Market Perspective - Spring 2025

Guide to the markets

Sifting through financial information online is becoming quite onerous with so many opinions out there, so we've consolidated what we believe to be informative and insightful into one Market Commentary.

The U.S. economy (the largest economy in the world and still our most significant trading partner) entered 2025 with lingering momentum, but early-year developments have rattled markets and raised questions about the sustainability of growth. A combination of weakening consumer activity, deteriorating sentiment, and volatile policy developments—particularly tariffs—has clouded the outlook. Although payrolls continue to grow and earnings came in strong to close out 2024, cracks are beginning to form. Consumer spending, the cornerstone of GDP, has downshifted following a robust fourth quarter. Inflation, meanwhile, is proving sticky, rising off its lows last fall and prompting the Federal Reserve to hold rates steady. While the job market remains tight by historical standards, signs of normalization are becoming more evident. Slowing immigration and restrictive policy shifts may compound labor shortages, creating upward wage pressures at a time when companies are already contending with rising input costs.

Fiscal and trade policy remain central variables in this environment. The Trump administration's intent to extend the TCJA, tighten immigration, and pursue an aggressive tariff agenda has added complexity to an already uncertain macro landscape. While tariffs may be politically expedient, they also risk exacerbating inflation and impairing growth via higher costs and potential retaliation. The federal budget picture is similarly strained. Proposals to offset tax cuts with tariffs or minor spending reductions appear insufficient to meaningfully rein in deficits, which are projected to rise sharply over the next decade. All of this puts the Federal Reserve in a difficult position: the desire to ease policy and support growth is at odds with the prospect of fiscal stimulus and protectionism rekindling inflation. Markets currently price in rate cuts, but the Fed’s path remains data-dependent and clouded by political noise.

Meanwhile, markets are navigating these crosscurrents with caution. Equity valuations remain elevated, particularly among the “Magnificent 7,” which have become increasingly susceptible to downside pressure amid policy shifts and stretched expectations. While S&P 500 earnings growth remains solid, investor tolerance for missed expectations is low. International markets have staged a surprising comeback, propelled by sector-specific catalysts and more attractive valuations, challenging the long-standing U.S. equity dominance. In fixed income, tight credit spreads suggest complacency, but the all-in yields are attractive for those selective in their approach. Ultimately, this is a market where discipline and diversification matter. Investors should avoid concentration risk, look for value across global sectors and asset classes, and remain nimble as the intersection of politics, policy, and economic fundamentals continues to drive volatility.

I have included below an economic & market update from J.P. Morgan Asset Management that I would like to share. This Guide to the Markets provides concise insights into economic trends globally, emphasizing growth, employment, and inflation. The commentary, and its many supporting charts, are presented by JP Morgan's Chief Global Strategist Dr. David Kelly, and they highlight the major themes and concerns impacting investors today.

From JP Morgan’s Dr. David Kelly:

The U.S. economy entered 2025 with solid momentum. However, tariff whiplash, an equity market correction and weakening economic data have sparked fears of a possible recession and resurgent inflation. Businesses have continued to expand payrolls at a healthy, albeit slower, pace, while consumers have pared back spending. Moving forward, what matters most is whether the weakness in consumer and business sentiment persists, intensifies and translates into a further slowdown in spending activity.

Inflation eased slightly in February but has trended higher since last September. This, in conjunction with policy uncertainty, prompted the Federal Reserve to hold rates steady during the first quarter. Interest rate volatility has remained a feature of the bond market and will likely remain elevated until the policy outlook clears. Across equities, a sharp sell-off in the Magnificent 7 stocks has dragged the S&P 500 into correction territory from all-time highs set in February. Elsewhere, structural factors and shifts in fiscal policy have propelled European and Chinese markets ahead of the U.S. despite mounting trade tensions. That said, it remains unclear whether this momentum can be sustained.

Until policy uncertainty turns to policy consistency, risks to both the economy and markets remain. Investors should remember the basics in times like these. Rebalancing can help right-size portfolio exposures away from the most concentrated and vulnerable parts of the market, while investors can use pullbacks to access quality companies trading at valuations that seemed unattainable just months ago. More broadly, exposure to bonds, international markets and alternatives can help investors play defense in portfolios during times of stress.

