Kari O. from Carmel, IN asks: Hello Mitch, I’m looking for your thoughts on the recent declines in the stock market. Things seemed to be going pretty well after the election and now all of a sudden, the market has done a U-turn. Do you think this is just temporary or are we heading for more trouble?
Mitch’s Response:
Thanks for writing. Investors everywhere are likely wondering the same thing as you.
If I were to give you a one-sentence explanation for recent market volatility, it would be the following: The uncertainty of trade and economic policy in the U.S. is pressuring a fully valued stock market, but I do not think—at least for now—that it’s changing the trajectory of the economy or corporate earnings.1
That’s a long sentence, I know. But let me break it into sections.
The first piece is valuations. We know around the end of last year that the S&P 500 was trading at over 21x 2025 earnings, which is above its 10-year average of 19x. Valuations are not predictive, of course. U.S. corporate earnings could accelerate – particularly in areas of the market where multiples are lower, i.e., outside of Tech – and the market could keep pushing higher.
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In fact, excluding Technology’s contribution to 2025 expected earnings, we are still anticipating 12+% full-year earnings growth. We currently show 16 Zacks sectors we expect to enjoy positive earnings growth in 2025, with nine expected to post double-digit earnings growth.
As I’ve written before, however, a fully valued market also implies that any policy missteps, perceived economic weakness, or earnings misses could have an outsized effect on downside volatility. And that’s where the uncertainty factor comes into play.
If the market rally following the election was tied to optimism about deregulation, lower taxes, and a general pro-business and pro-growth stance from the new administration, then the selloff may be aptly attributed to the notion that tariffs are working against these goals. Above most things, markets do not like uncertainty, and the on-again, off-again nature of tariffs over the past few weeks is not exactly providing clarity.
The case-in-point is trade policy between the U.S., Mexico, and Canada. 25% tariffs were implemented, then delayed by one month, and then implemented again with exceptions that many investors and business leaders are still trying to map out. Businesses and investors are also trying to determine if this will be the “final delay” as communicated by the Trump administration, which could mean the tariffs become more permanent if demands aren’t met.
Ultimately, this situation reinforces a fundamental market principle: uncertainty breeds hesitation. Without clear policy direction, businesses struggle to make strategic decisions, leading to a more cautious economic environment. As more details emerge, markets will likely reassess the broader economic effects of these trade measures, but for now, hesitation remains the dominant theme—and short-term stock market volatility comes with that.
Without a clear understanding of what policy will look like from here, it’s challenging to make a forecast for how long the volatility will last. U.S. economic fundamentals remain in overall solid shape, and we still believe U.S. corporations can deliver double-digit earnings growth in 2025. There just needs to be a clearer roadmap for how trade policy will look moving forward, so businesses—and the market—can adjust accordingly.
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Disclosure