Market & Economic Commentary

Not all pauses are created equal. Jon Manchester, CFA, CFP® (Senior Vice President, Chief Strategist, Wealth Management, and Portfolio Manager, Sustainable, Responsible and Impact Investing), shares how this one mattered.

There is power in the pause. Take a breath, stop to think, sleep on it. In this rapid reaction, first to land the ‘digital’ punch world, we could probably all benefit from a hesitation move. This is well understood in the field of psychology, where the late Austrian psychologist Viktor Frankl is credited with saying “Between stimulus and response, there is a space. In that space is our power to choose our response. In our response lies our growth and our freedom.” That power is also appreciated by the financial markets, particularly when the pause removes—at least temporarily—a perceived impediment. A mere week after announcing sweeping “Liberation Day” tariffs in early April, President Trump largely shelved the plan for 90 days. He explained that people “were getting a little bit yippy, a little bit afraid.” The remark, in keeping with the President’s signature off-the-cuff style, lent support to the idea of a “Trump put;” broadly meaning that the President uses the markets as a barometer for his policies and then adjusts accordingly. Equity investors clearly had a case of the yips: the Standard & Poor’s (S&P) 500 Index traded down more than 15% in response to the trade war escalation. The bond market trembled as well. The 10-year U.S. Treasury Note yield jumped roughly 30 basis points higher in a matter of days and reportedly caused Trump’s inner circle to fear sparking a financial crisis.

Wall Street does enjoy a good “kick the can down the road” party, whether it is yet another increase to the debt ceiling or an injunction delaying new regulations. This time was no different. In fact, Strategas Research Partners noted it took just 55 days for the S&P 500 to return to a new high—the fastest recovery following a 15% drawdown in history. The dizzying ascent, which resulted in the S&P 500’s best quarter since December 2023, has left some market participants puzzling over the dichotomy between what they feel and what stock prices show. Amidst the noise of an unresolved trade war, Middle East hostilities, floundering consumer confidence numbers and other disconcerting data, it is not particularly surprising that there is a degree of cognitive dissonance involved here. This mental discomfort is actually a fairly routine aspect of investing. There is always a laundry list of doubts casting a shadow over the markets, the so-called wall of worry. The dissonance is only exacerbated by inherent contradictions in the financial markets. For example, the bad news is good news phenomenon. In recent years, weak economic data (seemingly bad) has cheered investors conditioned for the sugar high of easier monetary policy or fiscal policy support. It creates confusion around exactly what we are rooting for as investors and an incongruous feeling as equities trade higher on disappointing news.

Not all pauses are embraced equally, however. In another high-profile pause, the Federal Reserve (the “Fed”) has been in wait-and-see mode. After cutting the target Fed Funds rate from 5.5% to 4.5% in late 2024, the Fed has held steady at four subsequent meetings, citing “somewhat elevated” inflation. This pause has greatly displeased President Trump, to say the least, who wants to see an aggressive rate cutting approach by the Fed, posthaste. Current Fed Chair Jerome Powell—who Trump appointed in 2018—wisely avoids comment on government policy, but the reality is the administration’s tariffs are clouding the inflation outlook, forestalling what otherwise might be easier monetary policy. This has the potential to create another shadow—in this case, a shadow Fed Chair. Powell’s term as Chair is slated to end in May 2026, but Trump is threatening to name a replacement soon, creating an extended lame duck situation. According to CNN, announcing a successor this far in advance “would be an unprecedented development in the central bank’s 111-year history.” This may end up being simply a further attempt by Trump to jawbone monetary policy, but it certainly has the potential to further muddy the waters at a time where uncertainty is already running high.