In this Guide, we assess the recent performance of the markets and economy, considering trends in growth, jobs and inflation and how policies proposed by the Trump administration could impact the path forward. This is followed by comments on monetary policy and finally, a discussion of the global opportunity set across stocks, bonds and alternative assets.

Coming into the new year, the U.S. economy looked strong, although momentum appears to have faded during the first quarter. To understand why economic activity has been so resilient, why it has slowed and where it is headed, we can analyze its different components.

The chart above offers a closer look at the key drivers behind recent GDP growth. Given that consumption accounts for almost 70% of the U.S. economy, it’s no surprise that the health of the economy is closely tied to that of the consumer. Supported by impressive gains in household wealth and 22 months of positive real wage growth, consumer spending has powered the economy forward, rising 4.2% during the fourth quarter.

Business fixed investment slowed after a string of strong prints, likely reflecting the lagged impact of higher rates, while residential fixed investment improved after two straight quarters of declines. The recent decline in mortgage rates and suppressed level of housing starts in 2024 suggests there is some room for revival in the housing market, but a sudden plunge in immigration could impede housing demand and building activity moving forward. Government spending has helped boost growth in recent quarters. That said, budget cutbacks could limit any meaningful support from federal or state and local government spending in the months ahead.

Policy uncertainty is casting a fog on the economic outlook. Recent data have shown a huge spike in imports, likely driven by businesses trying to front-run tariffs. Should imports remain elevated, it is possible that we get a negative print on 1st Quarter 2025 growth due to a drag from net exports. On top of that, weaker vehicle and retail sales through February point to a sharp slowdown in consumer spending from its booming 4th Quarter pace, while consumer confidence recently fell to multi-year lows. With policy uncertainty weighing on consumer and business sentiment, it is clear the economy has slipped a gear. That said, it is unclear if this slowdown is the start of a moderation back to trend growth, or the beginning of something more sinister.

The unemployment rate has stabilized near 4% for the better part of the last year. At 4.1% in February, it is meaningfully above its cycle low of 3.4% set in April 2023, but it is still lower than it has been almost 90% of the time over the past 50 years. Importantly, we view last year’s rise in the unemployment rate as a normalization of an economy operating above full employment.

As this year progresses, job growth could slow alongside economic activity but should remain positive. Layoffs have remained low, but any meaningful increase could pressure unemployment higher, although slower labor force growth due to more restrictive immigration policies could help offset this. In fact, if economic activity holds steady, unemployment might even drift lower over the course of the year.

Loosening labor market slack has allowed wage growth to moderate. After peaking at 7.0% in March 2022, wage growth has slowed back to trend with wages for private production and non-supervisory workers rising 4.1% year over year in February, just above the 50-year average. While slower immigration could put upward pressure on wages, sustained strong productivity gains should help limit any pass-through to inflation.

S&P 500 earnings grew 10% in 2024, capped off by an impressive 4th Quarter 2024 earnings season that saw earnings rise roughly 18% year over year and 5% quarter over quarter. Margins were the key driver here, contributing over 13 percentage points to overall growth. Beneath the surface, earnings continued to broaden, with S&P 500 ex-Magnificent 7 earnings rising 15% year over year vs. 31% for the Magnificent 7. In fact, 10 of the 11 S&P sectors contributed positively to earnings growth, led by financials. This trend should continue in 2025.

Analysts are projecting even stronger growth of 11% and 14% in 2025 and 2026, respectively. However, earnings are cyclical, and compared to the long-term average of 7.3%, these estimates seem too rosy, particularly given our expectation for slowing nominal growth. Normalizing GDP growth could limit revenue growth while rising input costs from tariffs could pressure margins despite corporate tax cuts, complicating companies’ efforts to beat expectations.

Against a backdrop of increased uncertainty, markets are already sensitive. Companies that fail to meet expectations may be punished more than usual. In times like these, investors can use active management to play defense in portfolios. This involves limiting exposure to companies burdened by elevated valuations and expectations, while focusing on underappreciated companies that are less susceptible to market sell-offs.

