By Jack Kraft, CFA, Vice President, Investment Strategist
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U.S. stocks were whipsawed during the week as geopolitical uncertainty ultimately weighed on investor sentiment, creating an environment where markets felt under pressure. The S&P 500 finished the five-day period down 3.1%, its worst week since September. Meanwhile, the tech-heavy Nasdaq lost 3.5% and entered correction territory (a 10% decline from recent highs). The Dow outperformed its large-cap peers, declining 2.4% on the week. The path of least resistance remains to the downside as investors become less confident in the U.S. exceptionalism theme, causing a shift from growth to value, with a broader move towards global markets.
Changes in trade policy under the Trump administration have contributed to a dip in consumer sentiment and growth prospects, adding to market volatility. Although the S&P 500 is only off roughly 6.1% from all-time highs, certain pockets of the markets have declined even further. There has been a quick unwind as uncertainty has picked up in concentrated parts of the market, specifically those exposed to the artificial intelligence trade and the beloved Magnificent Seven stocks. The story here is pretty simple—U.S. equity markets came into the year with lofty growth expectations combined with high valuations. As those growth estimates have been questioned and uncertainty rises, valuations have compressed towards a more normalized level, although still elevated relative to history.
A key factor in this change of growth expectations is attributed to the increase in tariffs and uncertainty around U.S. trade policy. So far, tariffs have included a 25% levy on steel and aluminum, a 20% increase on Chinese imports, and additional duties on select goods from Canada and Mexico. More import taxes are likely to come on auto imports and other critical goods, as well as reciprocal tariffs. These measures have contributed to lower forecasts for U.S. gross domestic product growth and will likely keep inflation running above the U.S. Federal Reserve (Fed) target of 2% for 2025. All things considered, this complicates the Fed’s outlook for additional rate cuts.
Digging into the concerns around a U.S. growth slowdown, the recent economic data presents a mixed picture. Consumer confidence measures from both the University of Michigan and the Conference Board weakened, while inflation expectations in both surveys saw a notable increase, stoking fears of stagflation. Much of this deterioration in sentiment appears to be tied to a change in trade policy, yet these worries have not yet materialized in hard data. The latest jobs report showed a healthy gain of 151,000 jobs last month, and Institute for Supply Management data on both services and manufacturing indicated that both sectors remain in expansionary territory.
For diversified investors, the risk-off scenario is paying dividends as equity returns have broadened out for the first time in several years. In fact, the equal-weighted S&P 500 is outperforming the cap-weighted S&P 500 by more than 2% year-to-date as investors rotate out of cyclicals into defensives such as utilities, health care and staples. Taken a step further, investors are piling into stocks with lower valuations globally, with the Vanguard European Stock Index (VGK) up 15% year-to-date and the MSCI Emerging Market Index up 5%.
Sparking the optimism in European stocks has been a shift in fiscal policy following prospects of a large German fiscal package and an increase in Europe-wide defense budgets. After the rally, European equities at a forward price/earnings of 14.2x, according to Goldman Sachs. This is a slight premium to the historical average but still trades at a large discount to U.S. equities, which trade at 21.4x forward earnings. Patient investors are being rewarded this year with most European stocks flat in 2024, while the S&P 500 gained more than 20%.
Uncertainty from the new administration is likely to linger as trade policy develops. The S&P 500 is coming off back-to-back years of 20%+ advances, something that has only happened three other times. When taking a longer-term view, the recent drawdown appears minor over a multi-year horizon. In fact, it’s crucial to remember during times of uncertainty that stock market declines are healthy and normal. Over the last 20 years, a decline of at least 10% has happened 50% of the time, with the average pullback being 15%. During times of market pressure, it’s essential to not let macro factors impact your long-term investment plan but rather look at them as opportunities to buy equities on sale.
Looking ahead to next week, investors will be focused on the economic data and developments on trade policy. Headlining the economic calendar will be inflation prints with both the February Consumer Price Index (CPI) and Producer Price Index (PPI) hitting the tape Wednesday and Thursday, respectively. On Tuesday, there will be an update on NFIB small business optimism for the month of February. Meanwhile, Friday will show updates from the University of Michigan on consumer sentiment and 1, 5 and 10-year inflation expectations. On the earnings front, reports will be rather muted as fourth-quarter earnings season ramps down. Notable reports in the technology space include Adobe, Oracle and Docusign. Big box retailers will be in focus with Ulta Beauty, Kohl’s, Dick’s Sporting Goods and Dollar General. Also look for updates on tariffs with the United States expected to have the 25% steel and aluminum tariffs to go into effect on Wednesday.
Economic Calendar March 10 – March 14
| Time (ET) | Report | Period | Median Forecast | Previous |
| MONDAY, MARCH 10 | ||||
| None scheduled | ||||
| TUESDAY, MARCH 11 | ||||
| 6:00 AM | NFIB optimism index | Feb. | 102.8 | |
| 10:00 AM | Job openings | Jan. | — | 7.6 million |
| WEDNESDAY, MARCH 12 | ||||
| 8:30 AM | Consumer price index | Feb. | 0.30% | 0.50% |
| 8:30 AM | CPI year over year | 2.90% | 3.00% | |
| 8:30 AM | Core CPI | Feb. | 0.30% | 0.40% |
| 8:30 AM | Core CPI year over year | 3.00% | 3.00% | |
| 2:00 PM | Monthly U.S. federal budget | Feb. | -$275B | -$296B |
| THURSDAY, MARCH 13 | ||||
| 8:30 AM | Initial jobless claims | 8-Mar | 220,000 | 221,000 |
| 8:30 AM | Producer price index | Feb. | 0.30% | 0.40% |
| 8:30 AM | Core PPI | Feb. | — | 0.30% |
| 8:30 AM | PPI year over year | — | 3.50% | |
| 8:30 AM | Core PPI year over year | — | 3.40% | |
| FRIDAY, MARCH 14 | ||||
| 10:00 AM | Consumer sentiment (prelim) | March | 64 | 65.7 |
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