We Now Return to Our Regularly Scheduled Programming
The 90-day pause on “reciprocal” tariffs allowed the markets to refocus on corporate earnings and guidance. A notable positive in this interim was reaffirmation around the equity market’s dominant theme: artificial intelligence (AI). With doubts starting to creep in, the large-scale cloud service providers offered reassuring guidance in April regarding planned capital expenditures (capex) for 2025. Alphabet stuck with its $75 billion bogey, saying it continues to have more customer demand for Cloud services than it has capacity. Meta Platforms raised its capex guidance range to $64 to $72 billion, up from $60 to $65 billion previously. Microsoft was rumored to have cancelled projects during the quarter, but its capex spending ran at a roughly $67 billion annualized rate and the company said it expects to grow capex in fiscal 2026. The sheer magnitude of these numbers is indicative of how these companies perceive the AI opportunity. In the lull following the storm of tariff-related headlines, the announcements provided a needed dose of confidence to equity markets and reinvigorated the AI trade. By the end of the second quarter, leading AI semiconductor companies ranked among the best performers for the three-month period, including Broadcom (+65%) and NVIDIA (+46%).

The resumption of tech leadership within the S&P 500—Semiconductors and Software were the top performing industry groups last quarter—lent an air of business as usual to the markets. It also took the large-cap index back up to an elevated valuation, trading at more than 22x estimated earnings for the next 12 months. As has been the case in recent years, however, the average stock is significantly cheaper. The S&P 500 Equal Weight Index finished June with a projected 17.8x forward price/earnings multiple. Over 200 stocks in the S&P 500 declined during the second quarter, reflecting a tougher environment for companies lacking real estate on the high-priced AI (or crypto) avenues. Nonetheless, corporate earnings reports overall helped to rally the markets. First quarter operating earnings per share rose 5.3% year-over-year for the S&P 500, led by the Communication Services, Healthcare, and Technology sectors. Standard & Poor’s reports that 77% of S&P 500 companies posted higher-than-expected Q1 earnings, topping the average of roughly 73% over the trailing 13 years.

Profit growth continues to get a boost via significant share repurchases. In fact, the S&P 500 set a quarterly record for buybacks in Q1 at $293 billion, up nearly 24% year-over-year. Share buybacks—which boost earnings per share growth by reducing shares outstanding—have not been slowed by the 1% excise tax on net buybacks, part of the Inflation Reduction Act of 2022. Apple led the way with $26 billion of buybacks and amazingly holds 18 of the top 20 highest repurchase quarters. By using some of its prodigious cash flows for buybacks—the iPhone maker generated nearly $109 billion in free cash flow during fiscal 2024—Apple has been able reduce shares outstanding by nearly 36% over the past decade.

Favorable tax policies are likewise helping firms pad the bottom line. In 2024, the S&P 500 tax rate was a little above 19%, well below the 30% average rate since 1993. The Tax Cuts and Jobs Act of 2017 lowered the statutory corporate tax rate to 21% from 35% previously, boosting net margins and providing companies with added capital that they can use to repurchase shares, pay out dividends, or reinvest in the business. Meta Platforms, which earns significant revenues overseas, said it expects a 2025 tax rate in the 12% to 15% range—this after paying a 9% effective tax rate in the first quarter. Some of those tax savings likely went toward the $13.4 billion of share buybacks Meta executed over the first few months of the year.

Foreign Exchange
For multinational firms with sprawling global supply chains, it was clearly a choppy first half of 2025. Some companies reacted to the policy uncertainty by throwing in the towel on providing earnings guidance, acknowledging the folly of trying to provide accurate forecasts with so many unknowns. One silver lining for these firms may have emerged from the turbulence. The U.S. dollar declined nearly 11% versus a basket of major currencies over the first six months of the year, its worst start to a year since 1973. Although a weaker dollar does make imports more expensive, it also means that revenues earned abroad in foreign currencies translate into more dollars. This is not likely to be a major tailwind, but at the margin it can be additive.

Nike, which gets more than 50% of sales from abroad, reported a roughly one percentage point negative currency impact to reported revenue growth last quarter. It hedges some of its foreign currency exposure, but for a company squarely in the path of the tariffs storm, seeing foreign exchange turn positive might ease some pain. Nike CFO Matt Friend noted on the company’s fiscal Q4 earnings call that they have “consistently been a top payer of US duties, with an average duty rate on footwear imported into the United States in the mid-teens range.” Friend added that Nike currently sources around 16% of imported footwear from China, but aims to reduce that to the high-single-digits by fiscal 2026, diversifying supply to other countries around the world.