Inflation, while still well below its cycle peak, has accelerated in recent months. Headline CPI came in better than expected in February, rising 2.8% year over year compared to 3% in January. That said, it remains well above last September’s 2.4% print. We still believe that underlying price pressures are easing, but come spring, the effects of tariffs could push inflation higher.

Core goods prices were a steady source of deflation throughout 2024. In recent months, however, prices have moved higher on a sequential basis. New and used vehicles are largely to blame, with prices likely being pressured by increased replacement demand following recent hurricanes and wildfires. On the more volatile components, energy and food inflation have been running hotter recently, although both eased in February. With tariffs now having been imposed, all these categories could see prices rise meaningfully in the months ahead.

Elsewhere, shelter and auto insurance have remained key contributors to inflation. Shelter accounts for over a third of the CPI basket and, while showing signs of easing recently, has held stubbornly above its pre-pandemic trend. That said, real-time measures of market rent point to more normal levels of shelter inflation ahead. Auto insurance has backed off but still rose 11.8% year over year in February. Fortunately, as last year’s rollover in vehicle prices feeds through the data, this trend lower should continue.

While progress on disinflation has been encouraging, the last leg down to 2% could prove more difficult due to tariffs. In fact, based on what we know about tariffs so far, inflation at or above 3% by the end of the year is not out of the question.

Over time, economic globalization has led to increasingly relaxed trade policies. Indeed, the average tariff rate on U.S. goods imports has steadily fallen since the 1930s. However, geopolitical tensions and supply chain snarls induced by COVID-19 have prompted a re-evaluation of open trade policies. With promises to protect American businesses and address unfair trade practices, tariffs sit at the center of the Trump administration’s policy agenda.

Tariff headlines are changing every day and tracking them can be difficult. Considering the tariffs that were already in effect, we estimate the current average tariff rate on U.S. imports to be 6.4%, up from 2.3% in 2024 and the highest since the early 70’s. Admittedly, U.S. trade policy remains highly uncertain, and it is unclear what tariffs will be implemented permanently, and which will be used primarily as a negotiation tool.

Regardless, tariffs have risen and are likely to rise further, under the new administration.

Beyond discouraging imports, tariffs can have negative unintended consequences. Tariffs could lead to higher inflation and trigger retaliation, reducing the demand for U.S. exports. Overall, aggressive tariffs are adding even more uncertainty to an already foggy economic outlook, complicating the Federal Reserve’s path forward.

The labor market has normalized from its post-pandemic boom, but job growth has settled into a relatively healthy pace. That said, the Trump administration has expressed its intent to meaningfully reduce immigration, which could have meaningful implications for the labor market in 2025 and beyond.

After falling sharply during the pandemic, labor supply in the U.S. staged an impressive recovery, largely due to increased immigration. In fact, of the roughly 10.6 million individuals that joined the labor force from January 2021 to January 2025, 54% of them were born outside the U.S. With this surge in foreign-born workers, employers were able to fill open job openings without applying upward pressure to wages, helping to explain why strong job creation hasn’t sparked higher inflation. However, restrictive immigration policies could hinder labor force growth, especially given weak domestic demographics in the U.S., and potentially lead to higher inflation through higher wages and slower growth. The impacts of these policies can already be seen. Southwest land border encounters plunged to under 12,000 in February, compared to an average of roughly 100,000 per month in the fourth quarter of 2024 and over 250,000 per month in the fourth quarter of 2023.

Separately, a strong recovery in the labor force participation rate has boosted labor supply. While the continued aging of baby boomers into their retirement years has left the overall labor force participation rate below pre-pandemic levels, participation among prime age workers has fully recovered its pandemic losses.

Moving forward, employment growth is likely to slow throughout 2025, but solid corporate profits should keep it from collapsing. However, severely curtailed immigration could provide a stagflationary impulse, potentially weighing on economic growth while exerting upward pressure on inflation.

Among other expansionary fiscal policies, the Trump administration has expressed its intent to fully extend the Tax Cuts and Jobs Act, or the TCJA, and reduce the corporate tax rate. It has also promised to dramatically cut costs.

