Despite Recent Volatility, We Maintain Our Constructive Outlook

by Larry Adam of Raymond James, 3/11/25

At the start of the year, our Investment Strategy Committee outlook was positive for both the economy and the equity market, supported by strong consumer, labor market, and corporate fundamentals. However, we identified investor overoptimism as a significant risk, given the high expectations for President Trump's pro-growth policies and the equity market, which made it susceptible to volatility and disappointment.

With emerging policy concerns (such as tariffs, cost-cutting measures, and potential government shutdowns), economic growth worries (including slowing consumer spending and increased layoffs), and equity market volatility (with the S&P 500 approximately 7% below recent highs), we convened the Raymond James Investment Strategy Committee yesterday afternoon. This committee, which includes our economists, strategists, analysts, and money managers who provide their insights, assessed the impacts of these concerns on our economic and asset class forecasts. After vigorous discussion, here are our key takeaways:

Politics in focus, likely to avoid worst case tariff scenario

The Trump Administration has adopted a more aggressive trade stance this time around, implementing 25% tariffs on Canada and Mexico, 20% tariffs on China, and proposing additional tariffs, including 25% on the EU, set to take effect on April 2. While some tariffs will likely remain as the administration aims to use tariff revenues to fund its policy agenda (e.g., extending tax cuts), we believe the administration’s aggressive approach is a bargaining tactic. We anticipate that the final tariff rates will be much less severe, especially for close allies such as Mexico and Canada. Overall, we expect the effective trade-weighted tariff rate to rise from +2.5% to +7.5%. However, political uncertainty is likely to remain high. The uncertainty surrounding these tariffs and potential retaliations, particularly affecting business investment, remains the biggest economic risk moving forward. Over time, we believe there are three potential guardrails to push back against overly aggressive tariffs: the equity market, CEO feedback, and Republican members of Congress hearing from their districts.

Economy remains on solid footing despite weak 1Q

At the start of the year, we estimated U.S. economic growth to be 2.4%. However, weak consumer spending (with retailers noting a slow start to the first quarter of 2025), growing labor market concerns, and reduced business and consumer sentiment have heightened economic growth concerns. Overall, a disappointing first quarter is likely to lower our full-year GDP forecast to around 2%, which is still close to trend growth with limited recession potential. We believe much of the recent first quarter weakness is due to temporary factors such as cold winter weather in January and February, a severe flu season, and tariff-related front-running, which affected net exports. While uncertainty will continue to impact fixed investment, solid consumer fundamentals (e.g., record net worth, continued job growth) should drive economic growth from here.

Federal Reserve to cut rates two times in 2025

In recent weeks, Federal Reserve (Fed) members have emphasized the impact of DC policy uncertainty on future interest rate decisions. While tariffs are likely to put some upward pressure on inflation forecasts, concerns about weaker consumer spending and slowing job growth will keep the Fed in easing mode. We expect the Fed to remain on hold until June as it assesses the effects of recent policies, but we anticipate two rate cuts in total by year end.