Negative news continues to weight on financial markets the past few weeks—from big on-off-on-off tariff threats and U.S. economic indicators quickly shifting from sturdy to increasingly shaky.

 

Changes to the Federal Reserve’s thinking, and significant foreign policy moves continue to alter the landscape.

 

Amid the confusing and rapidly shifting market dynamics, we will use today’s note to focus on four key questions on investors’ minds about the U.S. equity investment environment.

 

Stagflation, Recession Or Both ?

A number of Q1 economic indicators have weakened.

 

U.S. GDP growth for the quarter will likely fall short of the current 2.1 % consensus forecast—potentially well short—when the preliminary data is reported on April 30.

 

 

At this stage, we can’t rule out that this could spill into Q2.

 

RBC Economics recently lowered its full-year 2025 U.S. GDP growth forecast to 1.6 % from 2.0 %. Yesterday, the Fed downgraded its forecast to 1.7 % from 2.1 %. The Fed even hinted at rising stagflation risks.

 

The 1970s—a period of prolonged economic malaise coupled with very high inflation—that’s not what the Fed is alluding to.

 

 

However, the U.S. central bank does see the potential for GDP growth to slow this year and for inflation to rise somewhat higher due to tariff risks.

 

Tariff fears have weighed on some Q1 economic indicators, especially those tied to consumer, business, and investor sentiment. There are signs that this is prompting a pullback in spending overall, however, some of the weakness also may be due to the normal ebb and flow of the business cycle.

 

The U.S. economic expansion has lasted for 58 months, which is just shy of the 60-month long-term average since 1933. The business cycle could simply be maturing and slowing down like it has many times before, and this process may have accelerated due to Washington policy uncertainties.

 

While a recession is not our base-case forecast for this year, nor is it that of RBC’s economists, we’re monitoring important recession indicators and other relevant economic data closely.

 

How much longer is the tariff situation going to last?

Regarding tariffs, the bottom line is: The high will tariffs be and the long will they last ?

 

When all is said and done, RBC Global Asset Management Inc. Chief Economist Eric Lascelles still thinks we’re more likely to end up with tariffs raised moderately, and some of the large tariffs that are introduced will be removed or reduced after trade deals are negotiated.

 

Getting to that point could continue to be challenging for markets.

 

There are early signs that U.S. President Donald Trump’s economic team—including those who spent many years in very senior positions on Wall Street—heard the market’s message of the past few weeks to at least dial down the drama and roll out tariffs in a more orderly way.

 

U.S. Trade Representative Jamieson Greer will play a bigger role in coordinating the rollout of reciprocal tariffs in April, and that there will be a formal process for businesses and other key stakeholders to provide feedback before they are implemented.

 

Negotiations with some trading partners are already taking place, and this will continue with some of it covered in the press, and a lot of it probably behind the scenes.

 

The process needs to play out. Expect to see more tariff-related volatility for markets this year, at least.

 

As stated in our previous blog, there are many clues to be taken from America’s trade war with China in 2018 (Trump 1.0)

 

Risk & Reward Potential For Equity Markets ?

Given the economic vulnerabilities, RBC Capital Markets, LLC’s Head of U.S. Equity Strategy Lori Calvasina recently lowered her year-end S&P 500 price target to 6,200 from 6,600.

 

This translates into almost 9.3 % upside from the 5,675-closing level on March 19.

 

This price target incorporates RBC Economics’ 2025 GDP growth forecast of 1.6 %. It’s important to keep in mind what price targets actually are - targets.

 

Calvasina describes her process as “a compass, not a GPS” and elaborates that her price target is “a signaling mechanism designed to reflect our general view of where stocks are headed.”

 

She considers five models and a wide range of economic and other data to determine her price target.

 

As part of this rigorous, detailed process, she would revise the target “if/when new information relevant to our forecast becomes available …” Calvasina also lowered her 2025 S&P 500 earnings forecast to $264 per share, well below the $271 per share Bloomberg consensus forecast of industry analysts.

 

The latter will likely end up coming down in the months ahead.

 

In terms of downside risk to the market, Calvasina’s “bear case” for the S&P 500 is 5,550 at year end, slightly lower than the market’s current level. This scenario incorporates more lackluster GDP growth of 0.1 % to 1.0 % for full-year 2025.

 

With this “bear case,” we’re mindful the S&P 500 could push lower than 5,550 before finishing around there at year end. Currently, the S&P 500 has declined 7.6 % from its all-time high reached in mid-February through March 19.

 

Contrarian indicators like the American Association of Individual Investors (AAII) survey, which attempts to measure investor sentiment. The proportion of bulls has plunged to very low levels in the AAII survey, and the proportion of bears has surged to very high levels. Historically, this has signaled that the market could bounce, at least over a course of months.

 

When AAII bullish and bearish sentiment levels in the past were as extreme as they are currently, the S&P 500 has risen around 10 % on average nine months later.

 

This is close to the upside potential incorporated in Calvasina’s 6,200 price target for the S&P 500.

 

How To Position Equity Portfolios During This Period ?

Portfolios should stay committed to equities up to but not beyond the long-term strategic allocation level.

 

Put simply: market weight – not overweight.

 

It is prudent to hold a high proportion of quality stocks. These are stocks of companies led by strong management teams who have weathered business cycle shifts before and who have demonstrated effectiveness at managing expenses during periods of economic uncertainties.

 

Within this category, we continue to focus on dividend growers and earnings growers, specifically those who are reasonably priced (“GARP” stocks).

 

If you have any questions or comments, please feel free to let me know.