I am writing to you from Mexico, as we are away with our family for March Break.
Similar to Canada, the Mexican economy has fallen into the crosshairs to this U.S. initiated trade war. Like Canadians, many of the locals have openly shared their fears and concern for the future of their country.
“El Diablo” or The Devil is a widely used moniker here to describe current U.S. President Donald Trump.
The S&P 500 is down 6.6 % from its mid-February all-time high. The tech-heavy Nasdaq has fallen 9.8 % during the same period.
The current situation can be separated into five catalysts, with the bottom line being that it’s not time to throw in the towel just yet !
- Support For Trump’s Economic Agenda Is Falling: When U.S. President Donald Trump won the election, many market participants rejoiced over the potential for low tax rates to be extended and widespread deregulation to be implemented. Investors have now become uneasy about the president’s economic agenda following some hefty tariffs levied on Canada and Mexico. Additional tariffs layered onto China, and the Trump team’s statements that big “reciprocal” tariff announcements are coming in April. The market’s jitters persisted on Thursday despite announcements that a tariff reprieve had been issued for Canadian and Mexican imports until April 2.
- Assumptions That Tariffs Are A Temporary Negotiating Tool: The on-off-on-off nature of the Trump team’s tariff announcements has generated uncertainties—and the market doesn’t like uncertainties.
RBC Global Asset Management Inc.’s Chief Economist Eric Lascelles still thinks it’s more likely than not that the bulk of the tariffs will be short-lived, but we can’t ignore the economic risks associated with them.
The longer high tariff rates last, the greater the negative impact on U.S. GDP growth and inflation, and the greater the GDP hit for Canada and Mexico.
I would go as far as to say that Trump could overplay his hand.
RBC Fixed Income Analyst, Atul Bhatia recently wrote “If counterparties are pushed too far, the U.S. could end up kicking off a trade war on the assumption that it will all be resolved quickly and favorably but ends up dragging out. This could conceivably lead to a global economic growth slowdown. This is not our base case, but it should not be dismissed out of hand.”
- Q1 U.S. Economic Data Has Deteriorated: Economic indicators has worsened at least moderately, including various inflation gauges, consumer confidence, retail sales, service sector activity, and various employment indicators.
While some of this may have occurred regardless of Trump’s policy decisions, tariff uncertainties have weighed on sentiment indicators and caused inflation expectations to jump.
Despite weaker data, economists’ consensus forecast for Q1 GDP growth has dipped only slightly from a peak of 2.25 % in January to 2.17 % currently.
Q1 GDP growth projection by the closely followed Atlanta Fed GDPNow Forecast, for example, has flipped from +2.32 % to -2.41 % in just the past week.
For now, Lascelles believes the damage to Q1 won’t be as great as currently feared. In the past, the Atlanta Fed gauge has been a good directional signal—meaning if it moves by a lot in one direction or the other and is much different than the consensus forecast, it’s usually an indication that the consensus forecast is off the mark.
- Full-Year 2025 GDP Growth Concerns: The notion that Q1 GDP could be soft or worse has raised the possibility that full-year 2025 GDP growth could end up shy of the 2.28 % consensus forecast, especially if high tariffs remain in place.
While it’s much too soon to foresee a recession in the immediate time frame, the level of GDP growth matters for the market.
RBC Capital Markets, LLC’s Head of U.S. Equity Strategy Lori Calvasina notes that historically the sweet spot for U.S. equities is when annual GDP growth has registered between 2.1 % to 3.0 %—the so-called “Goldilocks” level. This supports solid corporate revenue and profit gains, as well as capital investment and innovation. Conversely, when GDP growth slips to the 1.0 % to 2.0 % range, the market often falters as sales, earnings, and capital investment are dampened.
The risk of sluggish, sub-2% 2025 GDP growth, combined with elevated inflation, has risen.
- AI stocks Have Sold-Off: Concerns about artificial intelligence (AI) stocks, which represent a meaningful share of the S&P 500’s market capitalization, have also constrained the broader index.
Six of the Magnificent 7 stocks stumbled after their quarterly earnings releases. The earnings results and management guidance for important segments didn’t rise to the very high investor expectations.
America’s AI leaders will continue to face scrutiny in coming quarters to start showing real prospects for the return on invested capital in their AI buildouts - especially given that their price-to-earnings valuations remain high.
- Likely Downgrades To Earnings Forecasts: The listed factors above put 2025 consensus S&P earnings growth forecast of $271 per share at risk. This estimate has declined from $273 per share since mid-January. If economists’ 2025 consensus 2.28 % GDP growth forecast deteriorates meaningfully, consensus earnings forecast will retreat further.
The Answer: Focus on Quality
Again – it is not time to throw in the towel on the two-year-plus bull market just yet.
During the recent downdraft, investor sentiment became quite negative, and this is often a contrarian indicator.
Breadth measures (percentage of stocks moving up versus those moving down) have not deteriorated significantly within the S&P 500 but are weakening for smaller-capitalization stocks.
Investors should brace for additional volatility due to economic and earnings growth risks and the Washington policy uncertainties, particularly since additional large tariffs could be forthcoming.
This is not the time to Overweight equities in portfolios. The strategy is to remain committed to equities up to but not beyond the long-term targeted asset allocation levels—a Market Weight position.
This period of uncertainty as a good time to boost the quality of equity holdings, with an emphasis on dividend growers.
We have held several conversations with individuals and families over the past 2 weeks, to review portfolios with clients and to advise on portfolios with non-clients. If you have any questions or comments, please feel free to let me know.