Key Private Bank Investment Brief

Key Takeaways:

Diversification is working.

International stocks, core bonds, and real assets such as gold have all shown positive returns year-to-date (YTD) through March 28, 2025. YTD, international developed stocks are up 9.1%, while emerging market equities are up 4.7%; core bonds have risen 2.5%, while gold has risen a sharp 16.9%.

Conversely, after rallying strongly from 2023-2024, US stocks have taken a breather. The S&P 500 has fallen 4.8% YTD; large growth stocks have fared worse, dropping 8.7%, and small caps have fallen 9.4%.

Underneath the surface of the S&P 500, sectors like energy, healthcare, utilities, and consumer staples have been outperforming. Technology-related sectors have fared the worst. Value and international have fared better than growth and small-cap.

Global diversification has benefitted portfolios in the past.

Since 1990, US equities have outperformed international equities in 22 years (63% of the time) and have sharply outperformed in recent years. In terms of cumulative return, one dollar ($1.00) invested in US equities at the start of 2009 would have grown to nearly $8.00 through March 28, 2025; while $1.00 invested in international equities would have only grown to approximately $3.00 over the same period, according to data from MSCI.

After the bursting of the tech bubble in 2000-2001, international shares went on to outperform US equities in each of the next six years (from 2002-2007). International equities provided important resilience to portfolios during this difficult period.

Another argument for international diversification – on a price/earnings basis, the valuation of international markets is less expensive relative to history when compared to US markets. Moreover, the prospects over fiscal stimulus in the Eurozone and improving investor sentiment in Asia are two potential catalysts for continued outperformance.

Earnings growth for FY:2025 is decelerating.

Entering 2025, S&P 500 earnings growth for full year (FY) 2025 was expected to approach 15%, according to FactSet. Since the year began, earnings estimates have fallen, with growth now pegged at 11.5% for FY:2025.

Optimism for a second-half recovery persists. Earnings for Q4:2025 are expected to rise 18.4% compared to Q4:2024, according to FactSet. If this type of growth fails to materialize, markets may react negatively later in the year. Put another way – the bar is high for earnings growth later in 2025.

Economic growth is slowing, but the numbers are noisy. Consumers are still generally in good shape.

Significant gold imports into the US have skewed import/export data, according to Evercore ISI. Even after adjusting for gold imports, GDP growth is set to slow in Q1:2025 according to the Atlanta Fed GDPNow model and consensus estimates from Bloomberg.

Consumers are still seeing strong personal income growth, but consumer spending is growing at a slower rate; suggesting consumers may be choosing not to spend amidst uncertainty. Nominal disposable personal income increased a solid 0.9% month-over-month in February, according to Evercore ISI. Nominal consumer spending increased at a slower rate, 0.4% month-over-month in February.

Initial unemployment claims remain low (224,000 last week). The labor market remains stable. Initial unemployment claims are a leading indicator for the labor market and typically rise sharply prior to a recession.

“Liberation Day” is this Wednesday, April 2, 2025. This phrase was coined by President Trump, referring to an era when tariffs will be implemented to balance global trade between the US and other major countries.

The full array of tariffs is still somewhat uncertain (and potentially a negotiation strategy). In our view, tariffs will be going higher. Inflation may rise over the short-term. Over time, disinflation and/or deflation may be the larger impact, as growth may suffer.

Bottom Line – uncertainty will pass.

In some ways, the US is a closed economy. Approximately 70% of US GDP is generated from the consumer (e.g., consumer spending). This structure should provide some insulation from the effect of tariffs. Uncertainty from tariffs may be more troublesome than the tariffs themselves.

A deep and protracted recession is not our base case. That said, concerns over a self-fulfilling prophecy and negative wealth effects are real risks.

Clients should review exposures (indirect and direct) to US technology and/or growth stocks. Clients should also revisit possible over-concentration to US stocks and rebalance to international equities where appropriate.

In short, stick to your financial plan and rebalance as needed, but don’t overtrade.

