Q1 Market Commentary 2025
Since the new administration took control a few short months ago, there has been a lot of announcements for new policy and strategy. There seems to be a focus on shrinking the government deficit and controlling spending. Historically speaking “painful” policies tend to occur early in a new President’s term so the potential upswing occurs later. Both President Trump and Treasury Secretary Bessent have alluded to some sort of adjustment as Government spending comes in. In recent years, there have been a solid boon to GDP from the spending from Government, as they ran a deficit as large as often seen during recession. As we can see below, it is not unusual to have first quarter, especially March weakness in the first year after an election.
New recession fears loom large over the markets, driving volatility and uncertainty. US equities have experienced significant pressure, with the Magnificent 7 underperforming. So far this year, foreign stocks led by many European markets have outperformed. This has happened a few times in the last decade and follow-through will be important to signify a change in trend. On the commodity front, Oil has declined -6% which is often viewed as a “tax cut” to the U.S. Consumer. Meanwhile gold has rallied almost 10% and bonds have also been trending up, which brings interest rates down.
Market Performance Overview
Dow Jones Industrial Average +0.97%
S&P 500 -1.68%
Nasdaq 100 -3.69%
Euro Stoxx 50 11.19%
US Economy Outlook The US economy posted 2.3% GDP growth in Q4 2024, consistent with expectations. However, the Atlanta Fed GDPNow model forecasts a contraction of -2.4% for Q1 2025, contrasting with the New York Fed’s Nowcast estimate of 2.67%. The S&P 500 valuation remains stretched at a forward P/E of 20.7x, above both its 5-year (19.8x) and 10-year (18.3x) averages. Having seen the bulk of Q4 2024 earnings come in, things were decent. S&P 500 companies reported 17.8%, well above December's forecast of 11.7% and 77% of the S&P 500 companies beat expectations (1). The Federal Reserve has maintained a cautious stance, with market expectations now pricing three cuts in 2025, with June looking like a likely starting point.
Things we are watching:
US Recession: While the Cleveland Fed's recession probability has declined to 22.95% from a peak of 68.76% in April 2024, markets are increasingly worried about a slowdown.
Resurgent Inflation & Trade Policy: Tariffs, rising costs, and geopolitical instability could reignite inflation and pressure earnings.
Geopolitical Escalation: Any worsening of conflicts in Ukraine or the Middle East may further depress risk appetite and increase volatility.
Valuations: Elevated market multiples leave limited room for error in earnings expectations.
Markets face a challenging environment as recession risks and geopolitical uncertainties continue to weigh on investor sentiment. It is important to recall that corrections of 15% occur on average every year and this decline is still in the single digits and is occurring in a window that is consistent with historical weakness. It is said that markets take the escalator up and the elevator down, certainly adding to what feels like a fast and steep decline. This is due to the increased volatility caused by fear. Working with your advisor to develop a plan can help weather these short term storms. Please do not hesitate to reach out to our office with questions or concerns. It can never hurt to check that you remain on track!
Earnings Insight Infographic: Q4 2024 By the Numbers
The information presented in this post is the opinion of West Michigan Advisors and does not reflect the view of any other person or entity. The information provided is believed to be from reliable sources but no liability is accepted for any inaccuracies. This is for information purposes and should not be construed as an investment recommendation. Past performance is no guarantee of future performance. West Michigan Advisors is an investment adviser registered with the U.S. Securities and Exchange Commission. Securities offered through Level Four Financial, LLC, a registered broker dealer and Member of FINRA/SIPC