By Christine R. Quillian, CFA, CFP®, Helen M. Donahue, CFA, and Chris Guinther
Investors, who had been banking on a broad-based economic boom, have found themselves consternated by a wall of tariff-ic uncertainty.
President Trump’s “Liberation Day” tariffs announcement on April 2, 2025, will amount to the highest effective tariff rates for the U.S. in 100 years, contributing to a major spike in policy, business, and trade uncertainty. The near-term effects are likely to be an increase in inflation due to the higher costs of imported goods and reduced GDP growth.
Over the long-term, one of the Trump Administration’s stated goals is to reprioritize domestic manufacturing. In time, the thinking goes, this should lead to more resilient and domestic-based supply chains, less exposure to geopolitical risks, lower unemployment and higher wages.
However, this current uncertainty is likely to lead to downward earnings estimates for stocks and has raised anxiety among investors, contributing to the recent decline in equities. Few analysts have yet to make significant cuts in corporate earnings estimates, indicating that price declines have so far been driven by valuation compression, demonstrated by lower P/E multiples, as investors incorporate expectations of weaker fundamentals on the horizon.
After two years in a row of robust stock returns, investors are being reminded that pullbacks are commonplace, with average intra-year drops of 14.2% over the last 45 years. Even with the recent decline, the compound average annual return for the S&P 500 for the three years ending 3/31/2025 is 9.1%.
According to RBC, the US has experienced five declines in stocks ranging from 14-20% since the Global Financial Crisis of 2008-2009, sparked by a range of geopolitical events and prompting investors to anticipate a recession that never materialized. Importantly, the stock market rebounded after these declines and generated strong positive returns 3-12 months later.
It is also true that policy confusion and uncertainty out of Washington is nothing new. Investors have endured heightened periods of worry in the past, including uncertain US government responses to wars, 9/11, the Global Financial Crisis, the COVID- 19 pandemic, etc. Leaders of US companies have successfully navigated these difficult periods in the past, and we believe they will do so again.
Somewhat surprisingly, given everything that has gone on, the state of the economy does not yet look problematic. There is less confidence among consumers and business owners than there was a few months ago, but so far most of the evidence does not suggest the US economy is falling off a cliff. The evidence does suggest slower growth ahead, but it would be presumptuous to say more than that. The next few weeks will show just how this melancholy mood translates into hard numbers as companies report Q1 earnings, revenues, and margins.
In the meantime, stocks’ recent declines appear to be the result of investors anticipating that a lot will go wrong for the U.S. economy and company fundamentals. If history is any guide, then at some future point, a next step will be investors beginning to consider an alternative question: what might go less-wrong than feared?
It is easy to forget there is no free lunch. Declines are an opportune reminder that the market has historically been in decline 30-40% of the time and that persisting through downturns is the price of admission for 7-12% annual returns over the long term.
In times like these, it is important to remember the resilience and ingenuity of the people and businesses that make up the US economy.
SOURCES
1 Ned Davis Research, EDU_14, 4-4-2025
2 RBC Capital Markets March 24, 2025
The information provided is for illustration purposes only. It is not and should not be regarded as “investment advice” or as a “recommendation” regarding a course of action to be taken. These analyses have been produced using data provided by third parties and/or public sources. While the information is believed to be reliable, its accuracy cannot be guaranteed. MONTAG employees do not provide legal or tax advice. For specific legal or tax matters, you should consult with your own legal and/or tax advisors. There are risks associated with investing in securities. Investing in stocks, bonds, exchange traded funds, mutual funds, and money market funds involve risk of loss. Loss of principal is possible.
