Spring is here, April showers may bring May flowers, and April tariffs may likely bring storms to global financial markets. In any event, we're about to find out. We believe market participants will likely have to adjust their expectations moving forward, which will likely be accompanied by continued market volatility.
We say continued volatility because the last month was a bumpy ride. We came into the month with expectations for earnings growth still elevated, the market still expensive, and policy announcements keeping investors on their toes. US equities struggled over the month, with the S&P 500, Russell 2000, and Nasdaq falling by 5.6%, 6.8%, and 8.1%, respectively. From a sector perspective, equities were led lower by Information Technology, Communication Services, Financials, and Industrials, with more traditionally defensive sectors (along with Energy) fairing far better. It was also notable that high yield spreads continued to move off their lows during the month, reflecting concerns about the economic backdrop, and the yield on the 2-year Treasury fell by another 10 basis points.
The month has come where tariffs are sure to dominate headlines for at least the first few weeks as so-called Liberation Day—April 2nd, 2025—is set to see the implementation of broad-based tariffs across most (if not all) of our major trading partners. There have been varied reports about the size and scope of the tariffs, but one thing is as sure as anything can be under the current administration: Tariff rates are set to move meaningfully higher, and this is sure to have an impact on economic activity.
We already see this in survey data, where consumer and business confidence have rolled over. How durable these concerns are remains to be seen, as does whether they start to feed through into consumption or investment plans. While some would argue that tariffs are not definitionally inflationary due to the one-time nature of the price increase, we’re not sure the folks heading off to the grocery store and seeing the bill take an increasingly larger share of their wallet would agree.
Given all of this, expectations for earnings growth on the major indices remain elevated. We believe that these expectations will have to reset lower as growth slows. Given the added policy uncertainty and the continued starting point of valuations, this could be a bumpy road. We continue to focus on balancing risk and reward in such an environment. As an active manager, we remain focused on identifying investment opportunities no matter the environment and managing risk for our investors.
Our Perspective
We have been cognizant of the downside risks to the US economy for some time now. While we continue to see signs of softening in the US economy, growth has remained incredibly resilient due in large part to the massive fiscal transfers undertaken in the months and years following the pandemic and elevated household net worth. We believe that we are now nearing a critical juncture; fiscal stimulus has moved through the system and policy uncertainty is rising. Expectations are for a continuation of the strong economic growth we have seen to date. With the Federal Reserve having paused its cutting cycle, it remains to be seen how the economy will respond to a prolonged period of elevated rates and uncertainty. Given the varied risks we see in the market today, we are placing an emphasis on risk management.
Global Equities: A Look into the Strong German Market
US markets haven’t had the strongest start to the year, especially compared to their global counterparts. While US equities navigate the current tariff threats and subsequent volatility, the German equity market has had a strong performance this year, we analyze why here.
Our View
| Economic Cycle |  |
The US economy has remained resilient despite the aggressive hiking cycle we saw from the Federal Reserve. However, growth is slowing from above-trend levels. Can the US consumer continue to remain resilient? Could policy change be disruptive, or might factors such as deregulation support investment? |
| Stock Market | |
The US stock market continues to trade near all-time highs. Earnings expectations reflect a rosy outlook. With the Fed looking more cautious on its rate cutting cycle, can earnings growth support higher prices in the potential absence of multiple expansion? |
| Bond Market | |
Risks to the economy and inflation look balanced. While elevated levels of inflation and resilient growth could push yields meaningfully higher, a sudden slowdown in growth could also see cuts priced back into the market and yields fall from their current levels. Corporate spreads remain near their lows. |
| Important Issues on the Radar | |
AI: Booming investment in semiconductors and AI infrastructure has been a feature of markets for years now. Will the release of lower-cost models lead to a reduction in investment or could increased efficiency super-charge these efforts? How may AI begin to have a real impact on businesses and the economy? |
| China’s Economy: China has pivoted on key economic issues that acted as severe headwinds to growth over the last two years; however, economic growth appears to be stagnating and it will be critical to monitor the magnitude and the effectiveness of the policy response in the coming months. The imposition of tariffs may complicate the economic outlook. |
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Source: Bloomberg.
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