumers saying a higher level of uncertainty around policy and other economic factors is making it difficult to plan for future spending and investment. The key for the economy is whether this disappointment translates into slower consumer spending.
- The National Federation of Independent Small Business Optimism Index fell 2.1 points in February to 100.7, but it was the fourth consecutive month above the 51-year average of 98.0. The Uncertainty Index in the survey rose another four points to 104.0, the second highest on record. Inflation and labor quality were cited as challenges.
- China consumer prices contracted 0.7% year-over-year in February, more than expectations for a 0.5% decline, decelerating sharply from a one-year high of 0.7% in the previous month. Core prices fell 0.1% after a prior 0.6% rise, marking the first slide since January 2021. China’s National Bureau of Statistics said price volatility in the first two months of the year was caused by shifting timing of the Lunar New Year holiday. The official assessment of a mild rebound in economic activity and prices remained unchanged.
Equity markets
Quick take: Tariffs and associated risks to economic growth are impacting investor sentiment, expectations for earnings and company guidance. Our risk-on (more aggressive) bias remains intact, bolstered by inflation, interest rates and earnings, which remain directionally consistent with higher equity prices.
Our view: Inflation, interest rates and earnings are supportive of higher equity prices. Inflation is largely stable with downside bias, interest rates are stable with a dovish bias, and earnings projections for 2025 reflect double-digit year-over-year growth, all net positives. Tariffs and economic uncertainty remain headwinds.
- Lackluster performance is widespread. In March, as of Friday’s close, the popular broad-based indices are down between 5.3% and 5.8%, with all 11 S&P 500 sectors negative. Year-to-date returns are modestly more positive. While the S&P 500 is down 4.1%, seven sectors are posting gains.
- Looming tariffs are weighing on sentiment. The lackluster year-to-date performance of the Consumer Discretionary (-13.8%) and Information Technology (-9.4%) sectors is noteworthy; they are widely expected to be negatively impacted by tariffs. Meanwhile, the 20 largest S&P 500 companies by market capitalization, representing 46% of the total market cap of index, have a technology bias and are down 7.0% for the year in aggregate. Of the seven largest companies, representing 31% of the S&P 500 market capitalization, only Meta Platforms is positive. It is hard to envision the broad-based U.S. equity markets trending meaningfully higher without improved performance among the largest companies.
- Earnings provide some valuation support. Analysts forecast 2025 earnings of approximately $270 per share for the S&P 500, according to Bloomberg, FactSet and S&P Cap IQ, reflecting 10% year-over-year growth.
- Forward guidance is likely to be a key focus of first quarter results. The first quarter reporting period unofficially begins on April 11 with the release from several money center banks. We expect more companies to offer forward guidance following first quarter releases, including the impact tariffs may be having on company results. Delta Airlines, United Airlines and select retailers are among companies recently noting that weaker consumer confidence over uncertainty of how tariffs, inflation and government program cuts might affect them. Accordingly, we anticipate modest downward revision to the 2025 earnings estimate as the year progresses.
Bond markets
Quick take: Corporate and municipal bonds lagged slightly last week, with trade policy uncertainty weighing on investor risk appetite, but riskier high yield corporate and municipal bond prices have still delivered positive returns year-to-date amid broader market volatility.
Our view: Bonds can help stabilize returns in volatile markets to align portfolios with investor risk tolerance. Favorable income opportunities exist across many bond categories. Tax-exempt income from municipal bonds can benefit highly taxed investors. Non-taxable investors can find compelling yields in corporate bonds, non-agency mortgages and collateralized loan obligations.
- Bond yields reflect expectations that the Fed will hold rates steady at its meeting this week after inflation slowed in February. Inflation data released last week showed slower inflation, but recent survey data indicates concern that prices could accelerate in coming months. Fed communications said members prefer waiting for clearer evidence of decelerating inflation before delivering additional rate cuts. Fed members will update their projections for growth, inflation and policy rates this week, providing important insight into their perspective on managing monetary policy amid tariff uncertainty. Investors will also look for guidance on the Fed’s plans for managing its bond holdings, which have declined for three years. Slowing or pausing this runoff could provide incremental support for bond markets.
