Strategies to Withstand Market Volatility
HERE (Market Volatility Webinar July 19 Hyperlink)
Strategies to Withstand Market Volatility
HERE (Market Volatility Webinar July 19 Hyperlink)
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The market is pricing in multiple Federal Reserve rate cuts in 2025, but I don’t see it happening. At best, we might see one or two cuts this year—maybe two if conditions allow. The reason? Inflation is still persistent, long-term interest rates remain elevated, and economic data doesn’t yet justify an aggressive easing cycle.
Yes, inflation has come down significantly from its 2022 peak of 9%, but the decline has stalled. Core inflation for both CPI and personal consumption expenditures (PCE) remains around 3% and stopped declining in the latter half of 2024. While some expect inflation to continue easing, there are lingering and potential new inflationary pressures, including:
Even if the Fed does lower rates, it may not translate into lower long-term interest rates. Looking back at this Fed easing cycle, the 10-year Treasury yield was at 3.6% before the first rate cut. Since then, rates have risen significantly, with the 10-year Treasury yield reaching nearly 4.80% in January. Seems counterintuitive, right?
But it makes sense—longer-term bond yields signal inflation expectations. When investors expect higher inflation, they demand higher yields to compensate for the erosion of fixed-income returns. The spread between nominal Treasury yields and TIPS (Treasury Inflation-Protected Securities)—also known as the breakeven inflation rate—is a direct measure of these expectations. Right now, those expectations don’t suggest inflation will fall enough for aggressive Fed cuts.
Some analysts predict a ‘Neutral Rate’ of around 3.5%, but I don’t believe we’ll see that in 2025.
The Fed’s policy decisions are data-dependent, and right now, economic data remains solid:
With the U.S. economy still holding up well, the Fed has no immediate need to rush into multiple rate cuts.
Further, post-election fiscal policy could also influence the Fed’s decision-making. If the new administration adopts a more expansionary fiscal approach (fiscal dovishness), we could see upward pressure on Treasury yields and inflation, making rate cuts even less likely.
Another factor to consider is the tightening labor market, especially with uncertainty surrounding immigration. Economic growth is often simplified as:
Growth= Productivity Gains + Labor Force Growth
However, the U.S. median age is rising, with Baby Boomers retiring at a rate of 10,000 per day. Meanwhile, foreign-born workers now account for nearly 20% of U.S. employment. If immigration slows or labor supply declines further, we could see wage growth accelerate, particularly in construction and hospitality. This would add inflationary pressures, making it harder for the Fed to justify multiple rate cuts.
Many analysts predict more aggressive Fed rate cuts in 2025, but I disagree. Given stubborn inflation, strong consumer spending, labor market dynamics, and uncertain fiscal policies, I expect one or two cuts at most.
The Fed is likely to err on the side of caution, especially given that long-term rates remain elevated and inflation expectations are still too high. Investors hoping for a rapid return to low rates may be disappointed. The market should prepare for a more measured approach to monetary easing.
The S&P 500 has experienced a strong rally over the past two years, driven by optimism surrounding a U.S. soft landing, double-digit earnings growth, deregulation, potential tax cuts, global disinflation, and central bank easing. While many of these factors could materialize, the market may struggle to exceed investor expectations given the elevated valuations and economic uncertainties ahead. Based on current trends and macroeconomic factors, I expect the S&P 500 to end 2025 between 6,175 and 6,350—a moderate gain, but one that reflects both opportunities and risks.
Historically, bull markets tend to begin after a -25% correction, similar to what we saw in 2022. That correction turned into a buying opportunity, fueling strong returns in 2023 and 2024. Today, investors remain highly optimistic, despite weaker-than-expected Consumer Confidence and Sentiment reports.
This growing optimism is approaching what is often referred to as the “euphoric stage”—a phase that typically follows an extended period of strong stock market performance. While I don’t believe we have fully entered euphoria yet, conversations with investors suggest that we may not be far from it. If sentiment peaks too soon, it could limit further upside.
As of February 7, with 62% of the S&P 500 reporting, the blended earnings growth rate is at its highest level since 2021. However, a closer look at the data shows that revenue estimates are lagging behind earnings, meaning profit growth is being driven by cost-cutting and margin expansion rather than organic demand growth.
