Investor worries spark market volatility, but data suggests economic resilience

Markets have been on a bumpy ride as investors grapple with ongoing tariff uncertainty and the sentiment overhang it has created. U.S. stocks are down so far year-to-date, and volatility is up to levels above the 10-year average. Under the surface, the tech and tech-adjacent market segments that outperformed in 2024 are among the hardest hit, while defensive sectors like Health Care and Consumer Staples are in the green.

We have been sharing our thoughts on tariff uncertainty via their Top Market Takeaways publication, and wanted to complement those insights with a brief update on what we are seeing in recent economic data releases. There is a growing divergence between signals being sent by “soft data” (which reflects perceptions and expectations) and “hard data” (which captures actual economic activity, like employment conditions and consumption).

What is the data showing us?

Policy uncertainty has spiked, expectations for future business activity have declined, and consumer sentiment indicators are showing cracks. However, "hard data" like employment figures and retail sales remain strong, suggesting economic resilience. The key question at this juncture is how long the strength can persist if sentiment continues to weaken. Eventually, poor sentiment could feed a self-fulfilling prophecy, where consumers and business slow down spending given fear of what could be ahead, but rough estimates suggest that process could take another four to six months.

What does this mean for investors?

The near-term uncertainty is uncomfortable and volatility looks likely to persist, but our strategists’ one-year forward outlook on U.S. equities remains positive. The recent pullback in U.S. equities presents a compelling entry point relative to their expectations of where the S&P 500 could end the year, and they think it makes sense to consider adding or rebalancing exposures right now. Our strategists also see an opportunity to utilize structured notes that provide downside protection with some upside capture given heightened volatility.

Looking at the bigger picture, our strategists continue to advocate for the effectiveness of having a well-diversified portfolio at the core of your investment plan. Incorporating a geographic mix of equities has already helped bolster performance so far this year (the MSCI World has outperformed U.S. equities), and could continue to help capture returns in a world in transition. Meanwhile, bonds can play a vital role by providing a steady stream of income and serving as a potential cushion against any growth challenges. They also suggest considering assets that may have a low correlation to both equities and bonds, such as gold. This balanced approach can enhance resilience during market volatility, helping to keep your investments aligned with your long-term financial objectives.

Our strategists are actively monitoring the developments around our outlook, and are committed to ensuring your portfolio withstands uncertainties without derailing your near-term needs and long-term goals. A resilient portfolio is properly diversified and tailored to your long-term plan. We will strive to keep you informed about material impacts to our outlook and any necessary adjustments.

In the meantime, please feel free to reach out if you have any questions or would like to discuss your plan further. We are here to support you and ensure your investments remain on track.

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