The third quarter of 2025 began with President Trump signing a sweeping reconciliation bill into law on Independence Day, fondly known as the “One Big Beautiful Bill Act.” The bill included an amalgamation of provisions and most notably extended the tax changes implemented under Trump’s first term. The quarter ended with a looming government shutdown. Fiscal policy aside, the third quarter also brought a renewed focus on monetary policy, fresh off the first interest rate cut since December 2024. Barring a disruption from a government shutdown, markets have sights set on the September jobs report, which will contain crucial data that will inform the Federal Reserve on the health of the labor market as they consider how quickly to unwind their restrictive policy stance. Yet again, the third quarter was one dominated by policy and its many complexities and uncertainties.

While policy played a key role in shaping market dynamics, the quarter was rounded out by numerous other developments:

1. Equity markets continued their resilience and run-up from the previous quarter, hitting fresh records along the way with the S&P 500 closing above 6,600 for the first time in September. Importantly, equities witnessed a broadening out, with small cap and international companies continuing to perform well with help from domestic interest rate cuts and more favorable valuations, respectively.
2. Reciprocal tariffs were finally implemented in early August; however, additional duty announcements were made at the end of the quarter on pharmaceuticals, trucks, and certain pieces of furniture, illustrating that tariffs continue to be a pillar of President Trump’s agenda. Threatening this pillar was a federal appeals court finding at the end of August that Trump overstepped his authority in implementing his tariffs, a decision that the Supreme Court will opine on in early November, adding further uncertainty to trade policy.
3. Economic growth was one of the many macroeconomic data points impacted by tariffs, with the final reading of Q2 2025 GDP printing at 3.8%, driven by a significant decrease in imports and reversing the first quarter’s surge. While muddied by tariffs, economic growth continues to be an important data point in assessing the health of the U.S. economy as expectations, including from the Fed’s Summary of Economic Projections or “Dot Plot,” call for slowing annual growth, below 2%.
4. Interest rate cuts were supported by the Federal Open Market Committee, who cut rates by 25-bps in September after months of pressure from the Trump Administration, who continues to undermine the Fed’s independence as a central banking authority. Fed Chairman Jerome Powell termed the most recent cut as a “risk management” decision, citing the difficulties in managing their dual mandate, with future cuts signifying that the pendulum may now be shifting from the inflation to the growth part of their mandate.
5. Labor market drama ensued over the quarter not just as a result of downward revisions to annual and monthly jobs-added data, but also through the Trump Administration’s firing of the commissioner of the Bureau of Labor Statistics (BLS). Data reporting challenges aside, the labor market is showing signs of slowing, and future jobs reports remain crucial yet threatened by funding cuts and a looming government shutdown.   
6. A historic partnership with Intel was announced by the Trump Administration, including a multi-billion dollar, 10% equity stake in Intel by the U.S. government, adding fuel to the artificial intelligence (AI) fire, including the potential for greater chip manufacturing in the U.S.

The themes of the quarter underscore the importance of finding balance in today’s complex and uncertain environment – whether between potentially conflicting fiscal and monetary policies, between the Federal Reserve’s dual mandate, between bullish forces like AI and bearish signals like a cooling labor market, between the dueling parties of the American government, or even within investment portfolios – as markets navigate an economy poised for a variety of outcomes.

Below, this market wrap will provide a high level overview of key trends in capital markets and the economy over the quarter, concluded by a brief commentary of Centura’s outlook as we enter the final three months of 2025.

Markets 

Equities – Despite the historically slow summer months, U.S. equity markets performed strongly over the quarter and were buoyed by the Fed’s interest rate cut in September, which prompted major indices – including the Nasdaq-100, Dow, S&P 500, and Russell 2000 – to notch fresh all-time highs in the last month of the quarter. Small cap stocks quietly outperformed their large cap counterparts, supported by the tailwinds of imminent interest rate cuts, investor sentiment shifting away from more expensive parts of the market, and stronger than expected GDP growth. International equities also continued to perform well, with emerging markets outperforming developed markets over the quarter, illustrating growing market breadth, which is overall supportive of the broader equity asset class.

