Market Update & Economic Insights
Recent headlines have fueled market volatility, particularly in response to White House announcements on tariffs. Consumer confidence has also been down. While short-term reactions can be emotional, we emphasize staying focused on the longer-term.
Federal Reserve & Economic Trends
The Federal Reserve remains in the spotlight, with recent decisions signaling a more measured approach to tightened monetary policy. This has implications for interest rates, economic growth, and inflation expectations. They also continue to prioritize hard economic data over “soft data” as Jerome Powell put it during the interview session on 3/19. Consumer sentiment is one example of soft data. He said the consumer sentiment trends we are seeing are a result of survey questions given to various respondents and that it can be very subjective.
Federal Reserve Rate Decision and Future Economic Projections
The team spoke about how the Federal Reserve held rates steady at 4.25% to 4.50%. Jerome Powell talked about “tariff inflation” several times in the post decision news conference and appeared to indicate the Fed is acknowledging that tariffs may cause prices to go up. This is also evident from the Fed’s latest projection for inflation where they raised PCE inflation from 2.5% to 2.7%. Powell also said that this spike in inflation could be “transitory”, or temporary, using an inertia analogy similar to when you jerk forward when you stop your car quickly. But then you settle back in. The team discussed this and felt it made sense for the Fed to hold steady for the time being until better clarity can be attained on tariffs.
The team also discussed how the Fed projected a slowdown in GDP growth, from 2.1% to 1.7%. They also agreed this is the result of uncertainty around tariffs. But there are other factors at play here with the new administration policies, such as immigration, deregulation and government spending. This all adds up to continued uncertainty which has led many to conclude a possible growth slowdown is in the works. The Fed appears to be signaling that now too with their GDP projection.
Quantitative Tightening
The team also discussed how the Fed adjusts their balance sheet as part of their approach to help keep prices, inflation and jobs steady. This sometimes gets overlooked when all the talk is around interest rates, or the “dot plot”. But the Fed’s balance sheet is just as important.
The process by which the Fed uses to adjust its balance sheet is called “quantitative easing” or “quantitative tightening”. “QE” and “QT” for short. In very simple terms, this is like loosening or tightening the belt around your waist. If the Fed “tightens” policy, they are hoping to slow the economy down. If they “ease”, they are hoping to expand the economy. When they ease, interest rates go down, which helps expand the economy (easier to borrow). When they tighten, it contracts the economy. In the current cycle, the Fed has been tightening.
For a deeper dive into QE or QT, please see this article from the Federal Reserve Bank of Richmond. For example, it says that tightening by $2.5 trillion over several years would equate to raising rates by half a point.
It’s a Balancing Act
What the Fed is doing is by no means a perfect science. But the beauty of this is that the Fed has several tools at its disposal to help keep our economy in check. To help engineer the “soft landing” that has been spoken of for so long now. In other words, it’s a balancing act. We should not lose sight of that. But at the same time, we must also consider the implications of the new administration’s policies like trade, immigration, deregulation and government spending. The team discussed this and agreed this all warrants a continued cautious approach.
Higher versus Lower Income Earners
While concerns over inflation and economic slowdown persist, consumer spending patterns indicate resilience among higher-income earners, even as lower-income groups face more pressure from rising costs. The team discussed possible areas of spending where lower income earners may be starting to cut back as uncertainty around growth continues.
Earnings Growth & Market Positioning
The discussion shifted to current earnings estimates moderating from 12% to 7% growth as the first quarter earnings season has come to a close. However, a potential shift to 8-10% earnings growth could support more positive market sentiment as we finish out 2025.
Looking ahead to 2026, earnings growth projections are still in the mid to low double digits hovering around 12-14. Which the team acknowledged could be favorable for the market in the second half of the year. But the team agreed a lot can change before then.
Sector-wise, energy and healthcare remain top performers, and we are evaluating further exposure in these areas. Additionally, bank stocks may present opportunities as depressed valuations on competent banks begin to show during this period of uncertainty. Deregulation policies are favorable to banks too, so it is important to look beyond the tariff impact on banks because deregulation is indeed a priority for the new administration.
Portfolio Adjustments & Client Strategies
We are planning to rebalance the models with these thoughts in mind, and to align with both taxable and non-taxable investment strategies. We are also planning to reduce beta exposure to help minimize volatility in the portfolios. For clients with significant taxable investment income, we are exploring holistic financial planning tools to enhance tax efficiency. Maintaining a diversified and disciplined approach is crucial amid economic fluctuations.
