The year began with a shift in market dynamics. While last year ended on a high note, fueled by post-election momentum and hopes for tax cuts and deregulation under President Trump, the focus has now turned to trade policies and fiscal spending cuts. The U.S. stock market has entered a bull market correction, while international markets across the Atlantic have outperformed.
For the Federal Reserve, concerns have pivoted from disinflation and balanced labor market risks to growing fears of stagflation. Economic data presents a mixed picture—soft data continues to weaken, but hard data remains resilient, offering some hope for bullish investors. Meanwhile, earnings estimates have held steady despite rising economic uncertainty and a wave of earnings guidance cuts. It's a challenging environment, with no clear answers, and U.S. investors are flying blind through the trade turbulence. It’s a tariff-ic mess for sure.
Politicals – Fiscal Policies affecting investor sentiment
I appreciate how Jim Puplava recently highlighted the importance of investors following economic fundamentals, technical chart patterns, and political factors—specifically fiscal policies and geopolitical events that drive economic shifts and impact investor sentiment. I remember when we used to receive feedback from our podcast listeners urging us to avoid politics and focus solely on economics and charts. By now, it should be abundantly clear that fiscal policy plays a significant role in shaping investor confidence.
Take, for example, the surge in the stock market following President Trump’s election. Investors anticipated a continuation of pro-business policies—such as tax cuts and deregulation—that defined his first term. These initiatives were viewed as key drivers of economic expansion and corporate profitability, fueling bullish sentiment. The financial sector, in particular, outperformed on expectations of reduced investment restrictions and regulatory rollbacks. Similarly, cryptocurrencies gained momentum, buoyed by hopes that the administration would prioritize digital assets, promote a rational regulatory framework, and solidify their legitimacy in financial reserves. The election outcome sparked speculation and optimism across the markets.
Fast forward to 2025, and the investment landscape has been anything but favorable. Instead of a pro-market agenda centered on tax cuts and deregulation, the current administration has prioritized trade policies, tariffs, and spending cuts. The stock market correction began with tariff announcements, followed by counter-tariffs, with further retaliatory measures expected next week. Since Trump took office, a relentless stream of fiscal policy shifts—ranging from tariffs to budget cuts—has left investors grappling with uncertainty. And if there’s one thing markets despise, it’s uncertainty.
To summarize key U.S. tariff actions:
- Tariffs on Canada: Effective March 4th, 10% tariff on energy, 10% on potash, 25% on all other products.
- Tariffs on Mexico: Effective March 4th, 10% tariff on potash not under USMCA, 25% on all other products. Mexican President Sheinbaum has not announced counter-tariffs and is having “respectful dialogue” with Trump to resolve differences.
- Tariffs on China: Effective Feb 4th, 20% on all products.
- Tariffs on EU: 25% tariffs still to be determined but expected to be announced in April, with 200% tariff threatened on alcohol.
- Automobile Import Tariffs: On March 26, 2025, an executive order introduced a 25% tariff on all foreign-made cars and light trucks, including auto parts. This policy, effective April 3, intends to encourage domestic manufacturing and is projected to generate approximately $100 billion annually. However, it may lead to increased consumer costs and potential inflation.
- Tariffs on Aluminum and Steel Imports: Effective March 12th, revoking exemptions to aluminum tariffs and adding 25% tariff on steel imports for most countries to address national security and to encourage domestic production.
- Tariffs on Countries Importing Venezuelan Oil: An executive order signed on March 24, 2025, granted the Secretary of State the authority to impose a 25% tariff on imports from any country that directly or indirectly purchases Venezuelan oil. This measure, effective April 2, is set to expire one year after the last date on which the country imported Venezuelan oil. This appears mainly targeted at China.
Retaliatory measures by other countries:
- European Union (EU): In response to the U.S. tariffs on steel and aluminum, the EU announced counter-tariffs on $28 billion worth of U.S. goods, effective April 1. Targeted products include boats, bourbon, motorcycles, and various industrial and agricultural items. The EU is considering tariffs on U.S. digital services in response to recent auto tariffs from the US. The EU emphasized that while these measures are strong yet proportionate, they remain open to negotiations to avoid further economic strain.
