Weekly Investment Update (03/07/2025)

Perspective can be helpful amid rising market volatility. Although decidedly uncomfortable, stock market behavior this year has been normal. For example, the S&P 500 is down about 7% from its high in February, marking the 30th decline of 5% or more since the 2008-09 Global Financial Crisis. Each time we live through a market correction, narratives emerge that amplify fear. This time is no different, and the unusual (and frequent) nature of troubling headlines only adds to the emotional strain for investors.

Tariff headlines remain a key source of anxiety for market participants. As tensions heightened, President Trump announced a one-month reprieve for tariffs on USMCA goods from both Canada and Mexico through April 2, delaying most exports to the U.S. for another month. Based on the economic damage that would likely result from meaningful and sustained tariff hikes on Mexico and Canada, we believe that these tariff threats are largely a negotiating tactic with the aim of a transactional outcome. While much remains unclear in terms of the scale and timing of future tariffs, we are beginning to see early signs that tariff uncertainty may be weighing on business sentiment and in turn business investment.

As a result, we should anticipate continued volatility while trying to focus on longer-term fundamental drivers. Year-over-year forward earnings expectations show growth of nearly 12%. It would be unusual to enter a prolonged economic contraction with company profits still expanding at a double-digit pace. In fact, every recession in the past 45 years has been preceded by a negative year-over-year change in forward earnings growth expectations. We will be listening to companies closely to understand their expectations for future earnings.

Tariff Confusion Has Sparked Market Volatility

What is happening: The S&P 500 has endured a turbulent 10-day stretch, driven by the escalating risk of a tariff-driven trade war, more cautious corporate outlooks, and some weakening economic sentiment data. These factors have intensified concerns over economic growth, heightened inflation risks, and fueled market volatility, leading to broad sector rotations and divergent stock performances.

As of Friday, the S&P 500 was down 2% year-to-date, reflecting investor caution amid escalating U.S. tariffs and retaliatory measures from key trading partners. The VIX volatility index surged to 26 on Tuesday, its highest level since December. Treasuries have rallied sharply on mounting growth concerns, with the 10-year U.S. Treasury yield dropping to 4.1% on Tuesday, down from 4.8% in early January, before closing the week at 4.2%.

Why it matters: Uncertainty is prompting investors to adjust their positioning. The S&P 500 has declined nearly 5% over the past two weeks. However, defensive sectors have shown resilience, with healthcare (+7.7%) and consumer staples (+6.4%) emerging as the best-performing sectors year-to-date. In contrast, technology (-9.6%) and consumer discretionary (-12.7%) are the worst-performing sectors.

The mega-cap Magnificent Seven group of companies, which make up nearly a third of the S&P 500 and led the market last year, have declined by just over 12% this year. Meanwhile, the equal weighted S&P 500, which neutralizes for the impact of market capitalization, is unchanged year-to-date. This suggests an improvement in market breadth — a measure of how many stocks are advancing versus declining.

In total, 45% of S&P 500 companies are trading above their 50-day moving average, up from just 20% at the start of the year. This can be a healthy sign, indicating that last year’s narrow market leadership (only 31% of S&P 500 stocks outperformed their averages in 2024) has broadened. Year-to-date, 57% of stocks are outperforming.

While tariffs add complexity to the Federal Reserve’s decision-making, bond futures now anticipate three interest rate cuts in 2025, up from two at the beginning of the year, as markets increasingly factor in the economic impact of escalating trade tensions. Bessemer portfolio managers have been reducing exposure to cyclical sectors and increasing exposure to defensive sectors since the election and remain poised to capitalize on ongoing market volatility.

U.S. Labor Market Holds Steady Despite Areas of Slowness

What is happening: The Establishment survey reported nonfarm payrolls added 151,000 jobs in February, just below consensus expectations of 160,000.

At face value, the February jobs report supports the economic growth narrative. However, there are data that indicate labor market softening, such as the unemployment level inching up to 4.1% and slowing wage growth. Recent data doesn’t capture the potential impact of the Department of Government Efficiency’s (DOGE) mandate to further reduce government headcount. Additionally, earlier in the week, ADP reported that 77,000 jobs were added in February, declining 59% from January’s 186,000. Anecdotally, employers have expressed caution as they continue to assess the economic climate ahead, noting uncertainty related to future business activity due to the tariff and other potential government risks.

Why it matters: The health of the labor market underpins consumers’ ability to spend, which greatly affects economic growth. Recently published consumer confidence surveys illuminated concerns about job availability. This will likely cause consumers to pull back on spending to some degree. If the labor market weakens meaningfully, the Fed will likely move off the sidelines and resume cutting its policy rate.

We will be watching labor market data closely, as any material deterioration from current levels would be an important shift in our currently more positive full-year outlook. We should also note that both businesses and investors are currently bearing the brunt of the bearish elements of President Trump’s agenda — particularly as it relates to trade. As we move through the year, progress on deregulation and the extension of the TCJA could serve as a more positive counterbalance.