We believe the current environment is a growth scare, not the beginning of a recession. Growth scares tend to resolve themselves quickly, and the stock market tends to rebound afterwards.

Equity Takeaways:

Stocks fell in early Monday trading, continuing last week’s decline. The S&P 500 fell approximately 1.1%, to 5520. The Nasdaq 100 fell approximately 2.0%, while small caps fell approximately 0.9%. International shares were generally lower.

The S&P 500 is in the process of re-testing the early March lows around 5504. The next support area would be 5400, the late summer 2024 lows.

Even though earnings growth has decelerated early in 2025, the long-term uptrend in earnings remains intact. If earnings growth remains solid (a big if), stocks should eventually follow earnings higher.

The Russell 3000 reached an oversold condition earlier in March, with less than 20% of its constituents trading above their 50-day moving averages. When this indicator falls below 20%, the market is usually ripe for a bounce.

In a sign of equity market stress, the VIX futures curve inverted earlier in March, with front-month VIX futures trading at a premium to 3-month VIX futures. Such an inversion is very unusual and suggests investors were scrambling to hedge volatility.

In recent days, the VIX futures curve has reverted to a more normal shape. The overall market is trying to find a bottom.

Investing during periods of uncertainty can be rewarding. When uncertainty spikes, forward average returns on the S&P 500 tend to improve, according to data from Baker, Bloom & Davis, and Strategas Research.

Fixed-Income Takeaways:

Treasury yields moved lower across the curve late last week as the stock market weakened. Growth concerns are outweighing inflation fears.

On Friday, 2-year Treasury yields fell 8 basis points (bps), while 10-year yields fell 10 bps – big moves for a single day. In general, US Treasuries have significantly outperformed global G7 sovereign debt year-to-date.

In early Monday trading, 2-year Treasuries were yielding 3.89%, 5-year Treasuries 3.96%, and 10-year Treasuries 4.22%.

As economic growth projections have slowed, expectations for Federal Reserve rate cuts have increased. Market participants are projecting 75 basis points of cuts for the rest of the year, which would put the fed funds rate at the target range of 3.50% to 3.75% by the end of 2025.

Credit spreads widened last week amidst the selloff in equities, with investment-grade (IG) corporate bonds outperforming high-yield credits. We continue to favor bonds from high-quality, blue-chip companies with strong liquidity profiles.

New IG issuance volume set a record in the first quarter of 2025, according to Truist. Spreads have remained firm even in the face of very heavy supply.

Key Takeaways:

Diversification is working again.

International equities have outperformed US equities significantly year-to-date (YTD) through March 21, 2025. Developed international stocks have risen 10.7% YTD, while emerging market stocks have risen 6.6% YTD. Conversely, the S&P 500 has fallen 3.4%, while US large growth stocks have fallen 7.7%.

Countries such as Germany and China are pursuing substantial fiscal stimulus, which is providing a reflationary tailwind to global markets. Commodities (real assets) like copper and gold are benefitting from this stimulus.

We continue to recommend a real asset allocation in client portfolios where appropriate. Alternatives, such as private credit, can also provide additional diversification over the long term.

“Hard” economic data is slowing, but not collapsing. “Soft” economic data, which is generally obtained from surveys, remains weak.

The three-month moving average of US nominal retail sales grew 3.1% in February, while US industrial production hit an all-time high, according to Evercore ISI. Both are “hard” datapoints that are not recessionary.

Tariffs, deregulation, immigration, and taxes remain the four pillars of our internal framework for analyzing the current environment. Overall, the economy remains difficult to interpret, but we don’t believe the US is headed towards an imminent recession.

Bottom Line:

Clients should review exposures (indirect and direct) to US technology and/or growth stocks. Clients should also revisit possible overconcentration to US stocks and rebalance to international equities where appropriate.

In short, stick to the plan and rebalance as needed, but don’t overtrade.

