FRS March Insights
| Here are a few observations about what occurred across the public markets during the month: Market Update: A Gradual Cooldown, Not a Collapse As spring approaches and temperatures rise, the U.S. economy is beginning to cool. After a strong post-pandemic recovery, followed by steady growth driven by resilient consumer spending, economic expansion now appears to be settling back toward its pre-pandemic trend of around 2% growth. Recent confidence surveys suggest consumers may pull back slightly, and job opportunities are becoming somewhat scarcer. However, overall financial health remains strong—particularly among higher-income households, which drive much of the spending. In fact, the top 10% of earners now account for roughly half of all consumer expenditures. A gradual slowdown may actually be a positive for markets, as it helps ease inflationary pressures and increases the likelihood of Federal Reserve (Fed) rate cuts. We’re looking at a modest cooldown, not a sharp downturn. While concerns over weak economic data persist, the bigger risk may be a reacceleration of inflation rather than a recession. A measured slowdown from last year’s unsustainable 3% growth rate should help keep rate cuts in play while preventing major spikes in interest rates that could weigh on stock and bond returns. With bond yields remaining attractive despite a decline this year, 2025 is shaping up to be a strong year for fixed-income investors. Meanwhile, stocks have had a sluggish start due to tariff concerns, but cooling inflation and stable yields are key elements supporting the bull case. Shifting Market Leadership and the Earnings Outlook Corporate earnings remain a bright spot. In the fourth quarter, S&P 500 companies delivered over 18% year-over-year earnings per share growth. While expectations for double-digit earnings gains in 2025 may be ambitious—especially if tariffs remain in place and trigger retaliation—the overall outlook remains supportive of stock market gains. This year has also brought a shift in market leadership. The “Magnificent Seven” tech stocks have declined by about 9% year-to-date, while the broader S&P 500 has held up slightly better. As skepticism grows around the staying power of AI-fueled mega-cap tech rallies, investors are rotating into other areas—a natural evolution in a maturing bull market. Tariffs remain a near-term risk. While there is potential for exemptions, reductions, or reversals, some tariffs will likely remain in place, and retaliatory measures from trading partners could weigh on U.S. economic growth. Price increases in certain sectors—such as autos, food and beverages, and parts of retail—could make the Fed’s job more difficult. Importers in these industries may feel some profit pressure, but overall, corporate America’s AI-driven earnings momentum should remain intact. Portfolio Updates In the second half of February, we made strategic adjustments to our growth-oriented portfolios by adding exposure to emerging markets and commodities. Additionally, we slightly reduced our technology holdings, reallocating toward an equal-weighted S&P 500 approach and companies with strong cash flow. For tax-efficient portfolios, we have increased our exposure to high-yield municipal bonds. If you have any questions regarding these adjustments, please feel free to contact us. March Highlights March brings more than just St. Patrick’s Day, March Madness, later sunsets, and baseball’s Opening Day—it also marks birthdays for Ambler Selway and Jen Read in the first week of the month. If you have questions or feedback, please let us know. |