Many Moving Parts in the Economy

1. Crosscurrents Remain. On Friday, the Atlanta Federal Reserve GDPNow model revised its GDP growth forecast lower for the current quarter to -1.5% from 2.3%. The drop was largely attributable to the contribution of net exports, which fell from -0.41% to -3.7%, an indication that tariffs may be working their way through the economy. That said, net exports aside, growth is running at 2.2%. Additionally, the Fed’s preferred inflation gauge, the personal consumption expenditure index, came in line with expectations in February at 2.5% y/y. The index is well below the highs of 7% seen during the summer of 2022 and has mostly trended sideways since the beginning of 2024. The Fed will keep interest rates steady until they see further evidence that inflation is declining to their 2% goal.

We are in a growth scare moment, and this is something we discussed during our 2025 Outlook Webinar. Growth will slow in 2025 from the +3% levels we have seen over the last two years, but we are not headed into a recession; we will likely see 1.5-2% growth this year. The reason for the slowdown is simply that we do not have the enormous fiscal stimulus ahead given the new administration, versus the $7 trillion that has been implemented during Covid/post-Covid.  Importantly, the labor market remains balanced for consumers, and we have not seen any upward pressure in initial jobless claims. Historically during recessions, initial jobless claims rise to 350-375K; recent readings have come in around 220K-240K. While personal spending and retail sales have slowed in the past few months (likely tied to uncertainties related to tariffs and inflation), consumer income is up 5% y/y, and savings have increased from 4.6% to 5.5%. The American consumer is well-equipped to withstand any potential unforeseen downtrend in the U.S. economy.

As mentioned, while the economic data is slowing, investors remain attentive to tariff discussions. This Tuesday, it is expected that 25% tariffs on Mexico and Canada will go into effect, along with an additional 10% tariff on Chinese goods. That said, a lot of this information is fluid and unknown if and when it will truly go into effect, with Mexico mentioning it has offered to match the U. S’s tariffs on China as a potential way to get out of the tariffs set by the U.S.

We estimate a 7% hit to the S&P 500 earnings if tariffs go into full effect. Companies will need to decide if they want to reshore manufacturing to bypass tariffs (similar to Apple’s recent move to open manufacturing plants in the U.S.), take on the increased costs ultimately hurting margins, or pass costs onto the consumer. One example was from this weekend, Chipotle said they intend to absorb the costs of tariffs and not raise prices on consumers. Chipotle receives about 50% of its avocados from Mexico, and they said they expect the company’s cost of goods to increase by 0.60% on a rolling basis from tariffs. We expect cost cuts and or restructurings ahead for U.S. corporations to help offset price increases.

Chart 1: Atlanta Fed’s GDPNow Tracker Estimates for Negative Growth in Q1 2025^[1]

2. Growth, Value, International? The Russell 1000 Value Index is outperforming the Russell 1000 Growth Index by 650 basis points year-to-date. China stocks are up over 15% and Europe nearly 12%, while the S&P 500 is up 1.2%. Areas of the market that lagged last year with lower valuation multiples are outperforming in 2025 – the only two negative sectors this year are technology and consumer discretionary, while health care, financials, and energy are leading. This is driven by a broadening in overall earnings in many different sectors and stocks.

We continue to focus on fundamentals and look for opportunities in the dislocation. Last week, we added to many names we have not been able to in recent months, including Broadcom (AVGO), Palo Alto (PANW), Accenture (ACN), Diamondback Energy (FANG), Eaton (ETN), and Quanta Services (PWR). These companies are a part of our favorite investment themes, and amid the recent selloffs, we have found opportunities to add to them. We want to buy on lower, attractive valuations as these remain long-term themes for us – cybersecurity, power grid and infrastructure, data centers and artificial intelligence, and many more. We are focusing on the long-term through the noise and will continue to add to our favorite companies into any further weakness.

3. Fixed Income.  The bond market is doing its job for the Fed in terms of lower interest rates. And, importantly, credit spreads remain tame. U.S. Treasury yields ended last week lower across the curve on weakening economic data. The 2-, 10, & 30-year yields were lower by 21, 22, & 19 bps, respectively. Credit spreads widened across investment grade and high yield, increasing 8 bps to +121 bps for investment grade and 16 bps to +332 for high yield. During mid to late 2022, when inflation was at its peak with elevated interest rate uncertainty, investment grade spreads ranged from +150-200 bps while high yield spreads traded between +500-600 bps. Credit spreads remain well below these levels but have risen from recent lows.

Credit ratings improved last week as the main rating agencies issued 35 upgrades and 34 downgrades. Within those changes, financials led with the most upgrades, while industrials had the most downgrades. Tax-exempt yields followed Treasuries lower, rallying 6-9 bps across the curve.

4. The Week Ahead.

Earnings – Tuesday: AZO, BBY, CRWD, PGR, ROST; Wednesday: BF.B, CPB; Thursday: AVGO, COO, COST, HPE, KR.

Economics – Monday: ISM Manufacturing, Construction Spending; Wednesday: ADP Employment Survey, Markit PMI Services, Durable Orders, Factory Orders, ISM Services; Thursday: Continuing Jobless Claims, Initial Claims, Productivity; Friday: Hourly Earnings, Nonfarm Payrolls, Unemployment Rate, Consumer Credit.

Stephanie Link’s TV Schedule:

Return for Selected Indices^[2]

Sources:

^[1] Source: Atlanta Fed. As of March 2, 2025.

^[2] Source: Bloomberg. As of March 3, 2025.

Disclosure

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