We believe the current environment is a growth scare, not the beginning of a recession. Growth scares tend to resolve themselves quickly, and the stock market tends to rebound afterwards.

Equity Takeaways:

Stocks rose in early Monday trading. The S&P 500 rose approximately 1.4%, to 5748, while small caps rose approximately 1.75%. International shares were mixed.

Even as headline US indices have fallen in 2025, value stocks (including dividend-paying stocks) are higher YTD, highlighting the benefits of diversification. Growth stocks have significantly underperformed the broader market in 2025.

Large growth stocks comprise a significant portion of the S&P 500 index, which has become more concentrated in recent years. One positive – valuations for large US technology companies have become much more reasonable. Lower tech valuations could be enticing to investors and should help stabilize the overall market going forward.

The Artificial Intelligence (AI) Power Basket index has rolled over. As the AI trade has faded in recent weeks, stocks with broad exposure to the AI theme have sold off sharply.

Fixed-Income Takeaways:

Last week, Federal Reserve (Fed) Chairman Jerome Powell used the term “transitory” when referring to the impact of tariffs on the US economy. Powell seemed more worried about slowing economic growth, versus the potential impact of tariffs.

After the Fed meeting last Wednesday, the fed funds rate remained unchanged at the range of 4.25% to 4.50%. Powell’s dovish commentary in his post-meeting press conference pushed Treasury yields lower.

In early Monday trading, Treasury yields were drifting higher across the curve: 2-year Treasuries were yielding 4.02%, 5-year Treasuries 4.09%, and 10-year Treasuries 4.32%.

In the coming months, we expect the 2-year / 10-year Treasury curve to steepen further, with 2-year Treasury yields potentially falling relative to 10-year yields.

Shorter-term Treasury yields may fall relative to longer-term yields if the economy continues to slow and the Fed cuts interest rates. Currently, approximately 75 basis points of rate cuts are priced into the forward curve by early 2026.

Credit spreads moved tighter last week after Wednesday’s Fed meeting. Investment-grade (IG) credit spreads had widened from approximately 77 basis points in February, to approximately 95 basis points at their widest point in March, before ending last week at 89 basis points. On an absolute basis, both IG and high-yield spreads remain low – credit investors do not appear worried about a recession.

Key Takeaways:

FOMC buys some time as uncertainty around tariffs looms.

Key Takeaways:

• The Federal Open Market Committee (“FOMC” or “The Fed”) left the target range for the federal funds rate unchanged at 4.25% to 4.50%.
• The rate decision was unanimous.
• The Committee made a technical change to the pace of balance sheet run-off.
• The Fed’s projection for interest rates remained unchanged from December, but the Fed significantly altered the projections for economic growth and inflation.

Today, the Federal Reserve announced its policy decision to maintain the federal funds rate at its current target range of 4.25% to 4.50%, opting not to implement any rate cuts or rate hikes at this meeting.

The Committee revised their statement by replacing the language about the outlook being “roughly balanced” between employment and inflation to “Uncertainty around the economic outlook has increased.” This change clearly signals concerns about the imminent tariff effects on inflation and a wide range of outcomes regarding economic growth.

Updated economic forecasts were presented at this meeting. The median policy interest rate expectations in the Summary of Economic Projections (“SEP”) were unchanged, but the average policy rate for each year increased. The median forecasts reflect 50 basis points in rate cuts for both 2025 and 2026 with another 25 basis points in rate cuts for 2027. The SEP “dot plot” showed four Committee members’ forecasts for no rate cuts in 2025, and another four forecasts for one rate cut by the end of 2025; while nine forecasts called for two rate cuts by the end of 2025.

The distribution of forecasts narrowed since December’s SEP, signaling uncertainty. These forecasts are all made in the context of excess uncertainty surrounding the intersection of fiscal, trade, immigration, and regulation policies.

