Tariff Uncertainty Keeps Investors Close to the Sidelines

Performance for Week Ending 2.7.2025:

The Dow Jones Industrial Average (Dow) fell 0.5 percent, the Standard & Poor’s 500 Index (S&P 500) lost 0.2 percent, and the Nasdaq Composite Index (Nasdaq) finished down 0.5 percent. Sector breadth was mixed, with six of the S&P sector groups closing higher and five closing lower. The consumer staples sector (+1.6 percent) was the best performer, while the consumer discretionary (-3.6 percent) was the weakest.

*See below for Index Definitions

MARKET OBSERVATIONS: 2.3.2025  – 2.7.2025

The S&P 500 finished the week little changed as investors digested the threat of tariffs and mixed economic and earnings reports. For a second straight Monday, markets started the week with a sharp drawdown, this time driven by President Trump’s announcement of sweeping trade tariffs on our three largest trade partners. However, most of the initial losses were recouped after Trump agreed to delay the 25 percent tariffs on Canada and Mexico for a month after both committed to taking tougher measures to combat migration and drug trafficking at the border. China was also hit with a 10 percent levy and was quick to retaliate with 15 percent tariffs. However, China’s response was viewed as very measured as it only applied to a very small basket of American products. On Friday, Trump announced plans to unveil reciprocal tariffs in the weak ahead on all countries that currently impose tariffs on U.S. goods. In the announcement, Trump stated “they charge us, we charge them.” Stay tuned.

On Friday, the Labor Department reported that nonfarm payrolls during January expanded by 143,000, well short of the 175,000 estimated by economists. Despite the shortfall, the three-month moving average rose to 237,000, reflecting upward revisions to the prior two months’ worth of data. The unemployment rate dipped to 4.0 percent from 4.1 percent in December. Somewhat worrisome for inflation watchers was the hotter than expected rise in average hourly earnings The report showed wages grew by 0.5 percent in January and by 4.1 percent from a year ago. The mixed, but overall solid report, should leave the Federal Reserve (Fed) feeling comfortable that it hit the pause button on lowering interest rates as it assesses the path of inflation and evaluates the impact of Trump Administration policies, particularly tariffs, on inflation. According to Bloomberg’s World Interest Rate probability tool, fed fund futures markets are discounting a 82 percent probability the Fed will cut rates at the July Federal Open Market Committee meeting and a total of 37 basis points of reduction over the course of the entire year.

Fed Speak: The overriding theme of last week’s batch of Fed Speak was its desire to be patient. Boston Fed President Susan Collins said the U.S. central bank is unlikely to react to the impact of tariffs on prices so long as officials don’t see signals of higher, persistent inflation. Her colleague in Atlanta, Raphael Bostic, said he wants to wait “a while” before cutting interest rates again following last year’s reductions amid uncertainty over where the U.S. economy is headed in 2025. Chicago Fed President Austan Goolsbee said that while fiscal policy uncertainty may lead to fewer rate cuts, he still sees some reductions over the next 18 months. Dallas Fed President Lorie Logan said interest rates may already be near a neutral level, potentially obviating the need for further cuts even if inflation continues to cool. Richmond Fed President Thomas Barkin joined the chorus, saying central bank officials need more time to understand where the U.S. economy and inflation are headed amid elevated uncertainty about President Trump’s policies, strengthening expectations for rates to remain on hold.

Economic Roundup: Growth at service providers softened at the start of the year as a measure of orders fell to a seven-month low, indicating a slight loss of momentum in the largest part of the economy. The ISM’s gauge of services slipped to 52.8 in January from 54 at the end of the 2024. A gauge of new orders placed with service providers declined to the lowest level since June, marking the third month in the last four of cooler demand growth. Meanwhile, factory activity expanded last month for the first time since 2022 as orders ramped up and production quickened, pointing to a brighter manufacturing outlook. The ISM’s gauge rose in January to 50.9, the highest since September 2022. Elsewhere, employment at U.S. companies picked up in January by more than forecast, highlighting resilient job growth despite mounting uncertainty. According to ADP Research Institute data, private payrolls rose by 183,000 last month following an upwardly revised 176,000 gain in December. Job growth was concentrated in the service sector, led by trade and transportation and leisure and hospitality industries. Within goods-producing industries, construction and mining employment also rose, while manufacturing employment declined.

Q4 Earnings: Through Friday, 308 members of the S&P 500 have released fiscal quarter results with nearly 77 percent beating expectations. Aggregate earnings for this group are up 12.6 percent, modestly ahead of the 10 percent projected growth rate for the overall quarter. On the sector level, consumer discretionary and communication services companies have posted the strongest growth, while energy and materials have posted the weakest. Earnings season will begin to wind down with 74 members of the S&P scheduled to report. Amongst these will be Coca-Cola, DuPont, Applied Materials, Deere, and Cisco Systems.

Market Viewpoint: While the market is off to a solid start, February seasonals could come into play. Over the past 25 years, the S&P has produced an average loss of about 0.5 percent during February, the second-worst month of the year behind September. While seasonals and headline uncertainty could lead to some near-term volatility, over the intermediate to longer-term, fundamentals—the economy, earnings, and interest rates—are what drive stock prices. The good news is that the macro environment is expected to remain supportive in the coming quarters. The U.S. economy remains on firm footing, with minimal risk of a near-term recession. The Fed is easing 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 10.4 percent and 14.0 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: The focal point in the week ahead will be the semiannual testimonies by Fed Chair Powell to the Senate Banking Committee (Tuesday) and the House Financial Services Committee (Wednesday). Outside of Powell, five other members of the Fed are scheduled to speak throughout the week. On the data front, the consumer price index (CPI) report for January will be reported on Wednesday. According to Bloomberg, economists expect month-over-month growth for headline CPI to come in at +0.3%, down from +0.4% in December, but growth in the core measure is seen accelerating to +0.3% from +0.2% in December. On Friday, updates on economic activity will come from the retail sales and industrial production reports. Earnings season will begin to wind down this week with 74 members of the S&P 500 scheduled to report.

— 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.