What’s New

As we move into March, it’s tempting to start thinking about spring. Longer days, more sun, warmer weather, and maybe even some flowers popping up from the ground. But being headquartered in Western New York, we’ve come to know better, and that’s okay. We know those days are coming, just not yet. The key to not being disappointed comes in the form of properly setting expectations. In much the same way, properly setting expectations is critical to navigating financial markets. From our perspective, investors’ expectations may need a bit of a reset today, and, as we’ve been consistent in saying for some time now, market volatility may be accompanying that.

We have entered the year coming off a period of economic resiliency in the US. The consumer has held up incredibly well against a still-solid labor market backdrop and strong household net worth gains. Yet despite this resilience, growth was slowing coming into the year, and this continues to be the case today. Of course, slowing growth need not be a problem, and it certainly does not mean a recession is around the corner. What matters, though, is that market expectations don’t seem to be lining up with reality.

Economists expect another year of strong growth in the US while the market is pricing in double-digit earnings growth for the S&P 500. This is a high bar to clear with the economy already slowing, and that’s before we consider the potential for tariffs to increase to levels not seen since the early 1900s. At the precise time of this writing – February 28th, at 10:12:37am EST – that’s precisely the type of seismic shift we’re discussing in terms of erecting new barriers to trade, and there is simply no world in which that is not detrimental to growth in the short- to intermediate-term. (Specificity about the date and time matters greatly here because we’ve seen that these things are subject to change.)

These optimistic expectations are reflected in investor positioning as well. Retail investors have turned decidedly bearish, as reflected in survey data, but also price action in areas of financial markets, including crypto and meme stocks. However, institutional investors remain fully invested. Cash levels have fallen to multi-year lows, leaving little dry powder on the sidelines. Should we hit an air pocket, it’s fair to worry about who the marginal buyers may be for some time. This is happening with US equities still trading at significantly elevated multiples to make things more interesting.

All of which brings us back to volatility.

None of this has to mean that markets move lower. Still, it certainly calls into question the balance between risk and reward and sets the stage for a potential pullback as investors recalibrate their expectations. As active managers, 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.

Our 2025 Radar: Key Investment Themes and Opportunities

With our own in-house investment analysts evaluating companies, making recommendations, and building portfolios stock-by-stock, we asked them a simple question, "What could go right in your sector in 2025?". Find out what they had to say.

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.

Indicates change Indicates no change

Source: Bloomberg.

All investments contain risk and may lose value. This material contains the opinions of Manning & Napier, which are subject to change based on evolving market and economic conditions. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.