March 2025 Update on the Economy and Markets 

By Dennis Stearns, member of the SFG Investment Committee and Senior Partner 

With research provided by the SFG Investment Committee 

The state of the U.S. economy remains generally strong, but the impact of uncertainty has moved from the CEO to the small business to the consumer. Defying logic, CEOs have become more confident, while U.S. consumers have become decidedly less confident. 

The Conference board consumer sentiment index dropped the most in 4 years and was well below expectations. Meanwhile, CEOs of public companies are more “confidently optimistic” based on recent surveys, but remain cautious about investing in corporate strategies involving their global supply chains. 

In other news: 

• U.S. equities retraced their YTD gains in February and are now lower than pre-inauguration levels. The reasons include high valuations and economic news that has been less favorable of late, including a trio of disappointing reports on the U.S. consumer. In addition, President Trump’s assertion that 25% tariffs against Canada and Mexico will still be implemented in March have dampened investor enthusiasm. 

• Meanwhile, International stocks have outperformed their U.S. counter-parts year to date for the first time in a long time. See below analysis for how this asset class may fare under Trumponomics. 

• The latest annual shareholder letter from Warren Buffett provided insight into why Berkshire is now holding record cash reserves. Some suggest it’s because U.S. stock valuations are stretched and Buffett & Co. prefer bargains. Makes sense. Another good reason is that Berkshire is shopping for more interesting opportunities to directly purchase private companies.  
  • Per the annual shareholder letter, Buffet reveals that “While our ownership in marketable equities moved downward last year from $354 billion to $272 billion, the value of our non-quoted controlled equities (i.e. private companies) increased somewhat and remains far greater than the value of the marketable portfolio.”  
  • In other words, Buffet has locked in some market gains at high valuations and redeployed those assets into private markets. SFG has been following part of the Buffet strategy of late, rotating out of overpriced stocks to other areas, including private companies (for growth) and public and private debt (for stability and income).  
  • Private markets have been growing rapidly recently. In fact, Ritter data indicates companies are staying private twice as long over the last five years due to a variety of factors, not the least of which is the availability of alternate sources of capital, including private equity and private debt. Capital IQ data shows seven times as many private companies (with revenue over $100M) as public companies, a major shift from the days when going public was the only way to raise capital. 
• In separate news, the Fed explicitly referred to “upside risks to the inflation outlook” due to tariffs in its recent notes. And Americans don’t disagree. In February, the University of Michigan reported American’s are bracing for an uptick in inflation, with an inflation expectation of 4.3% over the next year. This marks the highest inflation expectation in 30 years.  
  • Weighing in with tariff-related concerns last week was the National Association of Home Builders (NAHB), whose monthly confidence index fell in February to its lowest level in five months.  
  • The NAHB attributed the drop in large part to “uncertainty over the scale and scope of tariffs” and their potential to drive up materials costs, noting that nearly one-third of appliances and soft lumber is sourced from outside the U.S.  
  • Finally, Ford Motor CEO Jim Farley stated: “Let’s be real honest: Long term, a 25% tariff across the Canadian and Mexico borders would blow a hole in the U.S. industry that we’ve never seen.” 
• U.S. stocks have outperformed International stocks for over 16 years, by far the longest run of outperformance in history. So far this year, however, we’re seeing a reversal, with International stocks up 6.8% vs. a 1.4% gain for the S&P 500 as of February 25.  
  • According to JPM’s latest reading, International stocks recently reached the lowest relative valuation to U.S. stocks in 20 years, two standard deviations below the norm. If you’re wondering whether this is a buying opportunity or an extension of a 16-year trend, see our analysis below.  
• Wildcard risks remain. The war of words continues between the U.S., Ukraine, Russia and our European allies.  
  • As of this writing, the U.S. and Ukraine have not signed a deal on U.S. access to Ukraine’s precious metals following a contentious meeting in the White House last Friday, and Zelinsky continues to demand explicit security guarantees from the United States. It is estimated about 5% of the world’s “critical raw materials” are in Ukraine, including: 
    • 19m tons graphite, which is used to make batteries for electric vehicles. 
    • A third of all European lithium deposits, the key component in current batteries. 
    • Before Russia’s full-scale invasion began three years ago, Ukraine also produced 7% of the world’s titanium, used in construction for everything from modern planes to power stations. 
    • Ukrainian land also contains significant deposits of rare earth metals, a group of 17 elements that are used to produce weapons, wind turbines, electronics and other products vital in the modern world.  
  • Another part of the deal will be a reconstruction fund (after the war is over), jointly run by the U.S. and Ukraine. Presumably this means U.S. companies will get first rights to reconstruction contracts.  
  • In an ironic turn of events, Russia now wants in on the deal and has discussed the U.S. accessing Russia’s own supplies of critical raw materials! 