The median economic projections show a modest deterioration in the economy for 2025, with real GDP growth for 2025 being adjusted downward to 1.7% from 2.1% in December 2024. Unemployment forecasts for 2025 were raised to 4.4% from 4.3%, suggesting some expected weakening in the labor market. Inflation forecasts were also revised upward, with Personal Consumption Expenditures (PCE) inflation for 2025 forecasted at 2.7% up from 2.5%; while Core PCE inflation for 2025 moved to 2.8% from 2.5%.

Given the mention of uncertainty in the statement and the unchanged medians for policy rates, the revised SEP forecasts appear to be the maximum pain threshold the Committee would be willing to tolerate before they step in to cut rates again and provide more accommodation.

Finally, the Committee announced adjustments to their Quantitative Tightening (“QT”) balance sheet run-off strategy. The monthly cap for maturing U.S. Treasury securities has been reduced from $25 billion per month to $5 billion per month. The monthly cap for maturing agency debt and agency mortgage-backed securities remains unchanged at $35 billion per month. These adjustments are effective as of April 1, 2025, and reflect the Committee’s efforts to manage market liquidity amid uncertainties surrounding the fiscal borrowing limit. It is important to note that Governor Christopher Waller was the only dissenter to these changes.

These changes to the economic outlook, inflation projections and balance sheet reduction strategy underscore the Committee’s response to evolving economic conditions and its commitment to adjusting monetary tools accordingly. Investors should remain cautious but optimistic, focusing on high quality and diversification, allowing for flexibility to adjust portfolio positioning based upon incoming data and further Fed decisions.

Key Takeaways:

Diversification is working.

Year-to-date (YTD) through March 14, 2025, international developed markets have gained 10.7%, emerging markets have advanced 6.6%, and the S&P 500 has lost 3.9%. High-quality fixed income has gained approximately 2.0%.

Key Wealth recommends periodic rebalancing. Despite recent outperformance, international stocks still have room to “catch up” to US equities. Too, many major international economies appear poised to undergo fiscal stimulus which has the potential to boost economic growth. The US, on the other hand, will seemingly be undergoing fiscal restraint, which may limit growth.

If portfolios have become very overweight to US equities, rebalancing likely still makes sense (it’s not too late). New Tools, such as alternatives and real assets, have also provided important diversification this year.

Economic and policy uncertainty remains elevated.

Bloomberg’s Trade Policy Uncertainty Index remains near an all-time high as President Trump begins to implement the new administration’s economic strategy.

We believe the new administration views tariffs as a primary component of a larger strategy. The plan: raise tariffs (revenues), cut expenses, deregulate, and lower taxes.

The administration’s plan is susceptible to a wide range of outcomes. Tariffs are being implemented first, given limited congressional involvement. Deregulation and expense cuts will take longer to influence the broad economy.

We think the Tax Cuts and Jobs Act of 2017 (TCJA) will be extended, but new tax cuts are unlikely. An extension of already-existing tax policy will not provide as much fiscal impulse as we saw from the initial tax cuts in 2017 but will still be marginally positive for growth.

Consumer sentiment is deteriorating rapidly, while inflation expectations are rising.

Amidst policy uncertainty, consumer sentiment is deteriorating across all income levels, according to data from the University of Michigan and Apollo.

The same survey data shows both long-term and short-term inflation expectations rising sharply in recent months. Consumers are getting more worried about job security, and consumer spending has slowed somewhat, although spending on travel remains robust (University of Michigan and Apollo data).

Hard economic data is holding up. Credit spreads have widened, but not to alarming levels.

The labor market is holding up for now. Initial unemployment claims dipped slightly to 220,000 last week. This is a modest level, consistent with a stable labor market (initial claims are a leading indicator).

Should weekly claims rise above 300,000, we would become more concerned.

Credit spreads are generally a good coincident indicator that recession risk may be rising. Since mid-February, BB-rated high-yield spreads have risen from approximately 150 basis points (bps), to approximately 220 bps. This move is a cautionary signal, but the absolute level of spreads remains tight on a historic basis.