The left chart above shows CBO estimates for government spending and how that spending will be financed in fiscal 2025. To reach its cost cutting goals, the incoming administration may have to make some difficult decisions. Non-defense discretionary spending accounts for just 12% of the government’s budget, meaning they may have to explore spending cuts on defense or entitlements. Initial efforts by the newly formed Department of Government Efficiency have focused on federal workforce reduction to cut costs. While the extent of federal layoffs is still largely unknown, their cost savings will likely be negligible. We estimate that less than 6% of the budget went toward federal employee compensation in fiscal year 2024.

The administration has also expressed its intent to use tariff revenues to offset the extension of the TCJA. However, tariffs are only a sliver of current government revenues, and that will likely remain the case. Moreover, higher tariffs, by inviting retaliatory tariffs, would slow the economy, reducing revenues from other areas of income taxation.

The graph on the right explores the outlook for the deficit and federal debt. With no revenue or spending offsets, the TCJA is likely to amount to significant stimulus and add to deficits. Every year, the federal deficit gets added to overall debt, which is shown on the bottom right. According to the CBO, federal debt is expected to climb to nearly 120% of GDP by 2035 excluding the impacts of a TCJA extension, and nearly 130% with them. This would be up from 98.2% in fiscal 2024.

Since the TCJA extension and any additional provisions will need to be passed through the once-a-year budget reconciliation process, they are unlikely to go into effect until early 2026. That said, a slowdown in economic activity could prompt additional fiscal stimulus before then. Not only would expansionary fiscal policy boost deficits, but it could also act as a longer-term source of inflationary pressure.

The Federal Reserve finds itself in an unenviable situation heading into the second quarter. After delivering 100 basis points of rate cuts in 2024, the Fed was confronted by slowing economic activity and stalling disinflation progress in early 2025. The Committee certainly has a preference to continue easing policy until it reaches a neutral stance. However, fiscal stimulus in addition to tariff and immigration policies could make this difficult to achieve.

As expected, the Federal Reserve voted to maintain the federal funds rate within in a range of 4.25% to 4.5%. With tariffs top of mind, the updated Summary of Economic Projections reflected expectations for slower growth and higher inflation in the near-term. The 2025 growth forecast was downgraded from 2.1% to 1.7% while headline and core inflation forecasts increased by 20 basis points and 30 basis points, respectively.

Further out, inflation forecasts were largely unchanged, suggesting the Fed, at least for now, expects any inflationary impulse from tariffs to be transitory. With increased uncertainty clouding the outlook, the Committee left its dot plot unchanged. The median FOMC member still expects two rate cuts in 2025 and 2026, and one for 2027. Turning to the balance sheet, the Committee announced it would slow the pace of quantitative tightening. The monthly Treasury redemption cap was lowered from $25bn to $5bn while the mortgage-backed security cap was left unchanged at $35bn. These adjustments support the Fed’s efforts to get back to an all-Treasury balance sheet.

Today, markets are pricing in just under three full rate cuts in 2025, but this likely reflects an average of two scenarios being weighed by investors. Should inflation remain elevated and the economy resilient, the Committee could deliver just one to two cuts this year. On the other hand, a more serious growth downturn could prompt more aggressive rate cuts. All this said, the ultimate impacts of government policy are still unknown, and the pace of rate cuts will continue to hinge on the incoming economic data.

After an impressive rally in 2024, fears of an economic slowdown forced investment grade and high yield credit spreads modestly wider during the first quarter. Even still, both sectors are up over 1% so far this year, and spreads continue to look tight relative to history. This tells us the corporate credit market is not overly concerned about a looming recession.

The graph above shows corporate credit spreads over time, and compares current spreads and yields to their long-term averages. Despite the recent spread widening, valuations in both sectors still look expensive. That said, we think investors should embrace credit for the attractive all-in yields. Spreads could widen further from here as economic momentum fades. However, corporate credit is better prepared to weather a slowdown today compared to previous cycles. Indeed, the credit quality of the high yield market has improved since the Great Financial Crisis.

With the outlook for monetary policy, government policy and the economy still largely uncertain, it’s difficult to make any outsized bets on duration right now. For those searching for enhanced yield and higher returns, corporate credit offers an attractive opportunity. That said, not all bonds are created equal, and an active approach to fixed income investing will be key to finding attractive relative value opportunities while limiting exposure to companies that could be adversely impacted by a slowdown.

