GSAM's Investment Committee Releases Their 1st Quarter 2025 Market Update

April 15, 2025

The first quarter of 2025 has been marked by financial uncertainty, driven by inflation, trade tensions, and increased market volatility. Investors, businesses, and policymakers are bracing for continued challenges as they navigate the complexities of the global economy. The anticipation and implementation of tariffs has rattled investors and those seeking more clarity on how additional tariffs will affect markets. In these turbulent times, staying informed and adapting quickly will be essential for those hoping to successfully navigate the evolving financial landscape. Looking ahead, much will depend on how these factors evolve and how the Federal Reserve (“The Fed”) and other key players manage the economic risks.

The tariff policies the Trump administration has enacted recently has affected markets in recent weeks. Uncertainty remains regarding the overall impact of these new policies on the broader economic landscape for both consumers and corporations. Fortunately, the U.S. is coming from a position of current economic strength across many metrics, as detailed here: 

• Inflation: The Consumer-Price-Index (CPI) is a widely used data point to measure the price increases of everyday items and services. The most recent CPI reading showed prices were increasing at a rate of 2.8% per year. This is an improvement from where inflation was a year ago (3.2%), but the progress on reducing inflation has slowed over the last twelve months as the CPI measurements have remained range bound between 2.8-3.4%, well above the target of 2% annual growth. Tariffs will likely lead to a modest rise in inflation for the short-term but should subside as substitutes and equal ground is found among trading partners.

• Labor Market: The current unemployment rate as of February, stands at 4.1%, a very low rate that has historically indicated full employment. For comparison, this is well below the 50-year average of around 6%. While this rate signals a strong labor market, we have yet to see the recent cost cutting initiatives by corporations and the federal government reflected in the data. Layoffs increased to 172,000 in February, the highest level since mid-2020, with roughly 62,000 from government jobs. While we anticipate a modest increase in layoffs and unemployment, it is worth noting that federal workers represent only 1.9% of all jobs, equating to about three million positions. Job openings continue to remain above the pre-pandemic average and indicate there are more job openings than unemployed workers seeking to fill those roles at this time. This data suggests that the labor market is still well positioned to withstand a modest slow down and has some cushion for the increased layoffs recently announced.

• Consumer Spending: Americans are less optimistic thus far in 2025 about the economy than in recent years. Consumer sentiment has declined to a two-year low amid concerns about rising prices, job insecurity, and economic instability. Again, much of this uncertainty stems from the unknown impact of the tariffs. Fortunately, household balance sheets remain solid with manageable debt levels. While consumer debt levels have increased from historically low levels in 2021, the debt payments facing consumers as a percentage of disposable income is still well below average levels over the past 15 years. Maintaining fixed-rate mortgages at low rates has supported the consumer debt picture despite an increased rate environment. We have noticed increases in delinquency rates for credit cards and auto loans, but these categories represent much smaller portions of the overall debt of the average consumer and are not yet cause for alarm. We believe the average consumer has cushion within their income to withstand some heightened inflation without derailing overall consumer spending and impacting GDP, but we are monitoring whether the decline in sentiment will translate to real softness in spending decisions among consumers.

• Corporate Earnings: After posting earnings growth of over 17% for the fourth quarter 2024, first quarter earnings estimates have been revised downward over the course of the first quarter 2025 as a result of the uncertain impact from tariffs on U.S. companies. Previously forecasted to grow at 12-15% for the year, revisions for S&P 500 earnings growth have fallen to 7-10%. We would argue that this is still a healthy level of earnings growth and that stocks may do quite well through the remainder of the year. Larger corporations also have healthy levels of cash and are not over-levered with debt. The outlook for corporate earnings for the remainder of 2025 is questionable at this time until more details emerge about the permanence of the tariffs and which industries may be most affected. This is the area we are most focusing our research efforts and tracking for changes that may impact markets throughout the year.

Shifting our focus to securities markets, please see below the summary performance of various equity indexes.

