Fear Outweighing Fundamentals

Performance for Week Ending 3.7.2025:

The Dow Jones Industrial Average (Dow) fell 2.4 percent, the Standard & Poor’s 500 Index (S&P 500) lost 3.1 percent and the Nasdaq Composite Index (Nasdaq) declined by 3.5 percent. Sector breadth was negative, with 10 of the 11 S&P sector groups closing lower. The financials sector (-5.9 percent) was the weakest performer followed by consumer discretionary (-5.4 percent) and energy (-3.8 percent).

*See below for Index Definitions

MARKET OBSERVATIONS: 3.3.2025  – 3.7.2025

The S&P 500 finished lower for a third straight week, reflecting fears over softening economic growth, uncertainties around President Donald Trump’s volatile trade policies, and worries over the sustainability of the AI trade in the wake of growing competition from Chinese companies. The S&P’s weekly loss was the largest since last September. On Tuesday, as promised, Trump rolled out 25 percent import levies on both Canada and Mexico, the United States’ two largest trading partners. While the Trump administration has been telegraphing tariffs for quite some time, most believed they were being used only as a negotiating tool. The negative reaction to the rollout suggested investors were caught off guard. While Trump is known to keep score by watching the stock market, the sharp market selloff began to stabilize after the president announced he would be delaying, for one month, tariffs on auto and auto parts that are compliant with the U.S.-Mexico-Canada free-trade agreement. If there is one thing markets don’t like, it is uncertainty, and markets are now left guessing as to what Trump's next steps may be and the vulnerability to new duties when the administration unveils so-called "reciprocal" tariffs on all of America's trading partners on April 2.

Fed Speak–‘Wait and See’: The focal point came late in the week when Federal Reserve (Fed) Chair Jerome Powell gave updated thoughts on the current state of the economy. Speaking at the University of Chicago’s Booth 2025 U.S. Monetary Policy Forum, Powell acknowledged increased economic uncertainty, but added that officials don’t need to rush to adjust policy. Powell said recent indicators suggested consumer spending may moderate, while surveys of household and businesses point to heightened uncertainty about the economic outlook. Powell also said he expects progress on lowering inflation to continue, but unevenly. Fed policymakers are widely expected to leave the central bank’s key policy rate unchanged when they next meet March 18–19. Meanwhile, Fed Governor Chris Waller said he wouldn’t support lowering interest rates in March but sees room to cut two or possibly three times this year. Atlanta Fed President Raphael Bostic said it could be several months before there’s clarity on how Trump’s policies and other factors will affect the economy, suggesting officials could hold rates steady until at least late spring. Bostic reiterated that Trump’s changes could affect the economy in different ways, which adds to uncertainty about the economy. Philadelphia Fed President Patrick Harker said risks to the economy are rising as businesses and consumers become more cautious and inflationary pressures build. While his base case is for inflation to move slowly down to the central bank’s 2 percent target, Harker is growing more concerned that the decline in price growth “is at risk.”

Q4 Earnings Wrap: Through Friday, 495 members of the S&P 500 have released fiscal quarter results, with just over 74 percent beating expectations. Aggregate earnings for this group are up 13.5 percent from a year ago, solidly ahead of the 7.5 percent estimated growth rate on Dec. 31. On the sector level, communication services and consumer discretionary companies have posted the strongest growth, while energy and industrials have posted the weakest. Full year earnings estimates have been trending lower in recent weeks, although earnings are still forecast to grow by a still solid 9.9 percent pace.

Economic Roundup: On Friday, the Labor Department reported that total nonfarm payroll employment increased by 151,000 in February and the unemployment rate increased by 10 basis points to 4.1 percent. Both readings fell short when compared to consensus forecasts, which called for net monthly job gains of 160,000 and for the unemployment rate to remain flat at 4.0 percent. For the most part investors shrugged of the report as the measuring period didn’t capture the recent uptick in market volatility, federal government layoffs and the impact of tariffs. As such, this will put increased emphasis on the March report to get a better feel for how these issues are impacting the labor markets. In other labor market news, applications for unemployment benefits fell last week and returned to the muted levels seen at the start of the year, offering some relief after other reports pointed to worsening labor-market conditions. Initial claims decreased by 21,000 to 221,000 in the week ended March 1, lower than analysts anticipated. On the services side of the economy, activity expanded in February at a faster pace as resilient demand helped drive a measure of employment to a more than three-year high. The ISM’s gauge of services advanced to 53.5 from 52.8 a month earlier (readings above 50 signal expansion). The group’s index of services employment climbed for a third month to 53.9, the highest since December 2021. The survey also showed new orders growth accelerated in February.

