By Daniel McGarvey, CFA, Senior Portfolio Analyst, on behalf of Stonebridge Financial Group advisors
In last year’s February commentary, we discussed how the US economy was remarkably resilient but shrouded in uncertainty regarding inflation, rates, and upcoming government policy. One year later, that is still the case. Real GDP increased 2.8% in 2024, unemployment stands at a relatively low 4.1%, and consumer spending has been strong, but we’re in the thick of an era of change with tremendously consequential policy decisions on the horizon.
Perhaps most notably, it is unclear to what extent the new administration will carry out its desired trade policies and spending and tax reform. The inflation outlook is heavily dependent on both factors, and the range of potential outcomes is wide. Even with recent clarity on the 10% China tariffs and the delay of the potential Mexican and Canadian tariffs, we do not know how many more tariffs will be threatened, how may will actually be implemented, and what retaliation might look like. As shown below, tariffs on the countries mentioned above, if enacted, would impact roughly 40% of our current imports, and no trading partner in the remaining 60% is safe from further threats.
Similarly, immigration reform has begun, but we do not know exactly how many illegal immigrants will be deported or to what extent that will be inflationary. In general, the shock and awe policy moves of President Trump’s first weeks in office were difficult to keep up with, and we expect they could continue for some time.
Regardless of the President’s orders and policies, we are currently in a situation where over 20% of tax revenues go towards paying interest on our debt, and roughly one third of our debt is going to be re-struck this year at higher rates. The consensus is that we are now in a higher-for-longer rate regime, so if taxes are lowered (as promised) there might need to be drastic spending reductions to afford our ever-increasing debt. Realistically, however, there are limits to how much spending can be cut without affecting entitlement programs like Social Security and Medicare.
President Trump has made it very clear that he wants lower rates, which would ease the debt burden, but for now the expectation is that the Fed will remain independent of his wishes and keep rates restrictive in order to fend off a potential reignition of inflation. History says that market multiples should be lower than they are if we stay in this 4-5% rate range, and further growth will likely need to come more from earnings than from multiple expansion. However, that has been the case for several years, and investors seem to be largely ignoring valuations. Whether we return to an era of price discovery is uncertain, but in a sense it would be welcome.
Much of the recent market enthusiasm is due to investments in artificial intelligence (AI), which came under the microscope recently with the reveal of DeepSeek, a Chinese model that allegedly produced competitive results at a fraction of the cost of the primary American models. We do not claim to have any unique insight on how this will affect American companies, and our hope is that it will spur more efficient innovation, but as the technology progresses we expect to keep seeing about developments that could shake up the landscape. It’s a reminder that while many AI-related companies are certainly worth investing in, they are trading based on expectations which could turn on their head quite quickly.
The S&P 500 returned 2.8% in January amid whiplash policy changes and a promising start to the earnings season. The Bloomberg US Aggregate Bond Index rose 0.5% as the 10-Year Treasury Rate fell to 4.58% and the Federal Reserve opted to keep short rates unchanged.
Charts and research provided by Strategas Research Partners, LLC and Y Charts, Inc .
Material discussed is meant for general/informational purposes only and it is not to be construed as tax, legal, or investment advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary therefore, the information should be relied upon when coordinated with individual professional advice. Past performance is no guarantee of future results. Diversification does not ensure against loss. The opinions and forecasts expressed are those of the author, and may not actually come to pass. This information is subject to change at any time, based on market and other conditions.
Daniel is a Senior Portfolio Analyst at Stonebridge Financial Group and works on portfolio analysis and other related tasks. When away from the office, Daniel spends his time playing guitar, reading, and exploring the outdoors.
February 2025 Commentary: Economic Resilience and Uncertainty – One Year Later
By Daniel McGarvey, CFA, Senior Portfolio Analyst, on behalf of Stonebridge Financial Group advisors
In last year’s February commentary, we discussed how the US economy was remarkably resilient but shrouded in uncertainty regarding inflation, rates, and upcoming government policy. One year later, that is still the case. Real GDP increased 2.8% in 2024, unemployment stands at a relatively low 4.1%, and consumer spending has been strong, but we’re in the thick of an era of change with tremendously consequential policy decisions on the horizon.
Perhaps most notably, it is unclear to what extent the new administration will carry out its desired trade policies and spending and tax reform. The inflation outlook is heavily dependent on both factors, and the range of potential outcomes is wide. Even with recent clarity on the 10% China tariffs and the delay of the potential Mexican and Canadian tariffs, we do not know how many more tariffs will be threatened, how may will actually be implemented, and what retaliation might look like. As shown below, tariffs on the countries mentioned above, if enacted, would impact roughly 40% of our current imports, and no trading partner in the remaining 60% is safe from further threats.
Similarly, immigration reform has begun, but we do not know exactly how many illegal immigrants will be deported or to what extent that will be inflationary. In general, the shock and awe policy moves of President Trump’s first weeks in office were difficult to keep up with, and we expect they could continue for some time.
Regardless of the President’s orders and policies, we are currently in a situation where over 20% of tax revenues go towards paying interest on our debt, and roughly one third of our debt is going to be re-struck this year at higher rates. The consensus is that we are now in a higher-for-longer rate regime, so if taxes are lowered (as promised) there might need to be drastic spending reductions to afford our ever-increasing debt. Realistically, however, there are limits to how much spending can be cut without affecting entitlement programs like Social Security and Medicare.
President Trump has made it very clear that he wants lower rates, which would ease the debt burden, but for now the expectation is that the Fed will remain independent of his wishes and keep rates restrictive in order to fend off a potential reignition of inflation. History says that market multiples should be lower than they are if we stay in this 4-5% rate range, and further growth will likely need to come more from earnings than from multiple expansion. However, that has been the case for several years, and investors seem to be largely ignoring valuations. Whether we return to an era of price discovery is uncertain, but in a sense it would be welcome.
Much of the recent market enthusiasm is due to investments in artificial intelligence (AI), which came under the microscope recently with the reveal of DeepSeek, a Chinese model that allegedly produced competitive results at a fraction of the cost of the primary American models. We do not claim to have any unique insight on how this will affect American companies, and our hope is that it will spur more efficient innovation, but as the technology progresses we expect to keep seeing about developments that could shake up the landscape. It’s a reminder that while many AI-related companies are certainly worth investing in, they are trading based on expectations which could turn on their head quite quickly.
The S&P 500 returned 2.8% in January amid whiplash policy changes and a promising start to the earnings season. The Bloomberg US Aggregate Bond Index rose 0.5% as the 10-Year Treasury Rate fell to 4.58% and the Federal Reserve opted to keep short rates unchanged.
Charts and research provided by Strategas Research Partners, LLC and Y Charts, Inc .
Material discussed is meant for general/informational purposes only and it is not to be construed as tax, legal, or investment advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary therefore, the information should be relied upon when coordinated with individual professional advice. Past performance is no guarantee of future results. Diversification does not ensure against loss. The opinions and forecasts expressed are those of the author, and may not actually come to pass. This information is subject to change at any time, based on market and other conditions.
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