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by Wealthstone Group on Feb 27, 2025
Certain Uncertiainty
Information is the resolution of uncertainty.
-Claude Shannon
Executive Summary
The year began with strong market performance, but equity markets pulled back in late January due to tariff uncertainty before shifting focus to economic and corporate earnings growth concerns. Inflation remains a key issue, with the Consumer Price Index rising 3% year-over-year, while economic growth is projected at 2% for 2025. Investor sentiment remains relatively strong despite declining consumer confidence and increased market volatility. Productivity trends, particularly technological advancements, will play a crucial role in shaping long-term economic performance. While short-term volatility is expected, our outlook remains positive for intermediate- to long-term growth.
The year 2025 began with strong momentum across major asset classes. Equity markets experienced a slight pullback in late January due to uncertainty surrounding tariffs. However, as investors shifted their focus beyond trade policy, concerns turned toward economic and corporate earnings growth. Several companies issued lower earnings guidance, reinforcing market unease. While tariffs, inflation, and immigration remain significant topics, the market appears more focused on growth prospects.
Over the past two months, the U.S. stock market has experienced notable fluctuations driven by economic conditions and policy developments. The S&P 500 Index posted a 2.8% return early in the year, while European markets outperformed with a 7.1% gain. Optimism was fueled by President Trump’s "America First" policies, including deregulation and tax cut promises. Markets climbed into mid-February but became more volatile as concerns over economic growth and geopolitical uncertainties intensified. The most expensive segment of the stock market, represented by the S&P 1500, experienced the sharpest pullback. However, many securities in this category still exhibit strong long-term growth potential. A return to more normalized valuation levels suggests a healthy market. Additionally, the 10-year Treasury yield fell to its lowest level in nearly 11 weeks, reflecting investor apprehension about a potential economic slowdown.
Economic indicators have presented a mixed picture. Consumer sentiment declined sharply in
February, driven by persistent inflation concerns and potential trade disruptions. The Conference Board Leading Economic Index also fell, with a 0.3% month-over-month decline in January—though this remains within historical norms. Inflation remains a central issue, as the Consumer Price Index (CPI) rose 0.5% month-over-month and 3% year-over-year in January, marking the strongest annual increase since June. Rising food and energy prices, exacerbated by avian flu-related disruptions, contributed significantly to this trend. Meanwhile, the U.S. economy expanded at a 2.3% annualized rate in the fourth quarter of 2024. Projections for 2025 suggest approximately 2% growth for the full year, supported by rising household incomes and a recovering housing market. Although economic expansion is moderating, there remains significant room for continued growth through at least 2026.
Productivity trends will be a crucial factor in shaping the economy’s trajectory. While the economy has expanded, productivity growth has remained sluggish, limiting long-term economic potential. Technological advancements, including automation and artificial intelligence, could drive efficiency gains and help mitigate inflationary pressures. However, companies face challenges in integrating new technologies and upskilling their workforce. Uncertainty surrounding trade policies may also discourage investment in productivity- enhancing initiatives, as businesses adopt a cautious approach in the current economic climate.
The divergence between investor sentiment and consumer confidence remains noteworthy. While consumer sentiment has weakened, institutional investors remain relatively optimistic despite some recent market pullbacks. Historically, declining consumer sentiment has sometimes signaled market downturns, as seen before the 2008 financial crisis. However, shifting economic dynamics and the increasing dominance of the technology sector have weakened this correlation.
With numerous economic and market forces at play, productivity will likely be a key determinant of economic performance in the coming years. While short-term volatility is expected, our outlook remains positive over the intermediate to long term.
Louis Tucci; Partner | Senior Investment Advisor
Paulo Aguilar, CFA, CAIA; Partner | Senior Investment Advisor
Mark H. Tucker, CFA; Chief Investment Officer
Chuck Bettinger; Portfolio Manager
Securities offered through Arkadios Capital. Member FINRA/SIPC. Advisory services through Arkadios Wealth.
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