- Canada: Following the U.S. tariffs, Canada implemented a 25% tariff on $155 billion worth of American goods. Additionally, Canadian Prime Minister Mark Carney engaged in diplomatic efforts with France and the UK, highlighting the strain in U.S.-Canadian relations
If you want to keep track of all the tariffs, and my source for the above information, ReedSmith has a good tariff tracker you can find here: ReedSmith's Trump 2.0 Tariff Tracker (last updated as of March 25th).
Tugging on investor sentiment with tariff news
Tariff announcements and counter-tariff responses have weighed heavily on investor sentiment, playing a significant role in driving the U.S. stock market’s recent correction and relief rally. As these trade tensions escalate, market volatility has followed suit, reflecting uncertainty about the long-term economic impact. Moreover, the situation remains fluid, with further developments expected in the coming months as the Trump Administration moves forward with its proposed tariffs and reciprocal measures.
On the upside, there have been small but notable improvements in investor sentiment, driven by hopes for a more strategic and measured approach to trade negotiations. Earlier this month, reports indicated that Commerce Secretary Howard Lutnick, a strong advocate of Trump’s tariffs, is inclined toward a more diplomatic stance and is “not thrilled” with Trump’s reactionary response to counter tariffs. His intervention helped de-escalate tensions with Canada, which had initially planned a 25% surcharge on electricity exports to Michigan, Minnesota, and New York in response to U.S. steel tariffs. Additionally, the stock market saw a rally on Monday following comments from President Trump suggesting that he “may give a lot of countries breaks” on the upcoming reciprocal tariffs.
While the market remains sensitive to ongoing tariff negotiations, signs of a more nuanced approach could provide some relief. However, investors should brace for continued fluctuations as trade policies unfold, with each new development carrying the potential to sway market sentiment in either direction. As global trade relationships continue to evolve, maintaining a cautious but flexible investment strategy will be crucial in navigating the uncertainty ahead.
Fiscal spending cuts
The Department of Government Efficiency (DOGE), led by Elon Musk under President Donald Trump’s administration has researched and found several instances of government waste and abuse citing research under the Biden Administration that found half a trillion dollars of wastage through Small Business Administration loans to 9-month-olds and Social Security checks to individuals that are deceased. The agency was established under executive order as a temporary organization until July 4th, 2026, and hopes to reduce federal expenditures by $1 trillion this year.
The organization has created a “Wall of Receipts” in which it transparently posts a combination of asset sales, contract/lease cancelations and renegotiations, fraud and improper payment deletion, grant cancellations, interest savings, programmatic changes, regulatory savings, and workforce reductions. You can find more information on the official website for DOGE here: https://doge.gov/savings. To be balanced, NPR reported this month that some of these claims have been inaccurate and have been overstated, but to be fair, the organization has worked quickly to correct most of these mistakes as the organization works out the kinks of its newly formed agency.
Legal challenges to the cuts and contracts violations are a big challenge to DOGE’s operations. Data privacy has been the primary concern. In response to lawsuits forming, a federal judge has placed a preliminary injunction blocking DOGE from accessing information at the Education Department, Treasury Department, and the Office of Personnel Management. A judge has found DOGE operatives using Treasury systems to halt USAID payments is likely unconstitutional.
The scope is broad and the concerns are many that these spending cuts will increase job losses, slow economic growth, and impair government functions in various areas affected by the cuts. It’s important to audit the government and find and eliminate wastage, but in the end, government expenditures are really a value system in which the bureaucracy places resources where it thinks it’s best used. A new administration from a different political party means implementing a new value system. This is also true for taxation views from both political parties.
Coupling spending cuts and job losses with rising prices from tariffs and stagflation is a word that is being used more and more to describe the current economic outlook by strategists and economists.
From Market Euphoria to Market Uncertainty
The stark contrast between the strong stock market performance in 2024 following Trump’s election results and the uncertain economic outlook in 2025 leaves investors with no clear answers. It’s important to note that investor sentiment is a driver in stock and bond performance. This sentiment change can show up in credit spreads and the price versus earnings ratio of the S&P 500. Piper Sandler’s Chief Investment Strategist, Michael Kantrowitz showed recently how events in the past several years shaped that sentiment in a chart I showed in my March 7th newsletter’s Chart of the Week. I want to show it again here as there’s been a clear drop in both credit spreads and the S&P 500’s P/E ratio because of tariff and fiscal spending cuts announced recently.
The compression in the P/E ratio happens as prices fall faster than earnings estimates. It will take the catalysts of “less feared” or a “more measured” approach to negotiations and tariffs with our trade partners that will be the factor needed to repair investor sentiment.