U.S. Stocks 

U.S. stocks reversed course in February, dipping down to pre-inauguration levels. The Conference Board reported that its consumer confidence index sank this month to 98.3 from 105.3 in January, the worst drop in 4 years. That’s far below the expectations of economists, who projected a reading of 103, according to a survey by FactSet.  

The Conference Board survey is the 3rd data point in less than a week (after the weak flash PMIs and Michigan sentiment report) reflecting greater policy uncertainty. Fortunately, corporate earnings (a key support for current U.S. stock valuations) have remained strong. According to FactSet, corporate earnings for S&P 500 companies grew 18.2% year-over-year (YoY) in Q4 which was the highest growth rate since Q4 2021. For 2025, analysts are projecting corporate earnings growth of 12.1%, but growth during the first half of the year will be slower. 

Current valuations for the S&P 500 remain expensive historically speaking. With valuations stretched, equity markets will need both positive investor sentiment and strong earnings growth to continue above average returns. 

International Stocks 

The European stock index kept pace with a white hot U.S. market for most of 2023 and 2024. What made this even more extraordinary was that U.S. stocks were turbocharged by the Magnificant 7 returns, arguably unstainable at the blistering two year pace.  

The dip in European stocks seen below (blue) came immediately on the heels of the U.S. election and was caused by two primary factors: a) sharply increasing U.S. dollar (a reaction to markets believing Trump’s tariffs would be inflationary) and b) a sell-off of stocks outside the U.S. as investors believed (wrongly so far) that Trumponomics would be detrimental to foreign company sales and earnings.  

Below we outline five drivers that have fueled this strong result (per Schwab): 

1. Europe’s seven defense stocks are leading the way. U.S. President Donald Trump working on a ceasefire agreement with Russian President Vladimir Putin, without the participation of Europe or Ukraine, concurrent with considering a reduction in U.S. military presence in Europe has further raised expectations for more European defense spending. 

2. Easing off the debt brake – Unlike the U.S. where controlling government debt has become a priority, there is a widening rift between growing public demand for more government spending and the self-imposed austerity mechanism known as the debt brake, which limits Germany’s structural deficit to just -0.35% of GDP. As Germany is the largest economy in the EU, this fiscal austerity has kept a lid on overall debt growth in Europe—especially relative to the U.S. 

3. Lower energy prices – U.S. natural gas exports will increase supply and ultimately lower prices in Europe. Trump threatened the European Union with tariffs in January unless it stepped up its purchases of U.S. liquified natural gas (LNG). On February 7, when Japan’s Prime Minister Ishiba met U.S. President Trump at the White House, he too offered to buy more U.S. LNG to help reduce the size of the trade gap. And, at his February 13 meeting with President Trump, Indian Prime Minister Modi also promised to buy more U.S. LNG. 

4. Beating expectations – Economic data and earnings in the Eurozone are better than expected. 

One possibly major threat to this trend – the latest from President Trump included a “reciprocal” tariff policy on imports that includes value added taxes (VAT) of trading partners and, more specially, tariffs of 25% on pharmaceuticals, semiconductors and cars that could go into effect on April 2. It remains unclear which categories of medicines, chips, and autos may be subject to this tariff. 

The impact of such a tariff on the eurozone economy would likely be relatively small, since exports to the U.S. of products across these three areas amount to just 5% of overall eurozone exports. Demand for pharmaceuticals and semiconductor equipment tends to be relatively insensitive to price changes, meaning additional tariff costs may be more easily passed on to U.S. consumers. Many large European producers of drugs and cars already have significant production facilities in the U.S., which also reduces exposure to potential new tariffs. 