For U.S. investors, the weaker dollar has given foreign investments added allure. Through June, the MSCI ACWI ex USA Index returned a robust 8.8% in local currency terms but jumped to a 17.9% return when translated to dollars. After years of a strong dollar weighing on (unhedged) international equity returns for U.S. investors, the reversal has sharply amplified returns. Of course, the opposite is true for international investors putting assets into U.S. markets. Longer-term, we want to continue to attract capital to our shores.

The markets, as with life, never stop moving. Still, there are moments of pause, and therein lies the power. Famed economist John Kenneth Galbraith once said, “Faced with the choice between changing one’s mind and proving there is no need to do so, almost everybody gets busy on the proof.” There is power in choosing our response. Wait for it….

Jon Manchester, CFA, CFP® (Senior Vice President, Chief Strategist – Wealth Management, and Portfolio Manager – Sustainable, Responsible and Impact Investing) reflects on the start of America with Benjamin Franklin and the role of, and impact on, these $100 bill “Benjamins” today on trade, negotiations, and tariffs.

Founding father Benjamin Franklin wore many hats for our nascent republic, both literally and figuratively. Often depicted wearing a tricorn hat—de rigueur for the colonial era—Franklin famously donned a fur cap when he traveled to France in late 1776 as the key member of America’s first diplomatic delegation. Tasked with securing the vital support of Great Britain’s arch rival following the Declaration of Independence, he methodically curried favor at Versailles and amongst French nobility. Using the skills he honed while representing the colonies in London, Franklin worked relentlessly to advance America’s interests and procure France’s military and financial backing.

His carefully cultivated homespun image, complete with the fur cap, won Franklin a great deal of popularity. Fur caps became fashionable in Paris, and his likeness was embossed on collectible candy dishes, stitched into clothing, and engraved into snuff boxes and walking sticks. In February 1778, his efforts culminated in the signing of treaties that provided for a military alliance, recognized the United States as an independent nation, and established terms of commerce. It was a remarkable coup for our fledgling country and proved instrumental in winning the Revolutionary War. To Stacy Schiff, author of “Benjamin Franklin and the Birth of America,” France’s affection for Franklin was a critical factor: “Every other American envoy who approached Versailles bungled along the way. Franklin was inventing the foreign service out of whole cloth.”1

For over a century now the $100 bill has featured Franklin’s portrait, in honor of his indispensable role in America’s push for freedom. Today, it could be said that U.S. foreign relations depend more than ever on Benjamins—meaning those crisp $100 bills that cross oceans in exchange for goods. After an extended period of globalization, the current U.S. administration appears determined to rapidly de-globalize. Longtime foreign allies are scrambling to adjust to this policy pivot and the new D.C. power brokers are clearly not afraid to ruffle diplomatic feathers. In this “America First” approach, relationships with foreign governments seem to be largely transactional in nature and ruled by protectionist instincts. It is indeed all about the Benjamins in this new world order.

As the economy struggles to adapt to this paradigm shift, even the agenda setters have warned of possible near-term pain. In a March 2025 interview with CBS News, Commerce Secretary Howard Lutnick said the administration’s economic policies are worth it even if they lead to a recession. Many economists disagree, including former Treasury Secretary Larry Summers. He referred to tariffs as “a self-inflicted supply shock” and cautioned that inflation should move higher in response. Michael Goldstein, managing partner at New York-based Empirical Research Partners, estimates that the direct tariff impacts—combined with the impact from the associated uncertainties—could reduce 2025 real GDP (Gross Domestic Product) growth to the 1.0% to 1.5% range, while adding 0.5% – 1.0% to inflation. Similarly, Goldman Sachs hiked its 2025 core PCE (Personal Consumption Expenditures) inflation forecast to 3.5% due to tariffs, and lowered its 2025 GDP growth forecast to 0.5%. In doing so, Goldman Sachs upped its twelve-month recession probability to 45%, citing the expectation for sluggish growth, a deterioration in household and business confidence, and statements from White House officials indicating a greater willingness to tolerate near-term economic weakness in pursuit of their policies.

