MAP Views Third Quarter 2025
Jul 01, 2025Investors would not know it from the slight gains in the broader market so far this year, but volatility has been the defining term for the first half of 2025. U.S. stocks rebounded following Liberation Day lows as global stocks held their own. The S&P 500 posted its largest quarterly percentage gain since the fourth quarter of 2023, and the Nasdaq Composite had its best quarter in five years. This was a sharp contrast to the first quarter. Year-to-date, both are up just over 5%. A recent Barron’s article mentioned that on a risk-adjusted basis, returns for the S&P 500 this year have been in the 24th percentile since 1990, while volatility has been in the 89th percentile. Now, more so than ever, the broader markets react to headlines and tweets rather than facts and figures.
As we move into the third quarter, the same uncertainties that plagued the U.S. market in the first half of the year remain, including valuations, global macroeconomic activity, interest rates, and tariffs. Despite the volatility this year, the S&P 500 is trading at 26.1 times trailing earnings, above the 5- and 10-year averages of 23.89 and 21.75, respectively. This compares to the MSCI ACWI ex-USA, trading at 16.35 times trailing earnings, slightly below the 5- and 10-year averages of 16.42 and 16.26, respectively. U.S. stocks have historically commanded premium valuations over most other countries for several reasons; however, as we have opined in a previous issue of MAP Views, we believe the delta between the two is too wide.
Elevated valuations need the support of continued earnings growth, and U.S. stocks are currently priced near perfection. Companies reported decent earnings growth in the first quarter, yet many either pulled guidance for the rest of the year or issued softened guidance in the face of economic uncertainty. The U.S. economy has demonstrated remarkable resilience in 2025, but cracks are beginning to form. The Investment Team is closely watching the labor market as layoffs rise, and recent college graduates are having difficulty finding a job. While markets cheer the pushback of tariffs, their continued uncertainty causes companies to hold back hiring plans and capital spending as they wait for clarity. The channel stuffing ahead of tariff implementations on the part of manufacturers and consumers that occurred earlier in the year has begun to stabilize, resulting in lower consumer spending and manufacturing slowdowns. As such, we have a cautious view on the U.S. economy and increasingly feel it will struggle to achieve growth above 2%.
At their most recent meeting, the Federal Reserve (the Fed) lowered its 2025 GDP forecast to 1.4% from 1.7% while raising its forecast for core inflation to 3.1% from 2.8%, as they anticipate a tick up in inflation in the coming months stemming from tariffs. Eventually, we believe the Fed will succumb to political pressure, and as the economy slows, lower interest rates. Fed actions have a much greater influence on the shorter end of the curve than the longer end. During the fourth quarter of last year, the Fed cut interest rates, and the short end of the curve moved lower, but yields on longer dated bonds rose, thereby steepening the yield curve. We would not be surprised if the market responded in a comparable way to additional rate cuts, especially with inflation above the Fed’s target of 2%. Even if the Fed holds its current stance, remember that Jerome Powell’s term ends in May of 2026, and whoever President Trump selects to succeed him will likely share his views that the Fed needs to lower rates. Essentially, we believe it is a matter of when the Fed cuts rates, not if.
With these views in mind, we have been extending duration slightly, purchasing bonds with maturities of 2027, 2028 and 2029. We do not like the risk/reward profile of bonds with much longer maturities, as we believe those rates will likely face upward pressure. The primary driver behind our forecasts for higher rates on the longer end of the curve is the government’s insatiable appetite for spending. Earlier this year, there were hopes that the Department of Government Efficiency (DOGE) would take a meaningful bite out of the government’s budget. However, threats were more hype than heft as they came up well short of expectations. Today, Congress is wrangling with passing the “Big Beautiful Bill,” which by most accounts will continue to push government debt levels upward even if parts of the bill end up being negotiated away.
While U.S. investors grapple with uncertainty, markets outside the U.S. appear well-positioned over the long-term. We contend that U.S. trade negotiations should push foreign nations to spend more on infrastructure and defense. As we have witnessed in the U.S. over the past several decades, spending money is stimulative to the economy. Europe may be in the preliminary stages of a substantial economic rebound as spending increases. The U.S. dollar has been under pressure versus most other currencies so far this year, falling approximately 10% - the worst start to a year since 1973. Such declines are not unusual, with the greenback falling by a similar amount in 2022 and 2017. But between 2000 and 2007, the dollar fell by about 40%.
It fell by roughly 50% during the five years following the signing of the Plaza Accord in 1985. We expect the initiation of interest rate cuts by the Fed may serve as a catalyst for another leg down for the U.S. dollar. Under such a scenario, global equities would likely benefit, as would select commodities. We caution, however, that this move down may be choppy accompanied by fits and starts.
While we monitor, we do not act on the seemingly daily barrage of tweets and headlines coming out of Washington. Rather, we look at the bigger picture. We are pleased with our performance year-to-date, especially in the face of the volatility the markets have faced. In summary , the Investment Team believes there are three major themes that will play out over the next several years: 1) The value of the U.S. dollar will move lower; 2) Valuation levels in the U.S. will contract; and 3) Valuation levels in many other geographies will expand. These trends have played out during the first half of 2025, and we believe they may continue for the foreseeable future.
We are incredibly grateful for your continued trust and partnership and remain committed to our disciplined investment approach and goal of striving to deliver the best possible risk-adjusted returns.
Wishing everyone a safe and enjoyable summer!
Managed Asset Portfolios Investment Team
Michael Dzialo, Karen Culver, Peter Swan, Zachary Fellows, John Dalton, and Nicolas Vilotti
July 2025
Certain statements made by us may be forward-looking statements and projections which describe our strategies, goals, outlook, expectations, or projections. These statements are only predictions and involve known and unknown risks, uncertainties, and other factors that may cause actual results to differ materially from those expressed or implied by such forward-looking statements. The information contained herein represents our views as of the aforementioned date and does not represent are commendation by us to buy or sell this security or any other financial instrument associated with it. Managed Asset Portfolios, our clients and our employees may buy, sell or hold any or all of the securities mentioned. We are not obligated to provide an update if any of the figures or views presented change.