Bottom Line:

We remain Neutral to Risk. Investors should maintain a long-term focus through turbulence, revisit their financial plans, and rebalance as necessary. Additional short-term cash should be raised if needed for liquidity purposes; but otherwise, investors should stick to their financial plans.

As part of the rebalancing process, investors should review their exposure to US technology and growth stocks, as many portfolios have become well overweight these sectors. Rebalancing towards international, dividend-paying, and/or low volatility strategies may be appropriate in some cases.

The odds of a recession have increased, but we don’t envision a severe and sustained downturn. Tariffs may slow growth and increase inflation over the short-term, but over the intermediate- to long-term, inflation should moderate, while fewer regulations and lower taxes could boost growth.

Equity Takeaways:

Stocks rose in early Monday trading. The S&P 500 rose approximately 0.5%, to 5667, while small caps rose approximately 0.7%. International shares were generally higher.

Last Thursday, the S&P 500 officially entered correction territory by falling 10% from its recent peak. The market bounced sharply on Friday, but we believe further short-term volatility remains likely.

Last Friday morning, less than 20% of Russell 3000 constituents were trading above their 50-day moving averages – sentiment had become very negative, and we were due for a bounce, which did occur.

Eventually, we believe the current correction will run its course, and the stock market will continue higher. The administration seems to be pulling forward bad news, setting us up for a potential rally in the future.

Corporate profits remain strong. Forward 12-month earnings expectations for the S&P 500 hit a new high last Friday. The recent selloff has been driven solely by price-to-earnings multiple contraction. The fundamentals underneath the surface of the market remain favorable over the intermediate- to long-term.

Sentiment indicators matter only at extremes. Many indicators are pointing to extreme negativity by investors. As measured by the American Association of Individual Investors (AAII) bull/bear spread, individual investors are as bearish as they’ve been at any point in the past five years.

Fixed-Income Takeaways:

Treasury yields ended last week slightly higher due to increased treasury supply and rising European bond yields. With the recent move higher in German bund yields, US Treasuries are looking expensive on a relative basis. US yields may need to leak wider to create more interest among global investors.

In early Monday trading, 2-year Treasuries were yielding 4.05%, 5-year Treasuries 4.09%, and 10-year Treasuries 4.30%.

This week, the Federal Reserve will release an updated Summary of Economic Projections (SEP) on Wednesday, March 19, in conjunction with its Federal Open Market Committee meeting. Market participants will be watching this data release closely.

Both investment grade (IG) and high-yield corporate bond spreads have been moving wider in recent weeks, although spreads remain tight relative to history on an absolute basis. Investor demand remains strong.

CCC-rated bonds are tied to the weakest issuers and have the most risk should the US economy fall into a recession. As with the rest of the credit markets, CCC spreads have widened in recent weeks, but not to alarming levels. We continue to watch spreads closely for clues as to the health of the overall economy.

Key Takeaways:

As America redefines its role in the world, the world is redefining its role with America. Many asset classes have seen significant reversals in performance year-to-date.

Examples of shifting global politics include the potential for a large fiscal stimulus package in Germany, as well as an election landslide in Canada. Germany moving away from balanced budgets and rearming their military marks a significant change in policy. European defense stocks have risen sharply in anticipation of higher spending.

The US has run a significantly larger budget deficit than Germany in recent years. Today, deficit spending in the US may be peaking, while Germany, other countries in Europe, and China, may all see increased deficit spending. With the US economy benefitting from higher government spending from 2020-2024, fiscal austerity in the US could present a headwind whereas greater government spending in Germany and elsewhere could provide an economic tailwind.

Non-US developed market equities have risen 11.7% year-to-date (YTD) through March 7, 2025, while the S&P 500 is down 1.7% over the same timeframe. After years of underperformance, a catchup trade in international stocks is underway, likely with more room to run.

US equities are broadening underneath the surface. Technology and consumer discretionary are the only two sectors that have underperformed the S&P 500 year-to-date through March 7, 2025. That said, these two sectors comprise a large portion of total S&P 500 market capitalization.

