May 2025 Market Commentary

Positive trade policy discussions lifted U.S. equity markets in the closing weeks of April but did little to improve investor sentiment. Professional investors turn the most bearish in 30 years, while Wall Street strategists reined in optimistic corporate profit and economic outlooks. From Wall Street to Main Street, everyone is intently focused on trade deals. First quarter corporate profits were strong, but investors wonder if they can continue.

U.S. equity markets began the month with a 10% decline but made a strong recovery to end April on a relatively high note. The NASDAQ Composite Index churned out a positive monthly return, while non-U.S. equity markets maintained year-to-date positive momentum. Technology and Consumer Staples were the only sectors to generate positive performance in April, while the Energy sector, down 14%, suffered its worst monthly performance in three years.

"The market may be crazy, but that doesn't make you a psychiatrist."

-Meir Statman

A Remarkable Reset

U.S. stocks ended last week on an incredible high, marking their longest winning streak in two decades. The S&P 500 Index posted positive performance for the ninth consecutive day, closing above the level seen on Liberation Day (April 2), a notable showcase of strong market momentum. The recent upward trend was likely driven by President Trump's more conciliatory stance on the U.S.-China trade war, and improved trade talks with India. Last week a spokesman for China's Commerce Ministry said China was currently evaluating proposals by the U.S. to begin trade talks, a positive shift that may lead to formalized negotiations. India is one of several countries actively negotiating with the U.S. to avoid high import duties. As the ninth largest source of U.S. imports, with goods valued at approximately $87 billion in 2024, India is poised to potentially become the first prime trading partner to finalize a deal. This development could significantly enhance trade relations and provide a boost to both economies, while also bringing much-needed clarity to the complex tariff situation.

Where Did the Bulls Go?

Despite U.S. equity markets staging a double-digit percentage recovery from the early April lows, America's money managers are more bearish today than they have been in nearly 30 years, according to Barron's magazine latest Big Money poll of professional investors.[i] About one-third of survey respondents are bearish on the outlook for stocks over the next 12 months -the highest percentage since 1997. Just 26% of respondents call themselves bullish, down from 50% last fall. It's no surprise that the change in sentiment is driven by worries about the impact of tariffs on corporate earnings and the broader economy. Investor confidence was already shaky heading into the new year, with many money managers concerned that equity valuations were unsustainably high.

This uncertainty was compounded in late January when China's DeepSeek unveiled an AI model that was more efficient and significantly cheaper than U.S. models, disturbing focused bets on AI technology beneficiaries. Overall, the combination of high valuations, a deflating AI investment theme, and a potential global trade war created a challenging environment for U.S. equity markets.

Wall Street's Weakened Outlook

Wall Street strategists and economists are also getting more bearish. Deutsche Bank's chief global strategist became the 12^th strategist tracked by Yahoo Finance to cut an S&P 500 Index target due to tariff uncertainty.

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Strategists are scaling back their bullish earnings growth expectations due to potentially higher prices on goods and persistent policy uncertainty. Deutsche Bank believes these headwinds may reduce S&P 500 Index earnings to $240 a share, down from the bank's prior forecast of $282 a share. On the other hand, Wells Fargo expects the S&P 500 Index to rally to 7,007 by year end, fueled by multiple Federal Reserve rate cuts and a favorable regulatory environment. Although predictions are varied, we anticipate that corporate earnings and commentary will eventually provide the clarity needed.

Earnings Notes and Notables

Not surprisingly, U.S. corporate executives are highly focused on tariffs, as highlighted by their remarks during the ongoing first-quarter earnings season. Management commentary has generally been cautiously optimistic, but it's noteworthy to highlight the contrasting perspectives: Evan Greenberg of Chubb's pessimistic outlook versus Ryan McInerney of Visa's more bullish view.

"There is currently a great deal of uncertainty and confusion surrounding our government's approach to trade, and it's impacting business and consumer confidence as well as our image abroad. The odds of recession have risen substantially, and higher inflation appears all but certain; to what degree is an open question. We have competing priorities between our stated trade, economic and fiscal objectives, and coherence of policy has yet to emerge. I hope we can reach agreements on trade, reduce or eliminate tariffs and reconcile our priorities quickly."

-Greenberg, Chairman & CEO, Chubb

"…in terms of spending, it remains strong and resilient. You add to that just looking in the U.S., employment remains strong. Wage growth remains steady.  Inflation is moderate. Consumer balance sheets remain relatively healthy. So we're kind of balancing the uncertainty that we all have with the facts. And the facts show a lot of resiliency in what we're seeing."

