The start of 2025 has been far from dull. With continuous waves of news from Washington and global markets, it’s clear that the turbulence we’ve been predicting is very much underway. Policy shifts, such as changes in tariffs, speculative moves like DOGE initiatives, and growing concerns about government spending and workforce reductions are all adding to the uncertainty. These issues are influencing both investor sentiment and financial market behavior, making this year a unique mix of challenges and opportunities.

Market Behavior So Far in 2025

After two strong years in 2023 and 2024, with nearly 60% cumulative returns, the S&P 500 showed little movement through February 2025, hovering around the same levels as post-election 2024. It fell about 5% from its February peak, indicating a shift in market momentum. Leadership within sectors has also changed, with riskier, growth-focused sectors like consumer discretionary and technology underperforming. On the other hand, more defensive sectors such as healthcare, utilities, and energy have seen positive returns.

Interestingly, growth stocks have lagged behind value stocks, reversing the trend seen in 2023 and 2024. The “Mag 7” stocks, which have dominated the market in recent years, have also underperformed significantly. At the same time, investor sentiment is at a notable low, with bearish sentiment reaching levels not seen since 2022.

The Wall of Worry and Market Behavior

Does this high level of pessimism mean the market will experience a downturn for the rest of the year? Not necessarily. In fact, high levels of bearish sentiment often act as a contrarian indicator. History shows that when investors feel the most pessimistic, the market can start to recover, as was the case during the market bottom in 2022. While market corrections like the one we are seeing now—around 5%—are common, they are not usually a sign of imminent disaster.

Our 2025 Outlook

We remain cautious about the magnitude of returns in 2025. Unlike other strategists who have turned increasingly optimistic, we anticipate higher volatility and a market that may see intermittent pullbacks ranging from 10% to 15%. Our forecast for the S&P 500 remains at 6600 by year-end, representing a 12% return. However, we expect choppy conditions throughout the year, with the market experiencing occasional dips and a lot of uncertainty driven by factors like tariffs and geopolitical developments.

Understanding the Economic Indicators

Some analysts have become more bearish, pointing to weaker economic data, including declining consumer sentiment and retail sales, as well as an uptick in unemployment claims. They also highlight the surge in imports, driven by businesses stockpiling inventory ahead of potential tariff increases. While these factors may temporarily impact GDP growth, it’s important not to react impulsively to headlines.

Retail sales, for instance, were significantly affected by extreme weather events, such as fires and snowstorms. Additionally, consumer confidence data can be misleading, as it often reflects broad, polarized opinions on inflation and economic growth. The reality, based on current data, is that inflation is stabilizing, interest rates are coming down, and capital spending, particularly in sectors like AI infrastructure, is on the rise.

The Wall of Worry: What’s Really at Stake?

There’s no denying that tariff concerns, potential immigration policy changes, and budget deficits are creating uncertainty. However, we believe these issues will ultimately be managed better than anticipated. History shows that while these “walls of worry” cause temporary panic, they usually lead to nothing more than short-term market drops, followed by recovery. A key example is the February 2025 tariff scare, which was initially expected to cause significant disruption but was quickly diffused when both Canada and Mexico made concessions.

At this point, it’s essential to remain patient and evaluate the evolving situation. Instead of reacting impulsively, it’s better to adopt a “ready-aim-shoot” mentality, meaning waiting for more clarity before making any major moves. If these concerns truly impact the economy, we’ll see the effects reflected in hard data like GDP, inflation, earnings, and credit spreads—metrics that we closely monitor.

Focus on Balancing Your Portfolio

The market’s recent behavior highlights the importance of managing portfolio imbalances. The S&P 500 has become increasingly concentrated, with just a handful of growth stocks—mainly the “Mag 7”—making up a significant portion of the index. This heavy concentration increases the risk for investors. If your portfolio is heavily weighted in these stocks, it might be time to reassess your strategy and ensure diversification.

International stocks, particularly in markets outside the U.S., are looking increasingly attractive. U.S. large-cap stocks now represent a record-high share of the global market, which may signal that diversification into international stocks could be beneficial.

What to Do Now?

So, what should investors do during this period of uncertainty and high volatility? First, we recommend holding your ground with your current asset allocation, especially if it reflects your long-term goals. If the recent market drops have caused discomfort, it might be a good time to review whether your stock allocation is too high for your risk tolerance.

Next, consider looking for income-generating investments or risk-reduction strategies to complement your portfolio. Alternatives like structured notes or option strategies can help mitigate risk and provide additional income, especially for those who are feeling more cautious.

Conclusion

In 2025, we’re navigating a period of clear air turbulence—high winds in otherwise calm skies. The key to successfully managing this environment is patience, strategic planning, and maintaining a diversified portfolio. While the market may continue to experience turbulence, we believe that the fundamentals remain supportive and that the long-term outlook for the S&P 500 remains positive. Stay focused on your financial goals, and don’t let short-term market fluctuations distract you from your broader objectives.