Summary
Outlook for 2025: Tariff Uncertainty The market response to President Trump’s ‘Liberation Day’ tariff announcements on April 2, 2025, has been severe. Heading into Liberation Day, the S&P 500 was already down 8% from the all-time highs set in mid-February. Indeed, the first three months of the year balanced a wave of enthusiasm regarding potential de-regulation and lower taxes with growing concern regarding still-coalescing trade policy. The Liberation Day details shocked investors and sent the market into full-scale panic. From a close of 5,671 on April 2, the S&P 500 swooned to 4,983 by April 8 — a decline of 12%. Investors were fearful that the tariffs as proposed along with retaliatory tariffs from trade partners could pitch the U.S. economy and perhaps the global economy into recession. As stocks tanked, the expected safe-haven trade in the U.S. Treasury market did not materialize. Instead, Treasury yields rose, and the dollar weakened — signs that global investors were exiting U.S. asset classes formerly perceived as rock-solid. The market has since bounced back and, as of mid-April, the S&P 500 was trading near 5,425 — up about by about 8% from the April 8 low but still 12% below its all-time high. The administration is seeking to make tariff-reducing deals with a multitude of nations. Various nations and product categories have been granted exemptions, typically for a few months. This has created a situation of flux whereby modeling the exact impact of all tariffs is nearly impossible. A blanket, one-size-fits-all tariff would enable companies to assess projected impacts and get on with business planning. The unsettled and ever-changing state of the tariff agenda is causing businesses and consumers to pause spending while awaiting clarity. The first quarter began with optimism but ended with investor foreboding, which has not dissipated in the second quarter. Tariffs have taken a toll on markets, and they have decimated consumer sentiment. Tariffs are not the only factor in the economy, however. Exiting the first quarter, the U.S. economy still appears to be on a solid foundation, given a healthy employment situation and prospects for EPS growth this year. The economy will need this foundation as the country and the world adjust to the developing trade war. Perspective on the Year Ahead In 2023, the stock market rallied over 20% on signs that inflation was falling, the Fed would wrap its rate-hiking campaign, and the supply chain would normalize. In 2024, stocks again rallied more than 20% as economic growth strengthened, earnings growth accelerated, and jobs growth remained hearty. The 2025 year began with uncertainty but also optimism that the new administration would be more business-friendly and would quickly move to lower taxes. Investors have turned pessimistic primarily on tariff policy, but also on concerns about possible ripple effects across the heartland from DOGE job cuts and the re-ordering of international relations with friends and foes alike. In a hangover from 2024, inflation remains stalled in the ‘last mile’ between 3% and 2%. For the past three years, investors have been attuned to monetary policy as the Fed sought to reduce inflation. The focus of investors in 2025 has been shifting to fiscal policy given the administration’s pledge to cut taxes further. The major geopolitical event of 2023 — the war between Israel and Hamas — continued into 2024. The hostage-exchange program and uneasy peace treaty reached in 2025 appears to be fraying. President Trump is discovering that ending the war in Ukraine is not going to be easy. Europe has stiffened its resolve to defend Ukraine following the Mr. Trump’s more-accommodative treatment of Russia’s Vladimir Putin and U.S. statements regarding Greenland, Canada, and the Panama Canal. Economic activity in China, the world’s second-largest economy, has warmed from post-COVID lows, but remains mixed. The government’s ambitious fiscal-stimulus program to spur economic recovery has been muted by demographic factors. Triple-digit tariffs levied by the U.S. and by China against one another threaten to effectively end all trade between the world’s two biggest economies. The two sides may be able to negotiate tariff rates down from these impossible levels, but any final tariffs are likely to remain prohibitively high. The global macro-environment had appeared moderately positive for U.S. stocks. Liberation Day tariffs and reciprocal response to U.S. tariffs from trading partners threaten to unleash a difficult and prolonged trade war. Although some of the challenges facing U.S. stocks in 2025 reflect disruption from new policies coming out of Washington, we currently do not expect policy shifts to tip the economy into recession. Measures of the commercial and industrial economy — including manufacturing PMIs, durable goods orders, and industrial production — have moderated but remain consistent with ongoing, if muted, growth. Sentiment indicators such as small-business confidence surged on Donald Trump’s election but have since turned lower. Sentiment is an unreliable predictor of future activity and can shift rapidly. Weariness with inflation and high financing rates continued to weigh on consumer confidence in 2024. High and prolonged tariffs risk pushing inflation higher, potentially causing already strapped consumers to pull back from big-ticket purchases. Tariffs threaten multi-year progress in curbing inflation but could have a muted impact on overall price trends depending on future negotiations among nations and also on the willingness of companies to absorb rather than pass on higher costs. We expect the U.S. economy to continue expanding in 2025, remaining on a narrow growth path in line with subdued population growth and higher productivity. Following 2.9% year-over-year GDP growth in 2023 and 2.8% GDP growth for 2024 (both revised), Argus as of mid-April 20205 is modeling 2025 GDP growth of 1.3%. That target was recently reduced from 2.0%. The Fed successfully reduced inflation growth, although getting to the Fed’s 2% target has proven to be challenging. The federal funds rate was 4.25%-4.5% as of April 2025, unchanged from year-end 2024, while the core PCE Inflation Index was up 2.8% on an annual basis. Based on the Fed’s revised ‘dot plot’ from March 2025, we continue to expect two rate cuts in 2025, back-loaded to the second half. Argus currently expects short-term yields to move gradually lower from current levels and long yields to widen their relative premium to short yields. Early in April, Fed Chair Jerome Powell warned that President Trump’s sweeping tariffs could reverse inflation progress and induce ‘stagflation.’ Those concerns could keep the Fed on the sidelines in 2025. At the sector level, key drivers for 2025 earnings are likely to include strong growth in Healthcare earnings and improved performance from sectors (Energy, Materials, and Industrials) that dragged on 2024 earnings. Energy prices have been volatile in recent years. We look for better balance in the supply-demand equation to keep energy p