The Tariff Gambit
If the daily barrage of tariff-related news has you confused, you’re not alone. In fact, corporate executives feel the same. According to analysis from MarketWatch, 64 companies in the Standard & Poor’s (S&P) 500 Index mentioned policy uncertainty on their quarterly earnings call with analysts, up from 33 in the prior quarter. This lack of clarity could weigh on economic activity in the near-term, simply by slowing decision-making. Gill Segal, a University of North Carolina economist, observed that “Policy uncertainty, in particular, typically leads to lower business investment and lower future GDP, as a result.”

Empirical Research Partners has taken to titling their recent notes “The Fog of War.” A trade war is admittedly a different type of war, but it is sowing confusion. A trio of academics created an Economic Policy Uncertainty Index with data back to 1985. On their methodology, the level of uncertainty has only reached a higher level during the Great Financial Crisis (GFC) and the initial stages of the pandemic—both recessionary periods. Perhaps it’s not surprising that consumer sentiment readings have moved sharply lower year to date. The March 2025 reading for the University of Michigan’s Consumer Sentiment Index declined 28% year over year. In the release, Director Joanne Hsu said, “Consumers continue to worry about the potential for pain amid ongoing economic policy developments. Notably, two-thirds of consumers expect unemployment to rise in the year ahead, the highest reading since 2009.” Speaking at the U.S. Monetary Policy Forum in March, Federal Reserve (Fed) Chairman Jerome Powell assuaged these worries somewhat, noting that “Sentiment readings have not been a good predictor of consumption growth in recent years.”

To the extent that the stock market is a daily scoreboard, the early votes are in on Trump’s tariffs and it hasn’t been a favorable reception. The “T is for Tariffs” playbook may rightly protect some industries, but the broad nature of the tariffs and the start-and-stop rollout clearly rattled the markets in the first quarter of 2025. Investors prefer greater degrees of predictability, making the erratic course that trade policy has followed less than ideal. They are also willing to pay more for perceived predictability, which is why the preference is often reflected in market valuations. For example, the S&P 500 Consumer Staples sector—filled with steady companies such as Costco Wholesale and Procter & Gamble—has traded at a forward price-to-earnings multiple nearly two points higher than the overall S&P 500 Index over the trailing 20 years. This, despite posting below-average earnings growth. More cyclical sectors or industries typically trade at lower valuations, an acknowledgement of their greater earnings variability. As such, it is a natural reaction for equity valuations to decline in periods of higher uncertainty. We are seeing that currently, with the S&P 500 Index’s forward price-to-earnings multiple about two points lower year to date. Still trading at roughly 20x forward earnings, the S&P 500 could see further multiple contraction without some fiscal and/or monetary policy relief.

Reboot Button
Historically, political risk has been a factor that carries more weight in emerging market countries. Broadly defined as the risk that investment returns could be impacted by country instability or political changes, it has leapt up the list of concerns for investors in 2025. We don’t have to look too far back to see the political changes the market desires. In the wake of November’s election, optimism reigned around tax-friendly legislation, deregulation, inflation relief, and directional improvement in our nation’s fiscal fitness. Although the administration is working on each of those items, the checklist has clearly taken a backseat to an unwanted, deeply unpopular trade war. This is not the business-friendly approach that was promised. For a U.S. equity market that entered the year with high expectations built into valuations, this distraction (at best) has been enough to derail the market’s momentum.

With the stroke of his pen—and President Trump has signed 109 executive orders alone thus far in his second term—we could see a realignment of the administration’s priorities. It is not too much to hope for, although the tariff troubles have already gone much further than expected. This myopic focus on our balance of trade is a bit puzzling, looking at historical data. Net exports as a percentage of GDP have drifted around the -3% territory since the Great Financial Crisis. It does subtract from U.S. GDP growth, but from a big picture standpoint the headwind is not particularly impactful. It seems like there is more risk in killing the goose that lays the golden eggs, so to speak.