-McInerney, CEO, Visa

About three-quarters of the S&P 500 Index companies reported first-quarter earnings and the aggregate results are good. Year-over-year earnings per share growth is 12%, marking the second consecutive quarter of double-digit growth, and the seventh consecutive quarter of year-over-year earnings growth. The blended year-over-year revenue growth rate is slightly below 5%, less than the 5-year average growth rate of 7%, but also marks the 18^th consecutive quarter of revenue growth for the index. Despite the angst and anxiety caused by trade policy uncertainty, corporate earnings remain strong.

Economic Indicators Tick Down

The latest U.S. GDP report for Q1 2025 reveals a contraction of 0.3%, down from growth of 2.4% in the final three months of 2024, and marking the first economic decline since early 2022. This downturn is primarily attributed to a 41.3% surge in imports as businesses accelerated purchases ahead of President Trump's impending tariffs, leading to a record-high trade deficit.  Imports took more than five percentage points off the headline reading. In light of the GDP contraction, several institutions have revised their growth forecasts downward. Notably, the Atlanta Fed revised down their Q2 annualized GDP rate from 2.4% to 1.1%, and Goldman Sachs now expects the U.S. economy to grow by 1.2% in 2025, down from their prior estimate of 1.8%. Despite the overall cautious outlook, some strategists remain optimistic about consumer spending and business investment. State Street Global Advisors, for instance, maintains a more upbeat forecast of 1.7% growth this year along with their "no recession" call.

Employment Numbers Remain Strong

The U.S. economy added 177,00 jobs in April, beating expectations of 138,000, according to the Bureau of Labor Statistics. The unemployment rate was unchanged month-over-month at 4.2%. In fact, the unemployment rate has remained in a narrow range of 4.0% to 4.2% since May 2024.

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Most sectors saw a continued upward trend in employment. Healthcare represented a large portion of the employment increases for the month, adding 51,000 jobs in April. The public sector was a notable exception to the positive report with federal employment down 9,000 last month, bringing the total reduction in workforce to 26,000 since January. Government employees on paid leave or receiving ongoing severance pay are considered employed in the data.

The labor market continues to show strength despite uncertainties in trade policy and market volatility. While there were net downward revisions of 58,000 to the prior two months of job gains, the three-month average increased to 155,000 in April. Given the stable state of the labor market, we anticipate the Federal Reserve will take no action with interest rates this week following their rate-setting meeting.

Connecting the Dots

Navigating the mixed messages is challenging. While we are heartened by the resilience of corporate earnings and the labor market, we recognize that the full impact of the U.S. trade policy on the global economy remains largely unknown. At present, tariffs are expected to increase by $300 billion, or about 1% of the U.S. economy.  The added revenues may lower the U.S. budget deficit (projected to reach $1.9 trillion this year) but the economic disruption could be meaningful.

Confronted with higher prices or reduced availability of goods, consumers may cut back on spending. This decrease in spending can lead to lower tax revenues and increased pressure on corporate profits. When companies face lower profits due to decreased consumer spending, higher costs, or other economic pressures, they often need to cut expenses to maintain financial stability. Companies may implement various strategies such as reducing investments, cutting back production, and laying off employees. 

What follows is increased unemployment, decreased consumer spending, and further profit declines. As this cycle continues, it could lead to a broader economic contraction and a prolonged economic downturn.

Looking Ahead

A month has passed since Liberation Day, but trade policy clarity remains elusive. Although the Trump administration has implemented policies aimed at bolstering the U.S. economy through enhanced manufacturing, innovation, and competitiveness, the widespread tariffs are causing noticeable economic disruptions and are raising the probability of a U.S. recession. The current trade war, particularly between the U.S. and China, is not expected to end definitively soon. However, the White House insists it can get 90 trade deals done in 90 days.

The promise of potential trade agreements has recently restored investor confidence and raised hopes that we might avoid the worst-case fallout from the trade war. Nevertheless, we expect consumers will face higher prices, shortages of goods and empty store shelves in the near future.

For investors, it's crucial to understand that the stock and bond markets are forward-looking mechanisms. Asset prices are shaped by investor expectations about future economic conditions.  If trade policy uncertainty lingers, market volatility will likely remain elevated, with no clear market direction building. If trade policy clarity develops, we expect better market outcomes.

As we stated last month, we contend that focusing on long-term fundamentals and eliminating emotions from investment decisions are essential steps for reaching long-term financial goals. We continue to assess market opportunities and portfolio positioning and will make changes when appropriate.

We appreciate your confidence and support and encourage you to reach out to an Old Point Wealth Management team member with any questions.