Market volatility climbs as supercharged policy uncertainty and a growth scare unfold

Investors have been unsettled over the past few weeks as news related to trade and tariffs has made repeated headlines. This element of policy uncertainty, coupled with recent evidence of a slowdown in economic activity, has disrupted a post-election advance in the U.S. equity market.

The sudden and dramatic shift in investor sentiment has led to a sharp selloff. We’re seeing a correction in valuations, which means the stocks that led markets higher in recent years and grown the most expensive—the Magnificent Seven and AI-related stocks—have recently been leading the way down, becoming more fairly priced.

Erratic policy, pursued with intensity

Uncertainty about the Trump administration’s policy actions is the great big X factor weighing on markets. We’re familiar with the policy strategy—use tariffs to negotiate with trade partners, and use the Department of Government Efficiency (DOGE) to make the federal government more efficient, for example. We knew this was coming, but the application of these policies has been more chaotic than we anticipated.

Our on-again/off-again trade war with Canada, Mexico and China—the U.S. economy’s three largest trading partners accounting for more than 40% of our imports—contributes to uncertainty at the business and consumer levels.¹ Tariffs are inflationary, they can induce negative supply shocks, and they challenge economic growth. Their erratic and intense rollout exacerbates all three counts.

Exhibit 1: Trade policy uncertainty begets market volatility

Source: Standard & Poor’s, Bloomberg LP, as of 3/10/25. Returns represent price changes and do not include dividends.

Corporate fundamentals provide good reason to be positive about the outlook for U.S. equities. We had the highest U.S. earnings growth in the fourth quarter—at about 17% from a year earlier—since the post-pandemic recovery.⁵ There have been slight downward revisions in earnings expectations this year, but investors are still looking for S&P 500 stocks to deliver 11% earnings growth in 2025, which would be quite healthy from a historical standpoint.⁶

In fixed income markets, credit spreads—the compensation for taking credit risk in the bond market—have been moving wider since mid-February, but still remain tight by historical standards. Like equities, we see this as an adjustment in valuations rather than a sign of stress. We’ll be watching closely to see if credit spreads continue widening or level off for a sense of how our outlook for corporate fundamentals continues to fare.

Portfolio discipline is the antidote to policy chaos

Economic growth has clearly been slowing, but we believe it has trended toward normal, sustainable levels rather than a prolonged soft patch or an outright contraction. Nevertheless, financial markets don’t respond well to uncertainty, and the intense and erratic approach to policy—policy volatility—may have exhausted investor patience. Still, we believe investors will be best served by riding out this choppiness.

Today, the economic outlook for the first half of the year looks supportive from the top—regarding economic fundamentals—and the bottom—in the form of corporate fundamentals. If this view becomes meaningfully challenged, we will reassess our portfolio positioning to reflect the balance of risks inherent in the outlook, but that doesn’t appear to be the case today.

We could envision prolonged uncertainty leading to greater cautiousness in consumer and business decisions, which could eventually undermine broader economic confidence and lead to material softening in economic activity. Currently, the impact of these concerns is limited to market valuations, but we’re mindful that an extended period of uncertainty could produce a real negative economic impact.

Taking all this into account, we believe portfolios should retain their equity exposures, both within and outside the U.S., and we still see appeal in exposure to fixed income. Investors should remain patient for now and maintain discipline, keeping in mind that valuations in the U.S. equity market are less extended today than they were a few weeks ago. Looking forward, we’re open to the possibility that a continued selloff could serve to make equity valuations more appealing and create eventual buying opportunities, provided our outlook for economic and corporate fundamentals remains intact.