Ultimately the equity markets should refocus on corporate profits, the long-term driver of stock prices. Earnings expectations for 2025 have edged lower, but only by around two percent for the S&P 500 year to date. For the multinational companies that heavily populate the large-cap universe, it will be more challenging to maintain profitability with rising input costs and reciprocal tariffs. The quarterly S&P 500 operating margin averaged close to 12% last year—but its average since 2006 has been 9.6%. To avoid an earnings shortfall versus expectations, corporations will need to carefully manage the trade off between passing prices along to customers and absorbing costs (sacrificing margins) to preserve sales. The foggy environment isn’t helping with that decision tree. Target Corporation, known for its bulls eye logo, announced in March that it will eschew offering quarterly guidance and move to only providing annual guidance numbers. Chief Financial Officer James Lee commented: “This change reflects our expectation of continued elevated volatility, which limits the effectiveness of quarterly forecasts.” Separately, Target said it would continue to move sourcing for its in-store brands, including All in Motion and Cat & Jack, away from China and toward Guatemala and Honduras.

Amidst the tariff tumult, positives remain. Importantly, the labor market remains strong with the unemployment rate at 4.2% versus a 50-year average of 6.1%. Federal government layoffs remain front page news, but with roughly three million workers that sector is fairly small compared to a little over 170 million in the civilian labor force. Monetary policy could also help: the futures markets now lean toward a Fed Funds target rate of 3.5% by year-end, a full percent below its current level.

In November 1789, about five months before his death, Benjamin Franklin wrote a letter to a French scientist. In that letter, Franklin offered what is now a famous quote: “Our new constitution is now established, everything seems to promise it will be durable; but, in this world, nothing is certain except death and taxes.” A wise man, that Franklin.

1 “Ben Franklin in Paris: How He Won France’s Support for the Revolutionary War,” www.history.com, 3/20/2024.
2 “Wall Street Journal editorial calls Trump tariffs ‘dumbest trade war in history,’ www.theguardian.com, 2/2/2025.
3 “Where We Stand: The Fog of War,” Empirical Research Partners, March 2025.
4 “US Daily: Countdown to Recession,” Goldman Sachs Investment Research, 4/6/2025.
5 “The word from U.S. companies to Wall Street in new Trump era is ‘uncertainty’,” www.morningstar.com, 3/20/2025.
6 “Surveys of Consumers,” www.sca.isr.umich.edu, March 2025.
7 “Guide to the Markets,” JPMorgan Asset Management, March 2025.
8 “S&P 500 Earnings and Estimate Report,” www.spindices.com, 3/31/2025.
9 Target Corporation Q4 2024 earnings call, 3/4/2025.
10 “Target braces for first-quarter profit pressure due to tariffs, low demand,” www.reuters.com, 3/4/2025.
11 “Benjamin Franklin’s last great quote and the Constitution,” www.constitutioncenter.org, 11/13/2023.

This quarter, Jon Manchester, CFA, CFP® (Senior Vice President, Chief Strategist – Wealth Management, and Portfolio Manager – Sustainable, Responsible and Impact Investing) delves into the paradoxes of momentum investing, inflation’s persistent influence, and the resilience of the U.S. economy in an era of shifting market dynamics.

Contrarians are not having a moment. Those resolute and hardy investors who row against the tide of popular opinion—shunning trendy stocks and embracing the unloved—found themselves sinking in 2024. A tidal wave of capital flowed into the fashionable set of equities, largely comprised of companies with a plausible artificial intelligence (AI) story. Winners kept on winning, resulting in a historic rout for momentum investing. In fact, the Standard & Poor’s (S&P) 500 Momentum Index had its best year relative to the overall S&P 500 Index since 1999. It soared 46%, including dividends, outpacing the benchmark S&P 500 by 21 percentage points.

