BY STRATEGIC ADVISERS INVESTMENT TEAM — March, 2025
Market Conditions
While markets have been volatile, we believe the U.S. economy continues to expand, supported by a growing job market and rising corporate earnings. Tariff uncertainty and government spending cuts may lead to more moderate, yet still positive growth for the U.S. economy. The investment team is carefully monitoring policy developments and is ready to act as needed.
- Uncertainty around tariffs and government spending cuts led to market volatility. While tariffs may lead to more moderate economic growth, they do not appear to be pushing the U.S. to an imminent recession. For a deeper dive on tariffs, please refer to this Fidelity Viewpoints article.
- Earnings growth was about 13% during the 4th quarter, based on over 495 companies in the S&P 500 that reported results so far. The outlook for corporate profit growth remains positive for 2025.1
- The job market remained an area of strength, as the Labor Department reported that 151,000 jobs were added in February. Unemployment remained low at 4.1%,2 well below its long-term average3 of 5.7%.
- U.S. manufacturing activity grew in February. This marked the second consecutive month of expansion after a long period of slowing growth. Manufacturing is a key indicator of overall economic health, influencing aspects such as job creation, GDP growth, and consumer confidence.4
- Inflation ticked lower in February to 2.8%, just below its long-term average. The Federal Reserve is closely monitoring inflation and jobs to determine the pace of future interest rate cuts.5
What it may mean for your portfolio
While recent news headlines may have led to a number of worries for investors, we believe economic growth and the outlook for corporate earnings have been more powerful drivers of stock market growth over time. For example, in the 5 years from 2019 to 2024, the S&P 500 index rose 97%, including dividends, despite experiencing numerous periods of volatility through the COVID-19 pandemic, the start of the Russia and Ukraine conflict, high inflation, and numerous other challenges.6 Patient investors who stuck to their financial plan over that time were more likely to advance towards their financial goals.
With that in mind, below are our views on the economy, tariffs, and government spending cuts.
Economy has shown resilience in the face of past stressors
Given its recent strength, the economy, which could potentially allow for a more moderate pace of growth without tipping into recession. For instance, the U.S. GDP growth rate grew over 2% every quarter in 2024.7 So even if the economy were to grow more moderately, it could still expand in 2025. With corporate earnings expected to rise this year, the job market potentially be impacted by some of the government job cuts underway. Additionally, employed consumers could continue to spend even if some prices on imported goods were to rise. This may feel uncomfortable for consumers, but the economy could still grow.
Tariff uncertainty may lead to more moderate growth, but recession risk is still low
Tariffs run the risk of raising some costs for certain imported goods for U.S. consumers. Higher prices on some goods may lead to a more moderate pace of economic growth. While this could potentially impact the U.S. economy, it is unlikely to tip into a recession. In recent years, inflation peaked at high levels and prices for many goods went up faster than average, but the economy continued growing through that time.
Government spending cuts may soften job market
Federal government job cuts are likely unsettling for the individuals and families involved. However, the size of the Federal work force is relatively small, making up less than 2% of U.S. jobs.8 Unemployment levels have also been very low compared to history, and the economy continues to add jobs overall. So Federal job cuts may have a gradual and relatively limited effect on the overall job market.
Outlook
As investors have already seen this year, periods of volatility are possible as policy shifts take place, and uncertainty remains on inflation and global trade. Overall, we believe it is important to keep potential policy discussions in perspective and not let them dominate long-term investment decisions. Historically, economic growth and corporate profits have been more significant drivers of market performance than policy measures.
One of the key roles of the investment team is to continually monitor and research current conditions to help manage risk within client accounts. If the economy shows signs of strain, we may seek to reduce stock allocations and add more exposure to bonds. Or if we get resolutions on tariffs or favorable global trade deals, this could potentially influence market conditions and may lead us to consider adjusting our exposure to stocks. We are prepared to act as the situation evolves.
Make a plan, stick with it, and stay invested
Market conditions can change quickly. Historically, the market has sometimes rallied even as news headlines may have felt discouraging. We aim to help clients navigate through market fluctuations, including the ones we have experience this year. As a result, we have maintained healthy exposure to stocks, even through bouts of market volatility. We believe that staying invested through varying market conditions can ultimately help you reach your financial goals over the long term.
