Navigating Turmoil Markets

Stocks Trade Lower on Unknowns

It has not been a great start to the year for markets. Year-to-date, the S&P 500 is down 5% and off 9% from its highs, but under the surface there is a definite shift happening – growth is down 13% while value is flat for the year. Technology is down 13%, consumer discretionary is down 18% and industrials are down 12%. Consumer staples, utilities, health care and financials continue to hold up. The reason is that the economy is experiencing a growth slowdown, and investors are uneasy about tariff implications. We said in January (see here) that 2025 was set up for more volatility and slower growth – not a recession, however, and we still believe that to be the case. The simple facts are that we will have less fiscal stimulus in place versus the previous administration, and the unknowns surrounding tariffs may dampen earnings. That said, if all the tariffs go into effect as mentioned (Canada, Mexico, and China) we estimate a 5% hit to S&P 500 earnings. But we are far from certainty that they will go into effect, and we continue to monitor the situation. Once we have more clarity on tariffs, we believe the administration will focus on its pro-growth initiatives, being lower taxes and deregulation. 

All in all, we see the economy slowing to 1.5-2% versus the 3% we have seen in the last two years. The consumer remains in solid shape owing to a stable job market, wage growth at 4%, 2.5% consumption growth and lower inflation. In fact, both readings on inflation this week showed solid progress – the consumer price index headline at 2.8% with the consumer services ex-housing at the lowest reading since October of 2023.  Additionally, the month over month PPI reading was -.1%. That being said, inflation is still higher than the Fed’s 2% target, so we expect them to stay on the sidelines regarding rate cuts for the time being. We still believe one or two cuts is possible this year, but we have to see multiple consecutive months of progress on inflation or a deteriorating employment situation, which we do not see in the data today. 

From a contrarian point of view, sentiment is weakening – one of the reasons we have been adding to equities this past week. The AAII Sentiment Survey shows that 57% of respondents are currently bearish, compared to the 31% historical average. The bull-bear spread increased 3.5 percentage points last week to -37.8%, one of the lowest readings in history and well-below the historical average of +6.5%. The many unknowns in the market are spooking investors to a flight-to-safety and defensive positioning. We discussed many of the factors that are facing markets today and how industry veterans are navigating the current times in our 2025 Day with the Stars recap.

Chart 1: Value is Positive in 2025, Outperforming Growth by Over 10%^[1]

In challenging, uncertain times, focus on fundamentals. It is easy to make irrational decisions based off daily price movements, but we are at the tail end of the fourth quarter earnings season, and we continue to add to the companies that showed positive fundamentals with expanding earnings. Earnings grew 17.8% y/y in the fourth quarter, which was the highest growth rate since Q4 2021. Notably, earnings revisions are not declining in tantum with stock prices; the recent sell-off is mostly sentiment-driven and not fundamental.

Chart 2: Stock Prices Are Falling, While Earning Revisions Are Not^[2]

We remain focused on adding to quality companies with leading management teams, who are the number one player in their respective markets. Boeing (BA) remains our top pick in 2025. We have written extensively about the company, and Kelly Ortberg has shown us what a new CEO can do. The company is focused on returning 737 deliveries to 37 a month with the goal of hitting 50 per month later this year. All three of the company’s factory lines are back up and running with ample cash to pay down debt. For Bank of America (BAC), net interest income bottomed in Q2 2024 and is now expanding – the major banks have not seen net interest income growth in over two years. Investment banking fees rose 44% y/y in the most recent quarter and is likely to expand further as the M&A market opens with deregulation. Chipotle (CMG) increased sales by 5.4% y/y last quarter with 4% transaction growth and 1.4% price increase. The company added 304 stores last year with another 300+ to come this year and is one of our consumer discretionary stocks.

Additional names we have been adding to include GAP (GAP), United Health Group (UNH), and Broadcom (AVGO). GAP gained market share for the eight consecutive quarters and hit its highest gross margins in 20 years. UNH and AVGO are both leading players in their respective industries, growing top and bottom line, with strong cash flow generation.

In times of volatility, it is pertinent to take a step back and see the bigger picture. The labor market remains strong, interest rates are declining, and for the time being, growth is above trend. We think growth remains above trend in 2025, and once markets get through the current growth and tariff scare, there are many tailwinds to come. 

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Sources:

^[1] Source: FactSet. As of March 10, 2025.

^[2] Source: Bloomberg. As of March 10, 2025.

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