2025 Market Update: Investing in Times of Uncertainty
To fully grasp the developments and subsequent movements that have taken place in financial markets this year, it is essential to step back and remember the consensus expectations that shaped investor sentiment coming into 2025.
What Happened?
Only a few short months ago, every major investment bank and Wall Street research firm released their 2025 market outlook. Most were optimistic about the prospect of tax cuts, deregulation, and/or pro-growth policies under the Trump administration; some were enthusiastic that a shift towards “America First” policies would amplify the theme of American exceptionalism – an expression that entered the financial lexicon late last year and is used to describe the outperformance of U.S. stocks relative to their International counterparts over the last two decades.
In our 2025 outlook, we stated:
Nearly all newly elected presidents enjoy a honeymoon period in which the public is hopeful about the potential of better times ahead before the hard work of governing begins…Major policy changes are often announced quickly but take time to implement…[and] the sequence of new policies and the rigor of their implementation will likely impact market returns in the year ahead.
If tax cuts are prioritized first, Wall Street analysts will likely increase their 2025 and 2026 corporate earnings estimates, which could provide a nice tailwind for stocks. Conversely, if tariffs are the focus day one of the new administration, concerns about reigniting inflation and corporate profit margins may arise.
On February 19, one month after Donald Trump took office, the S&P 500 (the index) traded to a new all-time high. Shortly thereafter, his honeymoon period came to a rather abrupt end. The sequence of new policies and the rigor of their implementation did, in fact, impact market returns as investors began to realize that tariffs are the primary focus of the Trump administration. This realization suddenly challenged consensus expectations and sparked concerns about reigniting inflation and corporate profit margins compressing, which then led to a drastic deterioration in investor, consumer, and business sentiment.
The headline images below from wsj.com illustrate how quickly the market’s mood can change. Over the last three months, investor sentiment has undergone a transformation from unbridled enthusiasm to what now seems to be a combination of uncertainty-induced anxiety and superstitious hope.
What is Changing?
The initial optimism following President Trump’s victory in November has shifted to significant uncertainty as markets grapple with determining whether tariffs are simply a policy tool that will be used by President Trump to drive a hard bargain, or a new source revenue under the President’s long-term plan to reshape the American economy. Additional volatility is expected as markets continue to recalibrate to frequent shifts in government policy.
One of the most difficult aspects of investing is separating signal from noise, and there has been a lot of noise thus far in 2025. Most now expect President Trump’s tariff regime will increase inflationary pressures and stall economic growth. Over the last few months, major investment banks and Wall Street research firms have updated their 2025 outlooks and increased their recession odds.
If the market has taught investors anything over the last few months, it’s that the consensus can be very wrong, very fast.
Where Do We Go from Here?
The positive news for investors is that diversification has provided stability to portfolios during 2025. The Bloomberg Barclays Aggregate Bond Index has posted a nicely positive 2.0% return year-to-date1, providing an offset within balanced portfolios to the S&P 500’s -9.9% year-to-date1 decline. The diversification benefit bonds have provided to balanced portfolios thus far in 2025 has made the stock market sell-off easier to stomach for long-term investors with recent memories of 2022, when bonds posted their worst yearly decline on record as stocks simultaneously sold-off.
Volatile market environments can lead investors into an illusion of control, making them feel as if paying more attention to headlines and the daily movements of their portfolio will yield better results. Market fluctuations are beyond the control of individuals. Factors influencing market movements can vary daily, weekly, or monthly. Oftentimes, sticking with an investment strategy during times of stress is more important than the strategy itself.
Volatility is never comfortable in the moment, but these types of environments have historically presented attractive opportunities for patient investors to take advantage of. At Tolleson, we remain deliberate in our investment approach as volatility is expected to persist, and we will continue to assess the impact tariffs have on growth rates across a broad range of asset classes, industries, and regions.
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Index Disclosure: The returns and volatility of the indices displayed may be materially different than the client’s account, and a client’s holdings may differ significantly from the securities that comprise the indices. The indices are disclosed to allow for comparisons to well-known and widely recognized indices, and may or may not be appropriate for performance comparisons. An investor cannot invest directly in the index.