Since emerging from the bear market associated with the Great Recession in 2009, U.S. stocks have dominated their international counterparts. However, after falling over 8% in the last quarter of 2024, international stocks have been the lone bright spot in the equity market in 2025. For the first half of the quarter, U.S. equity markets looked as if they were on track to continue their upward trend, as the S&P 500 reached another all-time high on February 19th. Nevertheless, after experiencing back-to-back years of double-digit returns, a more modest performance in 2025 was expected for large cap equities.

The S&P 500 remains extremely concentrated in the large cap technology sector. More specifically, the top ten names in the index make up over 35% of the index value. When these top ten names are not performing well, a significant portion of the other companies within the index must pick up the slack in order to see a positive total return for the S&P 500 Index overall. Over 200 stocks in the index had a positive return through March 31, but the top names were some of the biggest laggards, dragging the index down with them.

As uncertainty surrounding potential policies and tariffs mounted, short-sighted investors began to panic and reduce their exposure to U.S. equities. In the sixteen trading days after the S&P 500 reached its peak, the index fell 10%, generally known as a correction. Corrections are quite common and are a healthy part of normal market cycles. Since 1950, the S&P 500 has experienced a decline of 10% or more thirty-four times, which equates to about once every couple of years on average. Historically, it takes about four months for the market to fully recoup from the losses associated with a correction. As Q1 earnings season commences, the commentary from management could offer reassurance that domestic companies are prepared to navigate the new tariff landscape.

Aside from international equities, fixed income assets have rewarded balanced portfolios by providing low correlation to domestic equities, and thus a positive total return in the first quarter as shown in the table below.

Over the last twelve months, traditional fixed income assets have delivered respectable returns in line with their long-term averages, even outperforming some equity indexes. As interest rates have remained elevated for the last couple of years, bonds have benefitted from greater yields. The yields that bonds are currently offering can act as a cushion for a potential rise in interest rates. As a refresher, bond prices and interest rates move inversely of each other. If interest rates increase, the bond prices will fall and be worth less, however, the bonds will still pay the associated yield which can help offset any price depreciation. While the Fed has kept interest rates unchanged over the course of their first two meetings of the year, current projections indicate two rate cuts in the second half of the year. Any cuts by the Fed should benefit the defensive side of the portfolio.

The start of this year has brought the importance of diversification back to the forefront of portfolio construction, as evidenced by the dispersion in returns across equity and fixed income. This dispersion reinforces the importance of a well-balanced and diversified portfolio. The Grant Street Investment Committee has always expressed diversification as a pillar of our balanced investment philosophy. While we favor large domestic companies for their stable earnings and balance sheet health relative to their smaller company counterparts, we continue to maintain some equity exposure across small and mid-sized companies.

Portfolio activity within the first quarter of the year included a shift within both equities and fixed income. Within equities, the committee decided to liquidate an underperforming small cap value strategy and trim a significant healthcare overweight. The proceeds were reallocated further up the capitalization spectrum to large and mid-cap core equities. Given our committee’s concerns about the potential for intermediate-term rate volatility throughout 2025, the committee reduce duration (i.e. interest rate sensitivity) by trimming core taxable bonds and adding some short-term bonds.

We are actively in discussions with our research partners to further digest the potential for ongoing impacts from the every-changing tariff policies, and you can expect additional communication from us in the coming weeks. History tells us that corporations will pivot to maximize earnings growth in whatever environment they face, and we are confident in ongoing opportunities for portfolio growth. Emotional market shocks always bring opportunities for long-term investors. However, we also remain focused on capital preservation and protection. Our time-tested investment process of reducing risk in times of prolonged economic and market uncertainty has weathered many market shocks over the past forty years, and we are actively prepared to make adjustments as necessary. Thank you for your trust and confidence and we welcome your questions and conversations.

Grant Street Update: The Grant Street team continues to grow by acquiring talented, service-minded individuals. Join us in welcoming the newest member of the Grant Street Asset Management team, Allison Schmitt. Allie recently joined our operations group as a client service associate, and she comes to us with over five years of experience specializing in the operational side of the financial service industry. Allie is responsible for account maintenance, managing transaction requests, and ensuring clients’ needs are met. In her free time, Allie enjoys traveling with her fiancé, trying new restaurants around the Pittsburgh area, and cheering on her hometown team, the Buffalo Bills.

Sincerely,

The Grant Street Investment Committee