Launched a decade ago—but recalculated back to 1994—the S&P 500 Momentum Index includes the top quintile of the S&P 500 based on trailing 12-month price performance. The Index is rebalanced on a semi-annual basis. As investment concepts go, it does not get any simpler than selecting stocks solely based on price strength. It also challenges conventional thinking: buy low, sell high. Nonetheless, momentum investing has worked over longer timeframes (see Chart 1), although the approach can suffer painful reversals and has not outperformed in more than two consecutive years since the late 1990s. Academics have struggled to pinpoint why momentum investing succeeds. The performance edge is well-documented with a long track record. A 1993 article in the Journal of Finance is cited as the pioneering study on momentum.¹ The authors presented data showing that buying recent stock winners and selling losers produced significantly higher short-term returns than the overall U.S. stock market during the 1965 to 1989 time period. This ongoing performance anomaly could be partly attributed to behavioral factors such as FOMO (fear of missing out) and a bandwagon effect.² The “Big Mo” might also reflect fundamental strength (rising sales, e.g.) already embedded in prices that can persist in the short-term.
Akin to a snowball rolling downhill, momentum investing is driving ever-larger market capitalizations and a more concentrated U.S. large-cap stock market. As one example, the four largest holdings in the S&P 500 Momentum Index—Amazon.com, NVIDIA, Broadcom, and Meta Platforms—carry a combined market capitalization of $8.2 trillion, greater than the cumulative market cap of roughly the bottom 64% of the S&P 500. Morgan Stanley equity strategist Mike Wilson touched on the intersection between momentum and market concentration in a December note. “Another consideration is the growing propensity of investors to use price momentum as a key factor in their investment strategy. Rebalancing has also been de-emphasized as many investors have let their winners run, given the lack of mean reversion in the past several years. This all helps to explain the extreme concentration we’re seeing in many equity markets, not just in the United States.”³

To borrow from Sir Isaac Newton, momentum is the product of mass times velocity, so perhaps this makes some sense. We have exceptionally large companies moving at a fast pace and creating the momentum that helped lift the S&P 500 Index to a greater than 20% return in 2024 for the third time in the last four years. These market moves have been underpinned by robust asset flows into U.S. equities. According to The Wall Street Journal, investors added over $1 trillion to U.S.-based exchange-traded funds (ETFs) last year, shattering the previous record set in 2021.⁴ Not surprisingly, momentum ETFs were a popular choice. Invesco’s S&P 500 Momentum ETF pulled in over $3 billion of net purchases over the first 11 months of 2024—incredible growth considering the fund now has around $4 billion under management.⁵ The hot money trades seeking instant gains may prove ill-timed if the AI trade falters, but until then investors are siding with inertia. As the late New York Yankee great Yogi Berra once said: “Nobody goes there anymore. It’s too crowded.”

The Real Return
A leading kryptonite candidate for the equity markets could be higher-than-expected interest rates. The post-COVID inflation shock still reverberates today, even though the Consumer Price Index (CPI) year-over-year growth rate peaked in mid-2022. As of November 2024, the CPI growth rate was down to 2.7%, a full point below the 50-year average of 3.7%. Price growth has clearly decelerated, but not reversed, and the cumulative impact has made life uncomfortable for policymakers. There is a compelling argument that inflation cast a deciding vote in the recent presidential election. U.S. Federal Reserve Chair Jerome Powell acknowledged in his December press conference that inflation “remains somewhat elevated relative to our two percent longer-run goal.”⁶ This comment followed after the Fed’s decision to cut the Federal Funds target range to an upper limit of 4.5%, marking a third consecutive easing from its peak of 5.5%.
Any enthusiasm for the (expected) rate cut was quickly doused when Fed watchers realized that the updated Federal Open Market Committee (FOMC) projections implied only two additional rate cuts in 2025. Questioned on this in the press conference, Powell flagged the uncertain inflation outlook. He continued: “And, you know, the point of that uncertainty is it’s kind of common sense thinking that when the path is uncertain you go a little bit slower. It’s not unlike driving on a foggy night or walking into a dark room full of furniture. You just slow down.” An apt metaphor with wonderful imagery, but investors were not impressed. The S&P 500 Index traded down 2.95% in response, the second-worst trading session of 2024 and one of only four greater than 2% daily declines for the year.

Rate anxiety is real. With a more cautious FOMC outlook, the 10-year U.S. Treasury Note yield rose 78 basis points,⁷ or 0.78%, during the fourth quarter, finishing at 4.57%. The S&P 500 Equal Weighted Index declined 2.3% price-only in Q4, perhaps illustrating the perceived impact of higher rates on the average (smaller) S&P 500 company. Further down the market cap spectrum, the S&P SmallCap 600 Index declined 1.0% over the final quarter of 2024. Ebbing inflation will obviously continue to be a key to interest rate stability in 2025. Without further disinflation progress, bond investors may require a higher real, or inflation-adjusted, return. Longer-term rates may rise regardless, considering our country’s inconvenient $36 trillion (and counting) debt load. This has some analysts watching the horizon for the return of the “bond vigilantes,” those disaffected bond traders who sell bonds—driving yields higher—to signal unhappiness with fiscal and/or monetary policies.