Additionally, markets have not rewarded positive earnings surprises as significantly as they have in past cycles. This suggests that confidence is already high, and the bar for future earnings beats is rising. While this is not necessarily a bearish signal, it does indicate that earnings growth expectations could be too aggressive, leaving less room for upside surprises.
One of the biggest headwinds for sustained equity growth is fiscal policy uncertainty. U.S. government debt relative to GDP has tripled over the past two decades, with the 2024 fiscal deficit nearing 7% of GDP—the highest ever outside of pandemic periods.
Historically, low interest rates have kept debt service manageable, but this year could be different, as net interest outlays are at their highest level in decades. The budget office had anticipated some fiscal relief from the expiration of the 2017 tax cuts, but with the new administration prioritizing an extension, the fiscal outlook remains uncertain.
Markets may respond negatively if fiscal policy further strains government finances, particularly if higher interest rates increase borrowing costs and limit economic growth. While rate cuts are expected, the timing and pace of Fed easing remain unclear.
Despite these concerns, I don’t see a major market collapse on the horizon—but I do question whether the momentum of investor optimism will persist. Elevated valuations create a high hurdle for significant near-term gains, and long-term return expectations could moderate. That said, a period of average or below-average returns would not be catastrophic for financial markets.
I believe 2025 will be a stock picker’s market, where company-specific opportunities matter more than broad index movements. Certain sectors and companies will outperform based on strong fundamentals, innovation, and strategic positioning. Being selective and focusing on earnings sustainability, pricing power, and competitive advantages will be key to navigating this market.
Given the combination of strong earnings growth, high valuations, fiscal uncertainty, and shifting sentiment, I believe the S&P 500 will end 2025 between 6,175 and 6,350. This range reflects a moderate upside, but not the explosive growth that some investors may be expecting.
While broad market gains may moderate, select opportunities within individual stocks and sectors could still deliver strong performance. Investors should stay selective, focus on fundamentals, and prepare for a market that rewards careful positioning rather than blind optimism.
Despite high valuations, I remain overweight U.S. stocks because:
✔ The U.S. continues to have strong earnings momentum.
✔ AI and automation investments are creating new growth opportunities.
✔ The Fed’s measured approach to rate cuts supports a stable economic backdrop.
However, broad market exposure alone may not be enough. Investors should focus on quality companies with strong cash flows and earnings durability.
Europe may outperform low expectations, but I remain cautious given structural weaknesses and geopolitical risks.
Emerging markets offer pockets of opportunity, but economic instability in China and Brazil keeps me underweight in those regions.
Alternative investments—such as private equity, venture capital, private credit, and infrastructure —offer attractive opportunities in a market where traditional asset classes may deliver subpar returns.
While broad market exposure will be less effective in 2025, targeted investments in specific sectors and industries could provide outperformance.
🔹 Financial Services → Benefiting from higher rates and strong balance sheets.
🔹 Industrials → Supported by capital spending and reshoring of supply chains.
🔹 Technology → AI and infrastructure-related opportunities beyond chipmakers.
The utility sector has historically been viewed as defensive, offering stable dividends and inflation protection. While I still hold some exposure to traditional utility firms, I favor select companies that are partnering with AI firms to develop cooling systems for data centers.
These companies don’t fit the traditional utility mold—instead, they are positioned for above-average growth and should be viewed as growth stocks rather than defensive plays. This highlights the importance of taking a nuanced approach rather than painting entire sectors with a broad brush.
Investors can’t rely on broad market momentum as they have in recent years. Instead, success will come from strategic allocation and investment selection.
✔ Overweight U.S. equities, but be selective within sectors.
✔ Look beyond traditional sector labels—some utilities are actually growth plays.
✔ Favor India over China & Brazil in emerging markets.
✔ Stay cautious on bonds—government debt concerns could keep yields elevated.
✔ Alternative assets provide diversification in an environment where traditional asset returns may be below average.
With strong earnings still driving market performance, I remain constructive on equities, but with a targeted, selective approach. This stock picker’s market will reward investors who look beyond the headlines and focus on the right factors driving growth.
As of February 7, with 62% of S&P 500 companies reporting, the blended earnings growth rate is at its highest level since 2021. However, a deeper look at the data suggests that earnings growth expectations may be overly optimistic.