Divergence in US vs Foreign Equities
The same sentiment that has led to a correction in U.S. stocks over a tariff-induced rise in prices and spending cuts (stagflation) has led to a recalibration in portfolios allocations towards foreign peers as foreign governments increase spending to ween off dependency on the US for national security and as foreign central banks continue to support their economies by rate cuts.
China recently announced this week the issuance of 3.289 trillion-yuan worth of government bonds in Q1 of this year, the highest level on record according to Reuters on March 27th. China plans to increase its fiscal deficit ratio to between 3.5 to 4% issuing “ultra-long-term special treasury bonds, and focusing on supporting infrastructure, manufacturing technology transformation, and New Quality Productive Forces. On the Monetary side, policies will shift toward “moderate easing”, with anticipated interest rate cuts and reserve requirements ratio reductions to ease financing pressures on business” (China Briefing.com, March 10th).
The EU continues to spend its €750 billion launched Next Generation EU Recovery Plan earmarked for the period of 2021 to 2026 to promote green and digital transitions and investment in infrastructure, research and development. Germany announced on March 4th a complete overhaul of its government spending with a “new €500 billion infrastructure investment fund, an exemption from Germany’s “debt brake” rule on defense spending above 1% of GDP, and a rise in the net borrowing cap for federal states from 0% to 0.35% of GDP.” Vanguard Expert Insight, March 20. Monetary policy is also matching fiscal policy with the European Central Bank cutting rates to 2.5% which was announced on March 6th; however, it is the view of Vanguard that the ECB could change to a “noncommittal” tone in future policy meetings as a result of Germany’s new fiscal stance and due to tariff announcements.
2025 Outperformance of German DAX and French CAC 40 vs S&P 500
Vanguard calls the recent change in fiscal policy from Germany a “game changer” with Vanguard’s anticipation the recent rally could be more sustained. They further suggest that bond yields will likely remain volatile as a result of the changes and if the ECB makes any policy shifts as a result of these.
Soft vs Hard Econ Data
Chairman Jerome Powell recently pointed out the divergence between soft and hard economic data, stating at the recent March 19th press conference that “we do see solid hard data still and growth looks like it’s moderating a bit but still at a solid pace…unemployment 4.1%...job creation most recently at a healthy level…consumer spending moderating a bit but still at a solid pace…overall it’s a solid picture…the survey data (soft), both household and businesses show significant rise in uncertainty and significant concerns about downside risk…inflation has started to move up now we think partly in response to tariffs.” He also said there have been plenty of times where people feel pessimistic about the economy yet go out and buy a new car. He suggested it’s difficult to make a tie between soft data leading hard data, but that the Fed will be watching developments in hard data very closely.
Soft economic data typically refers to surveys and sentiment indicators that gauge expectations, confidence, and future outlooks. These include consumer confidence, business sentiment, and manufacturing surveys. Soft data can be volatile, subject to shifting moods and perceptions rather than hard, tangible economic output.
Hard economic data, on the other hand, refers to measurable, factual data such as Gross Domestic Product (GDP), employment figures, retail sales, industrial production, and inflation rates. These numbers are more concrete and less prone to sentiment shifts.
As Powell stated, hard labor data has been resilient. The most recent unemployment claims as of Thursday showed a decrease for the week ending March 22 of 1,000 to 224,000 claims. Continuing claims also decreased 25,000 to 1.856 million. This is a leading indicator for the job market and the data remains well off recessionary levels in the high 300k and 400k levels. Nonfarm payrolls for February were weaker than expected at 151k and did nothing to quell concerns over growth, but like Powell said, 4.1% unemployment is a solid figure.
While soft survey data has been weak, hard data may be lagging and playing catch up. Piper Sandler’s Chief Global Economist, Nancy Lazar, believes first quarter GDP is expected to decline sharply lower as a result of the trade gap near record wide metrics in February, which she believes will point towards a negative 7% hit to the calculation of GDP for trade. Given the inventory build many manufacturers and wholesalers have initiated ahead of tariffs, inventories could help to offset some of the damage, resulting in a net hit of negative 3.5% between the two. Together with their analysis of other data suggests an overall contraction to GDP of -2.0% for the quarter. This is in stark contrast to how GDP ended 2024, rising 4.5% at the end of the quarter, according to the latest revisions.