Despite the strong earnings outlook, elevated uncertainty at elevated valuations is a significant risk for U.S. equities. The concentrated rally of the past two years has left the market with plenty of room for a correction. Indeed, the S&P 500 has had a rocky start to 2025 with a 10% drawdown in the first quarter from February highs. Even with this sell off, the next-twelve-month price-to-earnings ratio is over one standard deviation above its long-term average. Other valuation metrics, like price-to-book and price-to-cash flow, are similarly elevated.

The Magnificent 7 are responsible for a large portion of this distortion and the recent downturn. These companies are profitable, but they are also the overvalued, over owned and an overly large portion of the S&P 500. While many of them could certainly benefit from AI, technological change is unpredictable and disruptive. The new administration is another significant source of uncertainty. Proposals for tariffs, taxes and deregulation have yet to crystalize into policies, and the opposing effects on profit margins are difficult to untangle.

AI and policy are driving U.S. equity markets, and the destination isn’t clear. As such, investors should ensure their portfolios aren’t over exposed to the most overvalued parts of the market, and instead consider formerly “unloved” parts of the market to reduce the impact that a broader downturn could have on portfolios.

Global equity market dynamics shifted meaningfully during the first quarter with international stocks surging ahead of U.S. stocks by the widest margin since the 1990s. Weak expectations for international markets led to depressed valuations, setting the stage for this rebound and reminding investors that valuations still matter. With the U.S.’s share in global market cap still near record highs, this reminder is as important now as ever.

While many international economies continue to face cyclical challenges, sector trends are driving powerful returns. European and Japanese banks have awakened from their long slumber, and on the back of higher interest rates and fee income, are among the performing industries. Meanwhile, European defense and aerospace stocks have jumped higher on the back of an 800-billion-euro defense spending package announced by the EU. China is still stuck in a cyclical bog, but its tech sector has seen strong returns due to better earnings and enthusiasm for AI innovation. Lastly, sectors that benefit from the growth of the EM middle class, like Indian consumer discretionary names and European luxury goods, continue to appeal to investors.

As seen on the left side of the chart above, the dollar’s recent decline has boosted U.S. dollar returns for a range of markets. Just as U.S. equities were overvalued, so was the dollar. Investors should always be aware of how currency fluctuations can impact their international equity holdings.

Although investors have benefited from overweighting the U.S. in recent history, the tide can always change. In times of increased uncertainty, investors can play defense by diversifying their equity exposure across global markets. Plus, an active investment strategy can help sidestep risky or lower-quality companies, unlocking the potential for higher returns.

As stocks sold off in early 2025, bonds rallied and helped soften the blow to portfolios. That said, with inflation uncertainty still elevated, stocks and bonds remain positively correlated over longer time horizons. Moreover, elevated equity valuations, even after the recent sell-off, and mediocre levels of income point to less impressive returns from the 60/40 moving forward. Against this backdrop, investors may have to look elsewhere for consistent outcomes across alpha, income and diversification. Investors willing to venture outside of the public markets can leverage a range of different alternative assets to reach their desired outcomes. Indeed, as is shown in the chart above, alternative assets can offer low correlations to public markets, diversified income streams and enhanced long-run returns.

Real assets shown towards the left, such as real estate, infrastructure and transport, tend to be less correlated to a traditional 60/40 portfolio while providing robust income. Private equity and venture capital, towards the right, could provide much higher total returns but come with higher correlations to public markets and less income generation.

The classic 60/40 stock-bond portfolio still looks attractive, but adding a sleeve of alternatives can help long-term investors achieve strategic goals through higher alpha, better diversification and enhanced income.

The Market Insights program provides comprehensive data and commentary on global markets without reference to products. Designed as a tool to help clients understand the markets and support investment decision-making, the program explores the implications of current economic data and changing market conditions.

J.P. Morgan Asset Management Market Insights and Portfolio Insights programs, as non-independent research, have not been prepared in accordance with legal requirements designed to promote the independence of investment research, nor are they subject to any prohibition on dealing ahead of the dissemination of investment research.

