When we published our Outlook 2025 only three months ago, we did not expect to be proven right in such a short period of time. Our most important predictions for the year included “rotation away from the Magnificent 7” with “reversion to the mean permeating the market landscape” and “heightened volatility” with “increasing odds for a meaningful pullback.” Further, we cited the propensity for negative surprises due to uncertain tariffs and immigration initiatives as a cause for concern.
In the wake of an increasingly uncertain economic environment ushered in by President Trump’s approach to tariffs and trade, the Dow Jones Industrial Average, S&P 500, and NASDAQ Composite are down -1.28%, -4.59% and -10.42% respectively for the first quarter. With the Mag 7 cohort tumbling 16% year to date, relative strength in the broader market is a testament to the rotation to the “other 493” we had anticipated.
With the S&P 500 having entered its first 10% correction since October 2023, the year-to-date numbers mask the steeper decline from the market’s mid-February record high. Meanwhile, the Mag 7 have penetrated the technical threshold of a “bear market” with their average 20% decline since December 2024. All told, the stock market suffered its worst quarter in three years, shedding a remarkable $5 trillion in market capitalization.
Corrections are normal and very healthy, with 10% drops in the S&P 500 occurring on average every other year. While bear market declines north of 20% are far less frequent, they are always more painful. Whether the overall stock market follows the Mag 7 from a corrective phase to a bear market remains to be seen and will largely depend on how Trump’s tariff policies unfold in the coming weeks and months. As difficult as heightened market volatility may be, corrections are a necessary cleansing mechanism that helps root out speculation and offers opportunities for long-term investors. To be sure, investor sentiment is already exceedingly pessimistic. The percentage of bearish investors in the AAII survey has topped 50% for five consecutive weeks, the longest stretch since the last bear market bottom in October 2022. Excessive pessimism and an incredible $7 trillion in money market dry powder stir the contrarian in us.
With 70% of the U.S. economy based on consumer spending, recent softening in consumer sentiment to levels not seen since late 2022 and the potential negative “wealth effect” from stock market losses may point to corresponding economic weakness. A CNBC survey of 14 economists sees GDP decelerating to a scant 0.3% in the first quarter from 2.3% in the fourth quarter of 2024. While it is surprising that the supertanker U.S. economy would shift so suddenly barring a significant shock, we cannot rule out the increasing odds of a recession.
With the economy cooling and inflation still running above the Fed’s 2% target, members of the FOMC are increasingly concerned as much about the risk of rising unemployment as they are about rising inflation. The Federal Reserve maintained the Fed Funds rate at a range between 4.25% and 4.5% at its recent meeting and continues to project two 25-basis point cuts in 2025 and two 25-basis point cuts in 2026. Importantly, the Fed announced that it would slow the pace of reducing its balance sheet. Instead of allowing up to $25 billion in Treasuries to mature every month without reinvesting the proceeds, the Fed will reduce monthly rollover to only $5 billion. This sharp reduction in Quantitative Tightening should help keep a lid on interest rates. The drumbeat for the Fed to cut interest rates will only grow louder as tariff uncertainty lingers.
With so many tariff variables and with so much economic uncertainty, it seems appropriate to build a theoretical framework for what the White House may wish to accomplish. For that, it is helpful to have a short history lesson. Crafted in 1944, the Bretton Woods Agreement created a new global financial system with fixed exchange rates pegged to the U.S. dollar and gold, the International Monetary Fund, and the World Bank, to foster economic stability and global cooperation after the devastation of WWII. Instead of occupying our conquered wartime enemies, the U.S. led the charge for increased global trade under the protection of the U.S. Navy, ushering in unprecedented globalization and economic interdependence. Although the gold standard was abandoned by President Nixon in 1971 due to the inability of the U.S. to convert foreign-held dollars for a limited supply of gold, the legacy of Bretton Woods and secular globalization marched on.
While globalization brought about prosperity and a rising middle class throughout much of the developing world, it also “hallowed out” manufacturing capacity in the United States in favor of cheap overseas labor. The U.S. Dollar became the new gold standard for global trade, creating new imbalances that were “solved” by currency manipulation and increased use of tariff policy by foreign countries to better compete with the U.S. In addition, in part to defend the world order created under Bretton Woods, the U.S. military served as a watchdog for the world.
What we are observing is the end of Bretton Woods and accelerated deglobalization. The United States is truly unique in its exceptionalism characterized by unparalleled consumer wealth, robust banking system, world-class corporations, leading advancement in technology and medicine, military supremacy, geography that provides natural protective boundaries, waterways that support intra-state commerce, energy and food independence, favorable demographics supported by immigration, and the dollar holding the place as the world’s reserve currency. In the new deglobalized order, the United States is the singular nation able to sustain such exceptionalism independent of other countries. American isolation will require other countries to play by our rules or risk losing access to the purchasing power of the American consumer and protection of the U.S. military.
President Trump seems focused on accelerating this new world order under the threat of so-called “reciprocal” tariffs, intended to level the playing field and restore/reshore U.S. manufacturing capacity. In addition, he seems intent on distributing the cost of military spending so that our allies pay their fair share to defend themselves. Trump has also introduced the idea of “secondary” tariffs on any country that purchases oil from Venezuela or Russia, potentially an interesting use of tariff policy to pressure those least friendly to U.S. interests. If tariffs are truly tactical and intended as part of an overarching negotiating strategy, one very bullish outcome is that tariffs are reduced or even eliminated.
If Trump’s tariff tactics fail to sway our trading partners and enemies alike, it will likely take many months before we know the ultimate impact on the U.S. economy and corporate earnings. Under this scenario, corporate rerouting of supply chains and manufacturing capacity will be messy, and we foresee an inevitable profit crunch. However, if Trump is successful in rewriting the Bretton Woods playbook for a world order more closely aligned with U.S. interests, the U.S. economy and Corporate America stand to reap substantial benefits.
Even prior to Trump’s recent election, we had already positioned our equity exposure to thrive in anticipation of this new deglobalized era. While we would not be surprised to see continued volatility in the months ahead, we are confident that our stable of high-quality blue-chips with proven records of steady earnings and consistent dividend growth will serve our clients especially well if such volatility persists.
