Quarterly Market Update: 2025 Q1

Market Summary

All major asset classes finished 2024 positively, with U.S. stocks leading again. Risky assets surged in the 4th quarter after a Donald Trump presidential victory, in anticipation of a more deregulated business environment. Treasury yields rose, sending bond prices down in the year’s final months, leaving the Bloomberg U.S. Aggregate Bond Index barely clinging to a 1.25% total return for the year.

The Federal Reserve continued its trend of cutting rates in the 4th quarter. We saw the federal funds rate drop 0.25% in November and December. However, investors took caution when the Federal Reserve signaled fewer rate cuts could be on the horizon.

The chart above shows the S&P 500 Index at key inflection points along with the forward price-to-earnings (PE) ratio. A few key takeaways about the chart.

1. Valuation matters. Periods like 2002 and 2009, when the forward P/E was well below the long-term average, became troughs on the chart. Meanwhile, elevated valuation at market peaks in 2000 and 2022 led to large drawdowns when there was a catalyst like a recession or interest rate hikes.
2. In hindsight, we can see these inflection points easily, but along the way, there were many highly volatile periods like between 2009 and 2020.
3. While there are significant sell-offs along the way, equity investing provides investors long-term rewards as the stock market is far higher today than it was in 1996.

2025 By the Numbers

As of January 2025, significant discussions are underway regarding the impending expiration of key provisions from the 2017 Tax Cuts and Jobs Act (TCJA), scheduled for December 31, 2025. Notably, the individual tax rate reductions, the doubled standard deduction, and the expanded child tax credit are among the provisions set to lapse. If these expire without legislative action, many taxpayers could experience increased tax liabilities starting in 2026. The Congressional Budget Office has projected that extending these expiring provisions could add approximately $4.6 trillion to the federal deficit over the next decade. In response, President Trump has advocated for a comprehensive tax-and-spending bill aimed at extending these tax cuts and introducing additional reductions, including lower corporate tax rates and tax relief on tips and Social Security payments. However, this proposal faces challenges within Congress, including internal disagreements among House Republicans and concerns about the potential impact on the national debt and inflation. As the expiration date approaches, policymakers are tasked with balancing the goals of sustaining economic growth and ensuring fiscal responsibility.

Also with the new year comes plenty of updated financial planning limits and figures. See the table below for some important ones that are worth highlighting.

2025 Outlook: Navigating Opportunity and Risk

As we enter 2025, several themes will shape the investment landscape:

1. Slowing but Positive Growth: Economic activity is likely to moderate further as the lagged effects of tighter monetary policy continue to materialize. However, the probability of a recession remains balanced with the possibility of a soft landing.
2. Earnings Growth Pivot: Corporate earnings growth is expected to recover modestly in 2025, supported by easing cost pressures and continued innovation in key sectors like AI, healthcare, and clean energy.
3. Global Growth Leadership: Emerging markets, particularly in Asia, are well-positioned to outpace developed markets. Opportunities may arise for diversified portfolios seeking exposure to these regions.
4. Monetary Policy Uncertainty: While the Fed appears to have paused rate hikes, market volatility could resurface if inflationary pressures persist or labor market dynamics shift.
5. President Trump’s Economic Policies: Tariffs, deportations, social spending cuts. Before the election, Donald Trump’s campaign rhetoric still had many people questioning whether he was serious or bluffing. Now, shortly after taking office, we’re starting to see the roll out of these policies. How much effect these policies will have on the economy and inflation is yet to be seen.

Strategic Positioning

In this environment, maintaining a diversified portfolio remains paramount. Our key strategies include:

• Equity Focus: Emphasizing quality companies with strong balance sheets and earnings potential.
• Income Opportunities: Leveraging high-yielding fixed-income instruments to enhance portfolio stability and income generation. Money market funds continue to be a viable short-term investment with their yields still in the 4% range.
• Global Diversification: Continuing to look overseas to diversify away from the concentration risk found in domestic indices. International equity valuations are
• Risk Management: Employing active management and rebalancing to navigate market volatility and mitigate downside risks.

Final Thoughts

While uncertainty is a constant, so too is the opportunity for disciplined investors. As always, our focus remains on aligning your portfolio with your financial goals, risk tolerance, and long-term vision. Should you have any questions or wish to discuss your investments further, please do not hesitate to reach out. We wish you and your families a prosperous and healthy 2025. Thank you for trusting us as your financial partner.

1. Source: Compustat, FactSet, Federal Reserve, Refinitiv Datastream, Standard & Poor’s, J.P. Morgan Asset Management.
   Dividend yield is calculated as consensus estimates of dividends for the next 12 months, divided by most recent price, as provided by Compustat. Forward price-to-earnings ratio is a bottom-up calculation based on IBES estimates and FactSet estimates since January 2022. Returns are cumulative and based on S&P 500 Index price movement only, and do not include the reinvestment of dividends. Past performance is not indicative of future returns. ↩︎