Albeit early, with less than 90 calendars days into the new year, 2025 has so far been characterized by volatile markets, driven by a variety of factors but most notably, persistently higher interest rates, trade tensions and their impact on growth and heightened expectations and valuations for a handful of large U.S. companies.
In light of this I thought it would be helpful to explore a few of these issues and offer a bit of perspective on how I view them and by extension, how we might navigate these temporarily choppy markets.
Elevated Interest Rates
The next Federal Open Market Committee (FOMC) meeting is scheduled for March 18-19, 2025. This meeting will conclude with a policy decision announcement at 2 p.m. ET on March 19, followed by a press conference at 2:30 p.m. ET. It is widely expected for the Federal Reserve to maintain interest rates at their current levels while additional data related to employment and inflation continues to come in.
This posture by the Fed has contributed to 2025’s early volatility. Effectively, the market is figuratively asking the question: “Could elevated interest rates and delayed Federal Reserve rate cuts begin to significantly impact U.S. economic growth?”
So far, forecasts for U.S. economic growth and S&P 500 earnings in 2025 remain robust. For now, concerns about Big Tech’s ability to continue to grow as well as tariffs have overshadowed the impact of elevated rates. However, with core inflation still above the Fed’s 2% target, unemployment at 4.0% in January, and growing worries about U.S. government spending and debt levels, it seems likely that rates could persist in a higher-for-longer environment this year, unless stock market weakness or a flight to safety in government bonds alters the trajectory.
While this issue remains somewhat under the radar, a prolonged high-rate environment could eventually strain smaller companies seeking to refinance debt, further dampen consumer and business borrowing, and reduce the attractiveness of future corporate profits when discounted using risk-free rates like the 10-year U.S. Treasury yield.
Big Tech
First off, when I reference Big Tech I am most specifically referring to the likes of Microsoft, Apple, Amazon, Alphabet (Google), Meta (Facebook), Tesla and Nvidia. These seven companies, sometimes referred to as the “Magnificent 7” or “Mag 7” account for nearly 30% of the entire S&P 500 as a percentage of market cap and represented around 47% of the S&P500 gains.
So as you can see, the relative health of these companies is top of mind for most investors. The good news is that the latest quarterly earnings from Big Tech companies were strong, but investors are becoming increasingly cautious due to concerns over AI spending. The emergence of China's DeepSeek AI model, reportedly developed at a significantly lower cost, has sparked concerns about the massive AI investments being made by US Big Tech companies.
While markets have partially shrugged off the DeepSeek news, and companies like Meta, Alphabet, and Microsoft have emphasized the necessity of aggressive AI investments to stay competitive, investors are now scrutinizing near-term profit outlooks more closely. This is driven by high expectations, elevated valuations, and massive capital expenditure plans. Nevertheless, a reset in expectations and potential volatility across Big Tech this year could be beneficial in the long run, given the significant gains these stocks have seen since late 2022.
Tariffs
Perhaps the most fundamental cause of recent market volatility has been trade policy and more specifically, the implementation of tariffs. As you can see from the bar chart below, much of the United States consumption is based on goods produced outside our borders. Tariff’s as a policy tool is an attempt to reconcile uneven trade between countries, bolster domestic manufacturing and stiffen border protocols to prevent the transport of lethal synthetic drugs.
This policy has introduced a layer of uncertainty into the market that complicates predictions for growth, profits, and global trade dynamics. Tariffs that escalate due to worsening global relations, become entrenched, disrupt supply chains, reduce global efficiency, drive up costs and inflation, or hinder growth and corporate profitability could weigh on stock prices in the near to medium term. In such a scenario, we could see increased selling pressure across sectors like consumer goods, industrials, materials, and technology. This could also temporarily dampen broader market performance and investor sentiment for a time.
How do we move forward?
Well, it is entirely ordinary to feel uneasy when confronted with unknowns in the economic and market landscape. However, history shows that situations like this are temporary and often, when uncertainty is high is precisely when the greatest opportunities emerge. Additionally, volatility is nothing new. In fact, not only have we seen this story before, it often happens around the same time each year. Recall:
Trade war 1.0 (2018-2019) – Not dissimilar to the current environment, the world overreacted. Markets finished the year higher than when it began.
COVID Crash (March 2020) – A wicked selloff that turned into one of the most profitable rebounds in market history. Those who stayed in—or better yet, bought in—cleaned up with one of the fastest trough to peak rallies in history.
Banking panic (March 2023) – All banks were set to fail according to the headlines. However, investors who looked beyond the headlines and maintained their composure didn’t miss a beat.
My suggestion is this:
Avoid reacting impulsively to the news cycle. Stay patient and allow developments around tariffs, Big Tech, and interest rates to unfold in the near term. Headlines on these topics are likely to remain fluid and, in some cases, unresolved. Making investment decisions based on uncertain outcomes increases the risk of being misaligned if circumstances change unexpectedly.
Additionally, stay committed to your long-term investment strategy. If your portfolio is comprised of well managed companies producing positive cash flow from an essential service or good, you are likely well-positioned to weather this period of uncertainty. Focus on maintaining discipline rather than reacting to short-term volatility.
And finally, as always - please call or email me to arrange a time to talk or ask questions.