5. Attractive valuations – Europe’s stock market is still fairly valued, even undervalued by some measures. The 12-month forward price-to-earnings (P/E) ratio for Europe’s stock market is close to its 20-year average of 13.7X. This is attractive when compared to U.S. valuations for the S&P 500 at 22.3X, much higher than its 20-year average of 15.9X. Clearly there is more room for growth in European stocks. 

One of our most frequently asked questions is “Are European stocks less expensive because of restrictive trade unions and less capitalist intensity?” The European Centre for International Political Economy cites four areas where Europe trails behind the U.S. in capitalist productivity: 

1. “The EU’s investment in research and development (R&D) pales in comparison to the U.S., leading to fewer patents and a slower pace of technology-fueled innovation.  

2. Europe trails America in the stock and growth of intangible capital investments, which are crucial for adopting and diffusing new technologies that drive productivity.  

3. The EU market exhibits slower business creation and destruction compared to the US. This rigidity hinders the flow of resources towards the most productive firms.  

4. Despite boasting higher levels of trade openness, the EU attracts less Foreign Direct Investment (FDI) than the US, curbing its access to cutting-edge global technologies and expertise. 

A not often understood dynamic is how major European companies have diversified their workforces around the globe, much like U.S. companies. They are increasingly less dependent on the workforce in their own backyard.  

Key to know: the global supply chain is much more complex than most understand. Apple says it assembles its iPhone and computers and watches with the help of “thousands of businesses and millions of people in more than 50 countries and regions.” 

Interest Rates 

Economic conditions, inflation, and Federal Reserve actions all impact interest rates. Borrowers with a higher credit score and lower debt-to-income ratio tend to get lower rates. Interest rates have been backing off their highs but remain elevated post-election due to concerns around tariffs and immigration policy. Many experts believe that mortgage rates will continue to decrease in 2025. However, the decrease may not be dramatic. Fannie Mae expects average rates for 30-year fixed home loans to remain above 6.5% for most of the year. 

Future Fed Decisions 

The FOMC now projects just two interest rate cuts in 2025, compared to earlier projections of four rate cuts. Uncertainty about future inflation trends remains a leading factor in the Fed’s decision to cut rates less.  

The Fed noted that risks to its full employment and low inflation goals are roughly in balance. 

From the Fed: “With our policy stance significantly less restrictive than it had been, and the economy remaining strong, we do not need to be in a hurry to adjust our policy stance.” 

Geopolitics 

China 

The Sino-American relationship is the one most likely to have a significant impact on the U.S. economy and investment markets going forward. As discussed previously, the trade war with China during Trump’s first term negatively impacted risky asset prices and global economic activity. Trump’s threats during his campaign went way past the previous tariffs imposed on Chinese goods, though current rhetoric is centered around a 10% increase. 

While investors, companies, and consumers may be more prepared for the tariffs and ensuing trade wars this time around, it would still have a negative impact on many areas of the economy – including inflation and economic growth. More recently, Trump has softened his stance toward China, even indicating he has a “very good relationship” with President Xi Jinping and looks “forward to doing very well with China and getting along with China.” 

A ministry spokesperson for the Chinese Communist Party echoed this sentiment, at least publicly, with his comments: “China is willing to work with the U.S. to push bilateral economic and trade relations in a stable, healthy and sustainable direction.” In this round of negotiations, Trump is looking to China for help in pressuring Putin to end Russia’s war with Ukraine. 

SFG’s Take: U.S. equity markets remain expensive relative to historical valuations. Tailwinds remain for another healthy year in stock returns although the outsized (and likely unsustainable) returns of the last two years won’t be repeated. Earnings growth and strong profit margins have thus far remained strong enough to support elevated valuations in Trump’s pro-growth environment.   

International stocks have outperformed the U.S. so far in 2025, though the year is young. We remain somewhat neutral on this asset class due to policy uncertainty. Beyond stocks, fixed income looks more attractive than it has in recent years with investment grade bonds yielding over 5%. Diversified, semi-liquid private equity has become increasingly attractive as a growth investment compared to stocks.  

Parts of the real estate market also look attractive relative to the past few years although the direction of borrowing costs during 2025 will have an impact on net operating income and valuations for this asset class. SFG continues to believe that a well-diversified portfolio including alternative assets is appropriate for most clients. 

As we have discussed, it is imperative that an investor be in the correct risk tolerance for their own personal situation. If you have concerns or want to revisit your current strategy, please do not hesitate to reach out to your wealth advisor.