This document is a general communication being provided for informational purposes only. It is educational in nature and not designed to be taken as advice or a recommendation for any specific investment product, strategy, plan feature or other purpose in any jurisdiction, nor is it a commitment from J.P. Morgan Asset Management or any of its subsidiaries to participate in any of the transactions mentioned herein. Any examples used are generic, hypothetical and for illustration purposes only. This material does not contain sufficient information to support an investment decision and it should not be relied upon by you in evaluating the merits of investing in any securities or products. In addition, users should make an independent assessment of the legal, regulatory, tax, credit, and accounting implications and determine, together with their own financial professional, if any investment mentioned herein is believed to be appropriate to their personal goals. Investors should ensure that they obtain all available relevant information before making any investment. Any forecasts, figures, opinions or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of production, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted. It should be noted that investment involves risks, the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Both past performance and yields are not reliable indicators of current and future results.

J.P. Morgan Asset Management is the brand for the asset management business of JPMorgan Chase & Co. and its affiliates worldwide.

To the extent permitted by applicable law, we may record telephone calls and monitor electronic communications to comply with our legal and regulatory obligations and internal policies. Personal data will be collected, stored and processed by J.P. Morgan Asset Management in accordance with our privacy policies.

Your portfolio

I try my absolute best to ensure my human outlook does not spill into your investment strategy.

"The investor who says, 'This time is different,' when in fact it's virtually a repeat of an earlier situation, has uttered among the four most costly words in the annals of investing.”

-Sir John Templeton

As a strategic asset allocator (decisions made based on past outcomes) versus a tactical asset allocator (decisions made based on future outlook), my belief is that future short-term outcomes are not yet known, and that past outcomes are a matter of fact.

Based on this framework, we make systematic determinations for portfolio shifts every quarter. The end result of these determinations was to reduce your overall equity/stock holdings in July of 2021, increase them in July of 2022, reduce them in July of 2023, and then again in April 2024. We last made a systematic change in December 2024 - moving some assets out of Canadian and US equities in favor of international equity, infrastructure assets, and fixed-income assets.

You'll note that we also shifted shifting our quarterly evaluation schedule going forward from January, April, July, October to March, June, September and December. This should better coincide with end-of year tax planning andd less of interference during the income tax preparation deadline. The next evaluation will be made June 15th.

A graphical representation of what I describe above, contrasted against the S&P 500 index (just one of several market factors) over the past 5 years, can be found below, whereby green dots represent slight shifts into equity, and red dots represent slight shifts out.

From a historical perspective, you may have found that this strategy has yielded results that had your portfolio overperform in 2020, underperform in 2021 (shifting out as stocks went up), and overperform in 2022 (despite the down year), 2023 and in 2024. A move to decrease risk in December 2024 proved to be bad timing after January's increases, but looks quite good as of today, as investors had less momentum through April's declines as a result.

Google and the Google logo are registered trademarks of Google LLC. Used with permission.

We continue to monitor any potential new holdings on an almost daily basis, and continue to evaluate your existing holdings to determine if the reasons we bought them in the first place remain true today. When markets decline, opportunities present themselves.

I hope you find this both interesting and informative in keeping pace with the events of today’s financial world.

This publication contains the opinions of the writer. The information contained herein was obtained from sources believed to be reliable, but no representation or warranty, express or implied, is made by the writer, Designed Securities Ltd. or any other person as to its accuracy, completeness or correctness. This publication is not an offer to sell or a solicitation of an offer to buy any securities. The information in this publication is intended for informational purposes only and is not intended to constitute investment, financial, legal, tax or accounting advice. Many factors unknown to us may affect the applicability of any statement or comment made in this publication to your particular circumstances. Hence, you should not rely on the information in this publication for investment, financial, legal, tax or accounting advice. You should consult your financial advisor or other professionals before acting on any information in this communication.

Avesta Wealth is an investments trade name of Designed Securities Ltd (DSL). DSL is regulated by the Canadian Investment Regulatory Organization (www.ciro.ca) and Member of the Canadian Investor Protection Fund (www.cipf.ca ). Investment products are provided by Designed Securities Ltd. and include, but are not limited to, mutual funds, stocks, and bonds. Adam Schacter is registered to provide investment advice and solutions to clients residing in the provinces of British Columbia, Alberta, Manitoba, Ontario, Quebec, and Nova Scotia.