Beige Book: The Fed’s so-called Beige Book report, which compiles anecdotes and commentary on business conditions in each of the 12 Fed districts, said economic activity rose “slightly” since mid-January though consumer spending edged lower. Consumer spending was lower on balance, with reports of solid demand for essential goods mixed with increased price sensitivity for discretionary items, particularly among lower-income shoppers. Prices, meanwhile, rose “moderately,” with several regions reporting faster price increases compared to the previous period. The Fed said “unusual weather conditions” in some areas weakened demand for leisure and hospitality.

Market Viewpoint: Despite recent market turbulence, which we believe is being driven more by fear than fundamentals, our favorable outlook on the equity market is unchanged and we continue to believe there is still money to be made over the course of this year. While headline uncertainty could lead to some additional downside risk over the intermediate to longer-term, it is things like the economy, earnings, and interest rates that drive stock prices. The good news is that the macroeconomic environment is expected to remain supportive in the coming quarters. The U.S. economy remains on firm footing, and while the pace of growth is slowing, it is not slow. The Fed is expected to continue easing policy and while the path forward could prove uneven, rates are likely to drift lower over the next year. Importantly, the earnings growth outlook remains strong. Consensus expectations from Bloomberg for S&P 500 earnings growth are 10 percent and 14.1 percent in 2025 and 2026, respectively. The combination of an accommodative Fed and brisk earnings growth creates a favorable backdrop for risk assets and should continue to drive the bull market. Still, with valuations elevated, earnings growth will likely drive performance, meaning that gains over the course of the year may be more modest compared to the past two years.

The Week Ahead: On the data front, the key release will be the consumer price index (CPI) report on Wednesday. According to Bloomberg data, month-over-month gains are expected to moderate for both the headline measure (+0.3 percent vs +0.5 percent in January) as well as core (+0.3 percent vs +0.4 percent). The producer price index (PPI) report will be released on Thursday. Apart from the inflation data, the focus will be on the University of Michigan’s consumer survey results for March on Friday amid swings in sentiment indexes as well as rising inflation expectations. Turning to politics, investors are expected to track progress on the funding deal ahead of the March 14 deadline to avoid government shutdown. On the tariff front, the United States is set to impose steel and aluminum tariffs of 25 percent on the European Union next Wednesday. On Monday, China is set to impose tariffs of up to 15 percent on various imports from the United States. Fourth quarter earnings season will continue to wind down, with just five members of the S&P 500 left to report results. Highlights include Oracle on Monday and Adobe on Wednesday. It will be a quiet week for Fedspeak as central bank members have entered into the quiet period ahead of the March 18–19 Fed meeting.

— By Michael Schwager, Chief Market Strategist, Managing Director

Definitions

The Dow Jones Industrial Average is a price-weighted average of 30 blue-chip stocks that are generally defined as the leaders in their industry. It has been a widely followed indicator of the stock market since October 1, 1928.

Wilshire 5000 Total Market Index^SM represents the broadest index for the U.S. equity market, measuring the performance of all U.S. equity securities with readily available price data. The index is comprised of virtually every stock that: the firm's headquarters are based in the U.S.; the stock is actively traded on a U.S. exchange; the stock has widely available pricing information (this disqualifies bulletin board, or over-the-counter stocks). The index is market cap weighted, meaning that the firms with the highest market value account for a larger portion of the index.

Standard and Poor's 500^© Index is a capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

The NASDAQ Composite Index is a broad-based capitalization-weighted index of stocks in all three NASDAQ tiers: Global Select, Global Market and Capital Market. The index was developed with a base level of 100 as of February 5, 1971.

This material contains opinions of the author, but not necessarily those of Guggenheim Partners, LLC or its subsidiaries. The opinions contained herein are subject to change without notice. Forward looking statements, estimates, and certain information contained herein are based upon proprietary and non-proprietary research and other sources. Information contained herein has been obtained from sources believed to be reliable, but are not assured as to accuracy. Past performance is not indicative of future results. There is neither representation nor warranty as to the current accuracy of, nor liability for, decisions based on such information. No part of this material may be reproduced or referred to in any form, without express written permission of Guggenheim Partners, LLC.