- The Bank of England (BoE) and Bank of Japan (BoJ) are expected to hold rates steady this week. The BoE cut its key policy rate last month, but investors expect steady benchmark rates at 4.5% this week due to rising inflation and increased geopolitical uncertainty. Investors also expect the BoJ to hold its key policy rate steady after hiking last month. Unlike most other countries, Japan has raised rates, and investors expect at least one more hike this year to slow inflation.
- Solid fundamentals and compelling yields support corporate and municipal bonds. Both underperformed last week as investors shifted to the safety of government bonds. The extra yield on corporate and municipal bonds over Treasuries rose, improving the compensation investors receive for taking on credit risk. Corporate debt issuers generally have low to normal leverage compared to the past and generate sufficient cash flow to service their debt. Municipal bonds also have generally strong fundamentals considering most states have healthy cash balances.
Real assets
Quick take: Real estate investment trust (REIT) prices fell alongside stocks last week amid cautious investor risk appetite. Trade uncertainty continued to benefit precious metals, with gold prices hitting a new all-time high.
Our view: Fourth quarter earnings reports confirmed REITs generally exhibit stable fundamentals with positive income growth despite price swings that can stem from shifting investor sentiment. We continue to see value in REITs as a component of diversified portfolios.
- REIT prices fell last week, but stable fundamentals support portfolio allocations. REIT fundamentals remain stable across most real estate categories. Net operating income, which measures profits from rental income less regular operating expenses, grew 3% year-over-year. Occupancy rates near 93% for the past several years bolster REIT fundamentals. Specifically, retail property occupancy rates improved in the fourth quarter to 97%. Solid retail fundamentals are encouraging for broader real estate opportunities, since retail is one of the largest categories in REITs and it can be sensitive to underlying economic conditions. Office real estate fundamentals remain weak, but office occupancy rates stabilized in the fourth quarter. Despite the pullback in prices last week, REITs have still delivered positive returns year-to-date, outperforming the S&P 500, and remain a key component of portfolio diversification.
- Broad commodity exposures gained slightly with a boost from precious metals. Gold prices rose to a new all-time high last week, suggesting investors continue to seek perceived safe havens in times of elevated policy uncertainty. Natural gas prices fell on expectations for warmer weather ahead that reduces heating fuel demand but are still up more than 25% year-to-date. Oil prices ended the week roughly unchanged as investors weighed impacts from global economic growth concerns, headlines on Russia and Ukraine ceasefire negotiations, plans for the U.S. to refill the Strategic Petroleum Reserve and tariff announcements. Commodities can help protect against inflation risks in portfolios but can also be sensitive to investor expectations for economic growth.
Based on our strategic approach to creating diversified portfolios, guidelines are in place concerning the construction of portfolios and how investments should be allocated to specific asset classes based on client goals, objectives and tolerance for risk. Not all recommended asset classes will be suitable for every portfolio. Diversification and asset allocation do not guarantee returns or protect against losses.
Past performance is no guarantee of future results. All performance data, while obtained from sources deemed to be reliable, are not guaranteed for accuracy. Indexes shown are unmanaged and are not available for direct investment. The S&P 500 Index consists of 500 widely traded stocks that are considered to represent the performance of the U.S. stock market in general. The Consumer Price Index is a measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food and medical care. It is one of the most frequently used statistics for identifying periods of inflation or deflation. The National Federation of Independent Business Small Business Optimism Index is a composite of 10 seasonally adjusted components. It provides an indication of the health of small businesses in the U.S., which account for roughly 50% of the nation's private workforce. The Michigan Consumer Sentiment Index is a monthly survey of consumer confidence levels in the United States conducted by the University of Michigan. The survey is based on telephone interviews that gather information on consumer expectations for the economy.
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Equal Housing Lender. Deposit products offered by U.S. Bank National Association. Member FDIC. Credit products are offered by U.S. Bank National Association and subject to normal credit approval.