This concurs with the outlook of the Federal Reserve Bank of Atlanta. The Atlanta Fed has a GDP model they call GDPNow. They revise their estimates based on the economic data as it comes in. The latest estimate as of March 26, is a contraction of GDP by -1.8%, which is below the consensus outlook. The Federal Reserve recently published their Summary of Economic Projections and downgraded GDP growth for 2025 from 2.1% in December to 1.7% at their March 19th meeting last week.
This is all to say, that while sentiment has been hurt by the trade war, inflation expectations are higher, it’s not enough for the Fed put to come to the rescue in the form of lower rates. The Fed did announce a reduction in the monthly Treasury securities runoff from $25 billion to $5 billion starting April 1, while maintaining the $35 billion cap for agency mortgage-backed securities. So that was a step towards moderating its current quantitative tightening policy which shrinks the Fed’s balance sheet and extracts capital from the financial markets.
Earnings Season in Two Weeks
The earnings season will kick off in two weeks led by the banks JPMorgan Chase and Wells Fargo on Friday April 11. More financial sector companies to report on April 15th with Bank of America, Citigroup, and Morgan Stanley. Johnson & Johnson Monday, Abott Labs Tuesday, and United Health Thursday will kick off the health care sector, while American Express and Netflix announcing Thursday will shed some light on the consumer. More importantly, given the stock sell off for momentum plays in AI and technology will be Taiwan Semiconductor Manufacturing to announce on April 17th in which we should get a clearer picture on the impact of trade restrictions on chips as laid out by the Trump Administration as well as the impact of other tariffs.
According to the most recent Earnings Insight from FactSet on March 20th, the company anticipates earnings will grow 7.1% for the S&P 500 in the first quarter. This would be the seventh-straight quarter of growth if actual results are positive; however, as a result of earnings revisions during the quarter, the estimates have decreased since the start of the quarter. Based on estimates, FactSet believes Health Care and Information Technology is likely to lead the seven sectors projected to grow year-over-year while there are four sectors expected to show year-over-year declines in earnings growth led by Energy and Materials.
Of important note is the exposure companies have to trade wars and how much of their revenues come from overseas. This is especially the case for large companies in the S&P 500 with operations, stores, and sales abroad. FactSet recently showed this exposure in their recent earnings insight on March 20th, showing that S&P 500 aggregate geographic revenues derive 41% of their revenues to international sales. This is why you’d think small-cap companies who derive a bulk of their revenues within the U.S. might outperform large-cap, but unfortunately, that hasn’t been the case in 2025.
Conclusion
The U.S. stock market is struggling to find stability amid shifting economic policies, trade tensions, and concerns about stagflation. Investor sentiment has been impacted by a wave of fiscal policy decisions from the Trump administration to prioritize trade and spending cuts. Tariffs announced this quarter are triggering retaliatory measures from trade partners such as Canada, China, and the EU. Meanwhile, fiscal spending cuts, led by the newly established Department of Government Efficiency (DOGE), aim to reduce federal expenditures but have sparked legal challenges and concerns over economic slowdown. Sentiment will likely be repaired only by an improvement in trade or a “less-than-feared” outcome as we’ve seen for a week or only for a couple of days. Additionally, foreign markets, particularly in Europe, have outperformed U.S. equities due to increased fiscal spending and monetary easing.
The divergence between soft economic data, showing concerns for higher prices, and hard data, which remains resilient by moderate growth and resilient job market, has added to market volatility. With the Federal Reserve maintaining a cautious stance and GDP projections weakening, investors remain uncertain about the market's direction. The upcoming earnings season will provide further insight into corporate views on the impact of tariffs and spending cuts from the government that could weigh on future earnings guidance. It’s a market environment with turbulent trade, and oh what a tariff-ic mess we continue to be in.
Portfolio Adjustments
As an active portfolio manager, in February I adjusted my clients’ stock exposure from an overweight to a neutral stance that aligns with my clients’ benchmarks. I’ve also sold some momentum names for value-oriented stocks while using the correction as an opportunity to adjust my AI portfolio. If my outlook for a recession strengthens, I may reduce stock exposure further below the benchmark and increase allocations to government bonds. On February 28th, I advised my clients to reduce their stock exposure by 5% and increase government bonds by 5% in their self-managed retirement accounts versus their benchmarks.
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