| GoalVest Advisory
May Update
Markets Have Moved Negative for the Year – Led by Fears of High Tariffs
Equity markets remained negative for the month of April and the year-to-date period. While the selling began in the final weeks of March, the April 2nd reciprocal tariff announcement has dramatically increased the selling, volatility, and negative market sentiment.
For the year-to-date period through April 28th, equity markets were uniformly negative, with the S&P 500 down 5.7%, the tech-heavy Nasdaq down 7.4%, and the slower-growing companies of the Dow Jones Industrials down 5.3%. Additionally, small-cap stocks, as represented by the Russell 2000 Index, were down 11.9%, thus was hit harder by tariff news than larger companies.
The CBOE Volatility Index (VIX) closed on the 28th at 26.0, down from the 60.1 intraday reading on April 7th. This reading is above the 20 value that is considered stable. However, it is well below the levels of the past two weeks. While the levels of the volatility index have improved, investor fears remain, as do cautionary financial media articles.
Fixed-income markets remain positive after a slow start to the year. The Bloomberg Aggregate Bond Index is up 2.7% for the year-to-date period, which is higher than last year’s 1.3% return.
Economic Data
The Bureau of Labor Statistics (BLS) released the March CPI inflation report on April 10th. The headline CPI rose by 2.4%, which was better than the prior month’s 2.8%. The month-over-month number decreased by 0.1%, better than last month’s positive 0.5%. The improved levels did not help the market, as fears of a resumption in inflation from tariffs dominated the market.
The Fed remained cautious about interest rate decreases, especially considering a tariff-driven uptick in inflation. Overall, the market views a cut in June, instead of May, as likely.
The BLS also reported unemployment numbers on April 4th. March job growth was strong, at 228,000 new jobs compared to 117,000 new jobs in February. The
unemployment rate ticked up slightly to 4.2%. This jobs report is expected to be strong enough for continued GDP growth; however, it was overshadowed by tariff worries.
Earnings – Hope for 2025
The earnings season started for the second quarter and has been solid so far. As of April 28th, 36% of the S&P 500 companies have reported their earnings, and 73% reported a positive earnings surprise.
Aggregate earnings growth for the first quarter of 2025 is estimated at 10.1%. This follows a robust fourth quarter of 2024, up 16.9% year-over-year. For the full year 2025, earnings growth is projected to be 9.7%. This projected growth is still strong and remains above the 10-year average of 8.0% (from 2014 to 2023). This 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. After the announcement of reciprocal tariffs on April 2nd, the markets traded negatively on the 3rd and 4th. As a result, the administration paused reciprocal tariffs for 90 days, and the market rebounded positively. As we approach the end of April, there is still hope that a less restrictive tariff policy will be enacted. However, this remains uncertain.
Overall, the fundamental economy remains strong and reasonably resilient. However, Wall Street firms have increased their predictions of a recession, some as high as 60%.
Our view is that if tariffs do stick, we are likely to experience a period of stagflation with low GDP growth and increased inflation. In this case, the changes of a recession would increase, but we do not believe we are at this point yet.
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 this patch of volatility.
The short-term remains murky. Nevertheless, we view the longer-term horizon more positively.
To Sum Up
Equity markets can recover in 2025, driven by earnings. However, volatility is likely to remain higher than last year. A full-blown tariff war will likely cause stagflation or a recession. However, investment opportunities remain diversified, and we remain more optimistic over the longer term. Examples of these opportunities include adding additional exposure to quality dividend names, opportunistically pricing structured yield notes (which yield more when volatility is up), and being ready with a buying plan for interesting tech stocks that may trade at a discount.
The markets have priced in some dislocation from the tariff policy, and equity valuations are now more attractive than at the start of the year. The present valuation of the market is 19.8 times forward earnings, down from 21.1 times 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.
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, PIMCO, and YCharts
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