| GoalVest Advisory
June Update
Markets have touched positive for the year – led by earnings and hopes for a tariff deal.
As we end May, equity markets have moved positively for the first time since February, driven by the strong month of May. For the month, through the 27th, the S&P 500 was up 6.5%, the tech-heavy Nasdaq was up 9.6%, and the slower-growing companies of the Dow Jones Industrials were up 4.3%. Additionally, small-cap stocks, as represented by the Russell 2000 index, were up 6.4%.
For the year-to-date period through May 27th, the S&P 500 was up 1.3%, the Nasdaq was up 2.3%, and the Dow Jones Industrials was nearly flat at 0.1%. However, despite a solid May, small-cap stocks remained negative at -5.6%.
The CBOE Volatility Index (VIX) closed on May 27th at 19.5, significantly down from the 60.1 intraday reading on April 7th. This reading is just below the 20 value that is considered stable. Positively, the VIX has been trending down for the past few weeks. While the levels of the volatility index have improved, investor fears remain because of a possible uptick in inflation and an unresolved tariff policy.
After a slow start to the year, fixed-income markets remain positive, with the Bloomberg US Aggregate Bond Index up 1.7% year-to-date, higher than last year’s 1.3% return. However, the bond index was down month-to-date in May by -1.5%, driven by higher 10-year and 30-year Treasury rates.
Economic data
The Bureau of Labor Statistics (BLS) released the April CPI inflation report on May 13th. The headline CPI rose by 2.3%, better than the prior month’s 2.4%. The month-over-month CPI increased by 0.2%, which was worse than last month’s negative -0.2%. A decrease in energy costs drove the improved CPI levels.
The BLS also reported unemployment numbers on May 2nd. April job growth was reasonably strong, at 177,000 new jobs versus 228,000 new jobs in March. The unemployment rate remained steady at 4.2%. This jobs report was expected to be strong enough for continued GDP growth.
The Fed remained cautious about upcoming interest rate cuts and held short rates steady after its May meeting on May 6th and 7th.
Earnings – a solid quarter
Earnings season has nearly finished for the first quarter and has been solid. As of May 27th, 96% of the S&P 500 companies reported their earnings and 78% reported a positive earnings surprise.
Aggregate earnings growth for the first quarter of 2025 is currently estimated at 12.9%. This follows a robust 2024 fourth quarter, up 16.9% year-over-year. For 2025, earnings growth is projected to be 9.1%, down slightly from last month’s 9.7% projection. Yet, the projected growth is still strong and remains above the 10-year average of 8.0% (from 2014 to 2023). Growth is an essential driver of continued market returns. Given potential tariff uncertainty, these growth rates will be our prime focus.
Market-driven by the news – primarily tariffs
Tariffs and a potential uptick in inflation continue to drive market uneasiness. It is difficult to predict what course tariffs will take. Many tariffs remain paused, with others, such as the 10% uniform and 25% automobile tariffs, in effect. On May 23rd, 50% tariffs were declared on the European Union, only to be postponed the following Monday until July 9th. The market believes that some manageable form of tariffs will be negotiated. However, this issue continues to be a pressing concern for the market.
Overall, the fundamental economy remains strong and reasonably resilient. However, many Wall Street firms have increased their recession predictions, although this estimate varies widely. If tariffs do stick, we are likely to be in for a period of stagflation with low GDP growth and increased inflation. The chances of a recession would increase, but we do not yet view this as the most likely scenario. Instead, we view some reasonable tariff deals and negotiations as the most likely scenario.
The market’s present valuation is 21.1 times forward earnings, which is the same as at the start of the year. The economy is starting from a strong position, and U.S. companies remain well-managed, profitable, and innovative, which helps to drive our longer-term expectations.
Our focus will be on opportunities in favorable sectors and companies. As we have mentioned, staying diversified across many types of investments, keeping a portion of assets liquid, and being ready to make portfolio adjustments can help us get through periods of volatility. While the short-term remains murky, we are encouraged by the strong rebound off the market bottom in April and the lower levels of volatility currently in the markets.
To Sum Up
We believe equity markets, driven by earnings, can continue to recover in 2025. While recently down, volatility is likely to remain higher than last year. We have hope for a tariff resolution. However, a full-blown tariff war that causes stagflation or possibly a recession cannot be ruled out. Investment opportunities remain across a diverse spectrum, and we remain more optimistic over the longer term.
Examples of these opportunities include adding additional exposure to quality dividend companies, opportunistically pricing structured yield notes (which yield more when volatility is up), and being ready with a buy plan for interesting tech stocks that may trade at a discount.
Sevasti Balafas, CFA, CPWA®
CEO & Founder
GoalVest Advisory
Sources: JP Morgan Asset Management, Bureau of Economic Analysis, Bureau of Labor Statistics, Morningstar, Factset, Barron’s, KKR, and YCharts
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