Investment Commentary – March 10, 2025

Equities

The S&P 500 returned -3.1% as uncertainty over tariffs and weak economic data roiled markets. The U.S. dollar saw its longest losing streak since last September, ending the weak down 3.5% while treasury yields climbed amid worries that tariffs would spark inflation. The ‘Magnificent 7’ stocks again dragged on the market, returning -4.5%. Financials (-5.9%) and consumer discretionary (-5.4%) were the worst-performing sectors in the S&P 500; healthcare (+0.2%) was the only sector to eke out a positive performance. EAFE markets returned +3.1% with Europe (+3.7%) leading. EM markets returned +2.9% with broad-based gains.

From a valuation perspective, U.S. large caps trade above +1 standard deviation based on historical forward P/E ratios with the S&P 500 at +1.5. The NASDAQ is at +0.7. For the next 12 months, EPS growth for S&P 500 is expected to be 10.3% (vs. 6.9% annualized over the last 20 years). For the next 12 months, EPS growth for NASDAQ is expected to be 18.5% (vs. 10.7% annualized over the last 20 years). All U.S. indices, including the S&P 500 (U.S. Large Cap), NASDAQ, Russell Midcap (U.S. Midcap), and the Russell 2000 (U.S. Small Cap) trade at or above their 20-year averages based on forward P/E ratios while the MSCI EAFE (Non-U.S. Developed Market Equities) and MSCI EM (EM Equities) are inline.

Fixed Income

Investment-grade fixed-income sectors posted negative returns as rates rose across the curve. Municipals returned -0.4%, U.S. AGG returned -0.6% and U.S. IG returned -0.7%. HY bond returned -0.3% as spreads widened 11bps while bank loans returned -0.1%. EM debt returned -0.2% as the U.S. dollar fell 3.5%.

Rates

Rates rose across the curve as markets worried about the potential for inflation pressures due to tariffs; further sparking concerns were comments from the Fed, which showed little inclination to move quickly with further rate cuts. The recession-watch 3M-10Y spread widened 9bps to -1bps and remains inverted. The 2Y-10Y spread widened 8bp to +30. Rates rose sharply in developed markets, especially in Europe, as governments there look to boost borrowing and spending. The BTP-Bund spread is at 1.12%. 5-year breakeven inflation expectations fell 5bps to 2.57% (vs. a low of 1.88% on Sept 10); 10-year breakeven inflation expectations fell 2bps to 2.35% (vs. a recent low of 2.03% on Sept 10); the 10Y real yield rose 12bps to 1.96%. The market now expects three cuts in 2025 vs the Fed’s guidance of two cuts. At year-end 2025, the market expects the Fed Funds rate to be 3.6% vs. the Fed’s guidance of 3.75%-4.00%.

Currencies/Commodities

The dollar index fell 3.5%.; the Euro gained 4.4% vs the U.S. dollar. The commodities complex fell 0.3%, while energy prices fell 2.3% for the week. Brent prices were 3.9% lower to $70/bbl. U.S. natural gas prices rose 14.7% while European gas fell 5.8%, both due to weather forecasts.

Market monitors

Volatility rose for equities and for bonds (VIX = 23, MOVE = 104); the 10-year average for each is VIX=18, MOVE = 78. Market sentiment (at midweek) remained negative at -38.