One key concern is the disconnect between earnings growth and revenue estimates. While profits are rising, revenue growth is not keeping pace, meaning much of the earnings expansion is being driven by cost-cutting, efficiency improvements, or temporary factors rather than sustained demand growth. Additionally, the market’s response to positive earnings surprises has been weaker than usual, suggesting that investors are skeptical of the sustainability of these gains.
Potential Risks to Earnings Growth
Beyond fundamental earnings concerns, several macro risks could weigh on corporate profitability:
Despite a strong earnings season so far, underlying risks suggest that market expectations for future earnings growth may be too high. The combination of lagging revenue growth, muted market reactions to earnings beats, tariff-related pressures, and economic uncertainties all point to the potential for earnings disappointment in the coming quarters. Investors should remain cautious about assuming that current profit growth trends will continue uninterrupted.
Valuations and Potential Catalysts
Historically, U.S. stocks have traded at a 20%–40% valuation premium over non-U.S. stocks. However, the current valuation premium is closer to 70%, suggesting potential room for international markets to outperform. Several catalysts could drive this shift in 2025, including:
Even if these factors do not fully materialize, selective global diversification remains a compelling opportunity.
Divergent Monetary Policies & Growth Outlook
The global economic landscape is shaped by divergent monetary policies.
This dynamic creates varying opportunities across regions. European central banks are easing, but growth remains relatively weaker compared to the U.S. That said, European growth may exceed consensus forecasts, supported by low expectations, attractive valuations, and monetary easing by the European Central Bank.
Emerging markets with strong domestic fundamentals, insulation from external risks like tariffs, and supportive local policies may also be well-positioned for outperformance.
China’s Structural Challenges and Stimulus Efforts
Since last year, Chinese policymakers have been rolling out stimulus measures to support their struggling economy. However, deep-rooted structural issues—such as high debt levels, overinvestment, a property market bubble, weak domestic consumption, and international trade pressures—have limited the effectiveness of these efforts.
Lessons from other highly indebted economies suggest that achieving stability requires painful but necessary reforms, such as writing off or restructuring bad debt. Without these structural adjustments, stimulus measures may offer only temporary relief rather than a long-term solution.
The Role of Capital Expenditures in Global Growth
A surge in capital expenditures (capex) could be another key driver of international market growth. Several factors contribute to this trend:
These shifts create opportunities beyond the traditional U.S.-focused investment approach, making global markets increasingly attractive in 2025.
While risks remain, selective exposure to international markets could enhance diversification and capture growth opportunities in 2025.
Test writing here
Anticipated U.S. Dollar Strength in 2025
The U.S. dollar has remained overvalued for some time, but economic growth differentials between the U.S. and other major economies continue to support its resilience. I initially expected a gradual decline in the dollar last year, assuming the Federal Reserve would cut rates aggressively. However, with tariffs likely to play a significant role in U.S. policy, alongside potential fiscal changes under the new administration, the backdrop suggests continued dollar strength in 2025.
A key factor in currency movements is monetary policy divergence among central banks. Countries like Brazil and Japan are raising rates, while Europe, Canada, and the U.S. are expected to cut rates. Central bank policies heavily influence currency appreciation or depreciation through their impact on interest rates, money supply, and investor confidence. Typically, when a central bank raises interest rates, it attracts foreign capital, strengthening its currency. Conversely, when a central bank cuts rates, investment returns become less attractive, leading to currency depreciation. For example, if the European Central Bank (ECB) lowers rates, investors may sell euros in favor of higher-yielding currencies, weakening the euro.
For asset managers, this divergence in monetary policy adds another layer of complexity when making foreign investments—whether to hold assets denominated in U.S. dollars or foreign currencies. Consider this example: If an investor purchases $1,000 worth of foreign currency units at an exchange rate of 1 USD = 1 Foreign Currency Unit, and the U.S. dollar appreciates to 1 USD = 1.2 Foreign Currency Units, the increased returns from exchange rate fluctuations alone would be $200. This currency effect can significantly impact portfolio returns.
Additionally, policy shifts under the new administration may constrain the Federal Reserve’s actions, further reinforcing dollar strength. While rate cuts in the U.S. are expected, they may not be aggressive enough to weaken the dollar significantly, given the broader economic and policy backdrop. As a result, investors should remain mindful of currency dynamics when allocating capital across global markets.