What Happened
US equity markets finished the week up after four consecutive weeks of negative returns. Markets were focused on the Fed’s Summary of Economic Projections, which showed that the Fed expected slightly slower economic growth and slightly higher inflation. However, Chairman Powell calmed market fears at the news conference after the FOMC meeting, where he signaled that the Fed was not overtly concerned with either economic growth (recession risks are “not high”) or inflation (impact of tariffs may be “transitory.”) The reassurance was all the markets needed to rally from an over-sold position; bonds also took their cue to rise in price (lower yields).
What We Are Watching
Tariffs: Tariff headlines will be the key focus for this week as President Trump has promised April 2 (next week) to be “Liberation Day,” when individual countries will be notified of the size of the tariff on imports being brought in to the US Markets are paying attention not only to the size of the tariff but also whether the announcements will bring some policy certainty relative to expectations.
Tax Bill: Congress returns to Washington D.C. this week, and the tax bill will be its key focus. Not only is the fate of expiring cuts from the 2017 bill at stake, but markets are looking for provisions that may be aimed at spurring economic growth, which may help offset some of the negative impulses expected from tariffs.
Artificial Intelligence: AI has been a key catalyst for markets over the past two years, with much of the rise of the ‘Magnificent 7’ stocks being attributed to the potential for AI to boost earnings growth for years to come. Coming on the heels of the DeepSeek announcements two months ago comes further news from China, however, where Jack Ma-backed Ant Group announced that it had developed techniques for training AI models using Chinese-made semiconductors, with 20% cost savings to boot. Investors may do well to hold off declaring winners in the AI space.
How to Invest
Diversify: The investment office recently reduced its overweight to US equities and added to non-U.S. developed market equities, where valuations are cheaper, the indexes are less concentrated and earnings may have tailwinds from a spending boost related to defense and energy security.
Reduce Portfolio Concentration: Many client portfolios include large positions in some of the large-cap technology stocks that have driven the market over the past two years. These stocks have recently performed worse than the market – the “Magnificent 7” stocks, in aggregate, are down 14% YTD vs. 3% for the S&P 500. Clients should look at potential solutions to reduce these concentrations in a tax-efficient manner.
Market Performance
Equities
The S&P 500 returned +0.5%, ending a four-week streak of negative returns. The key catalyst was Fed Chair Powell’s news conference following the FOMC meeting, where he calmed investor fears and concerns on the dual fronts of slowing economic growth and sticky inflation. Mid-cap stocks (+1.1%) and small caps (+0.6%) outperformed large caps. Energy (+3.2%) and financials (+1.9%) were the best-performing sectors in the S&P 500; materials (-0.2%) and utilities (-0.2%) were the laggards. EAFE markets returned 0.8%; EM markets returned +1.1% with a strong bounce-back in India (+6.4%).
From a valuation perspective, US large caps trade above +1 standard deviation based on historical forward P/E ratios with the S&P 500 at +1.4. The NASDAQ is at +0.6. For the next 12 months, EPS growth for the S&P 500 is expected to be 9.8% (vs. 6.9% annualized over the last 20 years). For the next 12 months, EPS growth for NASDAQ is expected to be 17.7=4% (vs. 10.7% annualized over the last 20 years). All US indices, including the S&P 500 (US Large Cap), NASDAQ, Russell Midcap (US Midcap), and the Russell 2000 (US Small Cap) trade at or above their 20-year averages based on forward P/E ratios while the MSCI EAFE (Non-US Developed Market Equities) and MSCI EM (EM Equities) are inline.
Fixed Income
Investment grade fixed income sectors had positive returns as rates fell across the curve while spreads compressed slightly. Municipals returned +0.1%, US AGG returned +0.5% and US IG returned +0.6%. HY bond returned +0.4% as spreads compressed 4bps while bank loans returned +0.1%. EM debt returned 0.0% as the US dollar rose 0.4%.
Rates
Rates fell across the curve, taking their cues from the Fed that inflation was not currently a major concern. The recession-watch 3M-10Y spread compressed 6bps to -5 and has again inverted. The 2Y-10Y spread was unchanged at +29. Rates fell in Europe but rose in the U.K. and Japan. The BTP-Bund spread is at 1.12%. 5-year breakeven inflation expectations rose 4bps to 2.57% (vs. a low of 1.88% on September 10); 10-year breakeven inflation expectations rose 2bps to 2.33% (vs. recent low of 2.03% on September 10); the 10Y real yield fell 8bps to 1.92%. The market now expects between two and three cuts in 2025 vs the Fed’s guidance of two cuts. At year-end 2025, the market expects the Fed Funds rate to be 3.7% vs. the Fed’s guidance of 3.75%-4.00%.
Currencies/Commodities
The dollar index rose 0.4%. The commodities complex rose 1.3%, while energy prices rose 2.0% for the week. Brent prices were slightly higher at $72/bbl. US natural gas prices fell 3.0% while European gas rose 0.2%, both due to weather forecasts.
Market Monitors
Volatility fell for equities and for bonds (VIX = 19, MOVE = 95); the 10-year average for each is VIX=18, MOVE = 78. Market sentiment (at midweek) remained negative at -37.