Over the last 30 years, as seen in Chart 2, the median spread between the 10-year U.S. Treasury Note yield and the Fed Funds target rate has been 121 bps. At year-end 2024 the spread was a miniscule 8 bps. The most straightforward path to normalize that relationship is further easing by the FOMC, combined with a steady 10-year yield. However, as the Fed would say, this will all be data dependent. Inflation will need to cool further, which would allow the FOMC to proceed on its intended rate cut plan. Any missteps could result in higher long-term yields, harming not only the bond market, but equities as well. With the S&P 500 Index trading at nearly 22x projected 2025 operating earnings—versus a long-term median of approximately 17x—there is not a lot of room for error.

Steady as She Goes
Although inflation dominated headlines again in 2024, particularly during the run-up to the presidential election, overall U.S. economic growth has been resilient. Gross Domestic Product (GDP) grew at a roughly 3% inflation-adjusted rate over the middle six months of 2024, and is estimated to have decelerated to a still solid 2.4% growth rate in Q4.⁸ The ongoing struggle to foster economic gains for a wider swath of the population continues. While the service economy chugs along, the goods-producing sector remains stuck in neutral. The Institute for Supply Management (ISM) reported that economic activity in the manufacturing sector declined for a ninth consecutive month in December.⁹ ISM’s survey has actually indicated a manufacturing contraction for 25 of the last 26 months, although the December reading did include some green shoots with new orders and production both in expansion territory.

The U.S. economy is much more dependent on services than goods, of course. In 2023, over 67% of Personal Consumption Expenditures (PCE) went to services, with goods accruing the other 33%.¹⁰ According to BlackRock’s Rick Rieder, head of global asset allocation, we may be needlessly worrying about whether the economy will experience a hard or soft landing. Instead, he suggests we think about the U.S. economy as a satellite: “Satellites don’t land. They just get tired over time, and they need a bit more energy…The Fed raises rates 500 basis points, and it doesn’t make a difference, and it’s because the service economy is not cyclical. Goods are hugely cyclical.”¹¹

Rieder’s argument feels like a trap: an explanation designed to fit the narrative since we have only experienced one, technically brief (COVID) recession over the trailing 15 years. It likely contains some truth, however. The economy has recently weathered some “rolling recessions” in which only certain sectors experience a downturn. Perhaps our predominantly service economy can help minimize overall cyclicality, outside of the black swan events. Disappointingly, it will not remove uncertainty, unless AI solves that problem, too. To pull another Yogiism, or pearl of wisdom from Yogi Berra: “It’s tough to make predictions, especially about the future.”

1 “Momentum Investing: It Works, But Why?”, www.anderson-review.ucla.edu/momentum, 10/31/2018.
2 “Momentum Investing: what it is, why it works and what to buy,” www.moneyweek.com, 6/15/2018.
3 “What Is Breadth Telling Us?”, Morgan Stanley Research Sunday Start, 12/22/2024.
4 “A Record-Shattering $1 Trillion Poured Into ETFs This Year,” www.wsj.com, 12/30/2024.
5 “Investors Are Looking to Momentum ETFs in 2024,” www.etftrends.com, 11/29/2024.
6 “Transcript of Chair Powell’s Press Conference,” www.federalreserve.gov, 12/18/2024.
7 A basis point (bp) is 0.01%.
8 GDPNow, www.atlantafed.org, 1/3/2025.
9 “Manufacturing PMI® at 49.3%,” www.ismworld.org, 1/3/2025.

10 “Gross Domestic Product (Third Estimate), Third Quarter 2024,” www.bea.gov, 12/19/2024.
11 “DealBook: R.T.O. battle,” www.nytimes.com, 10/12/2024.