Uncertainty remains very high, downside risks are rising, but an imminent recession is not likely. Tariff policy has become a major contributor to uncertainty.

Usage of the word “tariffs” has spiked on corporate earnings conference calls, according to Factset. Also, the words “tariff” and “uncertain(ty)” were peppered heavily throughout the Federal Reserve’s recent Beige Book report (per DataTrek).

Recession risk is not on the minds of CEOs and CFOs yet – amidst the uneasiness, the number of S&P 500 companies citing “recession” on earnings calls was very low in the last quarter, according to FactSet.

The sequencing of Trump’s policies is worth noting. Will we see tariffs now, and tax cuts later? Given the wide variety of unknowns, we think it is ill-advised to make major portfolio moves.

Bottom Line:

Key Wealth will be holding a national client call this upcoming Wednesday, March 12, at 1:00pm EDT. Title: “Assessing the Economy Fifty Days After Trump Took Office and Five Years After COVID-19 First Took Hold.”

Register here.

A financial planning / portfolio review can help clients navigate this period of heightened uncertainty and volatility. Investors should avoid the temptation to make major changes to portfolios in the current environment.

Adding some additional international equity exposure, versus cutting a small amount of US equity exposure, likely makes sense on a tactical basis. US stocks have outperformed on a relative basis for many years, but that dynamic may be changing.

New Tools, such as alternatives, real assets, and hedge funds, have continued to provide important portfolio ballast this year. These types of strategies can also offer downside protection during periods of market stress.

Equity Takeaways:

Stocks fell in early Monday trading. The S&P 500 fell approximately 1.8%, to 5665, while the tech-heavy Nasdaq 100 fell more than 2.5%. Small caps fell approximately 1.4%. International shares were generally lower.

With Bloomberg’s Trade Policy Uncertainty index hitting record levels, equity investors have become confused. Gyrating headlines have led some investors to reduce risk, which has put pressure on the overall stock market.

The S&P 500 is at an important junction and is approaching both the 200-day moving average, the trailing 65-day low, and the autumn 2024 lows. The market should bounce at this conjunction of support.

If the S&P 500 cannot rally from the current oversold condition, another 200-300-point decline is likely, which would mark a 12-15% peak-to-trough correction (not unusual in any given year).

We are not calling for a bear market or recession. Corrections are normal.

Defensive sectors, such as consumer staples, health care, and real estate, have taken leadership amidst the uncertainty. Technology shares have lost leadership status. Other types of cyclical sectors, such as financials and energy, have also been weak on a relative basis.

Fixed-Income Takeaways:

Bond market participants are pricing in downside risks to growth amidst sticky inflation. Last week, the 2-year / 10-year Treasury curve steepened about 8 basis points as a result, with long-term Treasury yields rising relative to short-term yields.

In early Monday trading, Treasury yields were 5-10 basis points lower across the curve in a flight to safety amidst equity volatility. In summary, 2-year Treasuries were yielding 3.93%, 5-year Treasuries 3.99%, and 10-year Treasuries 4.22%.

Due to slowing growth expectations, market participants are now pricing in a total of 75 basis points of Fed Funds rate cuts by year-end 2025, with the first rate cut coming as soon as June. Earlier this year, zero rate cuts were being projected for the rest of 2025. The current Fed Funds rate is the target range of 4.25% to 4.50%.

Investment-grade (IG) corporate bond supply remains very heavy. Deals continue to price into strong demand. Spreads have drifted wider in recent weeks, but the move has been orderly.

High-yield corporate bonds seem to be trading in a vacuum. Even as equity volatility has increased in recent weeks, high-yield spreads have remained stable. Inflows into the booming private credit market have kept overall credit spreads tight, and investors remain sanguine on credit products in general.

If the economy weakens, high-yield bonds may be impacted differently at the sector level, with more economically sensitive sectors weakening first. Active management can help investors navigate volatility.