Weekly Commentary
Investment Commentary – March 24, 2025
What Happened
US equity markets finished the week up after four consecutive weeks of negative returns. Markets were focused on the Fed’s Summary of Economic Projections, which showed that the Fed expected slightly slower economic growth and slightly higher inflation. However, Chairman Powell calmed market fears at the news conference after the FOMC meeting, where he signaled that the Fed was not overtly concerned with either economic growth (recession risks are “not high”) or inflation (impact of tariffs may be “transitory.”) The reassurance was all the markets needed to rally from an over-sold position; bonds also took their cue to rise in price (lower yields).
What We Are Watching
Tariffs: Tariff headlines will be the key focus for this week as President Trump has promised April 2 (next week) to be “Liberation Day,” when individual countries will be notified of the size of the tariff on imports being brought in to the US Markets are paying attention not only to the size of the tariff but also whether the announcements will bring some policy certainty relative to expectations.
Tax Bill: Congress returns to Washington D.C. this week, and the tax bill will be its key focus. Not only is the fate of expiring cuts from the 2017 bill at stake, but markets are looking for provisions that may be aimed at spurring economic growth, which may help offset some of the negative impulses expected from tariffs.
Artificial Intelligence: AI has been a key catalyst for markets over the past two years, with much of the rise of the ‘Magnificent 7’ stocks being attributed to the potential for AI to boost earnings growth for years to come. Coming on the heels of the DeepSeek announcements two months ago comes further news from China, however, where Jack Ma-backed Ant Group announced that it had developed techniques for training AI models using Chinese-made semiconductors, with 20% cost savings to boot. Investors may do well to hold off declaring winners in the AI space.
How to Invest
Diversify: The investment office recently reduced its overweight to US equities and added to non-U.S. developed market equities, where valuations are cheaper, the indexes are less concentrated and earnings may have tailwinds from a spending boost related to defense and energy security.
Reduce Portfolio Concentration: Many client portfolios include large positions in some of the large-cap technology stocks that have driven the market over the past two years. These stocks have recently performed worse than the market – the “Magnificent 7” stocks, in aggregate, are down 14% YTD vs. 3% for the S&P 500. Clients should look at potential solutions to reduce these concentrations in a tax-efficient manner.
Market Performance
Equities
The S&P 500 returned +0.5%, ending a four-week streak of negative returns. The key catalyst was Fed Chair Powell’s news conference following the FOMC meeting, where he calmed investor fears and concerns on the dual fronts of slowing economic growth and sticky inflation. Mid-cap stocks (+1.1%) and small caps (+0.6%) outperformed large caps. Energy (+3.2%) and financials (+1.9%) were the best-performing sectors in the S&P 500; materials (-0.2%) and utilities (-0.2%) were the laggards. EAFE markets returned 0.8%; EM markets returned +1.1% with a strong bounce-back in India (+6.4%).
From a valuation perspective, US large caps trade above +1 standard deviation based on historical forward P/E ratios with the S&P 500 at +1.4. The NASDAQ is at +0.6. For the next 12 months, EPS growth for the S&P 500 is expected to be 9.8% (vs. 6.9% annualized over the last 20 years). For the next 12 months, EPS growth for NASDAQ is expected to be 17.7=4% (vs. 10.7% annualized over the last 20 years). All US indices, including the S&P 500 (US Large Cap), NASDAQ, Russell Midcap (US Midcap), and the Russell 2000 (US Small Cap) trade at or above their 20-year averages based on forward P/E ratios while the MSCI EAFE (Non-US Developed Market Equities) and MSCI EM (EM Equities) are inline.
Fixed Income
Investment grade fixed income sectors had positive returns as rates fell across the curve while spreads compressed slightly. Municipals returned +0.1%, US AGG returned +0.5% and US IG returned +0.6%. HY bond returned +0.4% as spreads compressed 4bps while bank loans returned +0.1%. EM debt returned 0.0% as the US dollar rose 0.4%.
Rates
Rates fell across the curve, taking their cues from the Fed that inflation was not currently a major concern. The recession-watch 3M-10Y spread compressed 6bps to -5 and has again inverted. The 2Y-10Y spread was unchanged at +29. Rates fell in Europe but rose in the U.K. and Japan. The BTP-Bund spread is at 1.12%. 5-year breakeven inflation expectations rose 4bps to 2.57% (vs. a low of 1.88% on September 10); 10-year breakeven inflation expectations rose 2bps to 2.33% (vs. recent low of 2.03% on September 10); the 10Y real yield fell 8bps to 1.92%. The market now expects between two and three cuts in 2025 vs the Fed’s guidance of two cuts. At year-end 2025, the market expects the Fed Funds rate to be 3.7% vs. the Fed’s guidance of 3.75%-4.00%.
Currencies/Commodities
The dollar index rose 0.4%. The commodities complex rose 1.3%, while energy prices rose 2.0% for the week. Brent prices were slightly higher at $72/bbl. US natural gas prices fell 3.0% while European gas rose 0.2%, both due to weather forecasts.
Market Monitors
Volatility fell for equities and for bonds (VIX = 19, MOVE = 95); the 10-year average for each is VIX=18, MOVE = 78. Market sentiment (at midweek) remained negative at -37.
Disclosure and Source
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