Clearly, 2025 has been marked by uncertainty caused, in large part, by constantly shifting policy announcements related to trade, taxes, and immigration. While this uncertainty has certainly been reflected in sagging investor, consumer, and business sentiment, the fact remains that stocks continue to defy what headlines might predict. Stock performance is directly tied to earnings and expectations for future profits. And with continued strong consumer spending, a reasonably healthy labor market, and positive corporate earnings, stocks have powered through despite the fears in the headlines. While any sudden changes to Fed interest rate policy or an external shock, like changes on the ground in war zones in Europe and the Middle East, could certainly cause stock price rises to pause or falter, all signals indicate that stocks are the place to be even with signs of slowing economic growth. In this environment, it's hard to fight the tape. And it's best to maintain a diversified global portfolio.
Principal Asset Management - Commentary
There has been no shortage of bad news this year for equities. Despite lingering concerns over Fed policy, tariffs and unsettling geopolitical headlines, the S&P 500 continues to grind higher and is hovering around all-time highs. Healthy economic fundamentals are an ultimate buffer for negative headlines, after all. As such, equities should remain resilient unless an adverse event materializes into something larger that curtails household spending and company earnings.
This year’s investment landscape resembles a classic ‘buy the rumor; sell the news’ environment, making it difficult for investors to distinguish noise from trends amidst rapid change. Despite uncertainty encompassing Fed policy, fiscal policy, tariffs, and geopolitical tensions in the Middle East, the equity market has demonstrated remarkable resilience.
Tariff announcements initially triggered a sharp sell-off as investors worried that the trade levies would present significant headwinds for large and small businesses, and households by extension. The U.S./China trade truce and the 90-day reprieve reduced those concerns, but, perhaps more importantly, robust economic activity data reassured investors of the resilience of the U.S. economy, supporting a market recovery.
Similarly, as geopolitical tensions permeated headlines in recent weeks, markets produced only a small wobble, quickly shaking off concerns amidst a strong economic backdrop.
The muted market response is valid. Periods of high uncertainty typically do not warrant dramatic portfolio changes unless events escalate to have a material and sustained impact on economic fundamentals. After all, the equity market reflects earnings, which remain healthy courtesy of solid household spending, a robust labor market, and strong corporate balance sheets.
That said, given the uncertain policy backdrop, a broader hit to market sentiment cannot be ruled out. In this environment, it’s essential for investors to maintain well-diversified portfolios designed to navigate periods of heightened uncertainty.