Earnings season offered numerous insights, including a relatively cautious stance from businesses over policy uncertainty, macroeconomic data softening, and tariffs. Despite this more cautious stance, earnings grew around 12%, more than doubling initial projections. This growth was driven once again by the Magnificent Seven companies who reaffirmed their AI capex commitments and contributed 52% to overall year-over-year earnings growth. However, valuations in this part of the market remain rich and markets concentrated, with the Mag Seven representing around 32% of the S&P 500’s total market capitalization.

Bonds – Similar to recent quarters, fixed income markets continued to exhibit tight spreads, with high yield spreads currently around 280 bps, well below the 10-year average of 420 bps, making this asset class less attractive for investors. The Treasury yield curve experienced a flattening in the short-end of the curve, thanks to the Fed and their interest rate cut, and longer-term yields remained similar to where they started the quarter, with the 10-year hovering around 4.20%. Steeper than the Treasury yield curve was the municipal yield curve, and while absolute returns in this asset class were meager over the quarter, the slope of the municipal curve has not been this steep since 2015, offering investors attractive yields, particularly in the medium- to longer-end of the curve. Importantly, the bond market continues to be a sounding board for the Trump Administration, i.e., any policy change that causes an aggressive reaction from fixed income markets is unlikely to stick around for long.

 Source:YCharts. The Bloomberg US Aggregate Index was used as a proxy for Bonds; the Bloomberg US High Yield 2% Issuer Capped Index was used as a proxy for High Yield Bonds; the Russell 2000 Index was used as a proxy for Small Cap Equities; and the MSCI ACWI Ex USA Index was used as a proxy for International Equities. All returns are based on total return levels as of 9/30/2025.

Currencies – The U.S. dollar continued its decline over the quarter, after posting its worst first half performance since 1973 to end the second quarter. It is expected that pressures will continue to weigh on the dollar, including U.S. debt concerns, expectations for further interest rate cuts, and macro data softness. While the dollar is experiencing weakness, its status as the reserve currency remains intact. Over the quarter, stablecoins saw important developments related to regulation with the passage of the GENIUS Act in July, which provided additional clarity surrounding a regulatory framework for digital assets.

Commodities – With the decline in the U.S. dollar and the Fed shifting to interest rate cuts, safe haven assets experienced renewed interest from investors, including gold, which reached yet another record-high price to close out September and extended its bull market run. Other precious metals, including silver and platinum, also hit record highs over the quarter. Oil prices marginally declined over the quarter as supply increased in the market, putting pressure on profits of major oil companies.

The Economy

While markets demonstrated resilience, the macroeconomic data exhibited softness over the quarter, ultimately prompting the Federal Reserve to cut interest rates in September. The main culprit behind the interest rate cut was cooling in the labor market data, which occurred alongside still-elevated inflation and robust GDP growth, illustrating how the Fed’s dual mandate – stable prices and maximum employment – came at odds with one another over the quarter. This confluence of macroeconomic trends created challenges for the Fed over how quickly it should unwind its restrictive monetary policy stance, and these conditions are expected to persist moving forward.

Labor Market – Looking at the labor market, the July jobs reports, published in early August, stunned investors when nonfarm payrolls (73,000) fell well below expectations (100,000) and data for May and June was significantly revised downward. The revised figures showed nonfarm payrolls declined in June, marking the first negative change since 2020. Annual revisions to nonfarm payrolls were also published in September for the year ending in March 2025, with jobs added adjusted downward from initial estimates by 911,000. These trends point to a weaker labor market than initially thought and contributed to volatility over the quarter as markets began to price in interest rate cuts.

Importantly, the unemployment rate remained steady over the quarter, hovering around 4.2%, and layoffs have not picked up substantially, implying that companies have been slow to both hire and fire. Additionally, changing immigration policies are likely contributing to the slowing data as the Trump Administration cracks down on unauthorized immigrants. These factors support the notion that while the labor market is weakening, it is not deteriorating. Given some of the softness already seen and felt in the labor market, however, the conditions are ripe for the scales to tip should additional weakness emerge. This heightened risk makes the Fed’s job in supporting the economy and the growth side of their mandate an even more important balancing act in the current environment.

Muddying the labor market data is increased skepticism surrounding the BLS’s reporting of jobs data, which prompted President Trump to controversially fire the commissioner of the BLS after the July jobs report. Challenges in the reporting of labor market data are valid – budget constraints with agencies like the BLS as well as longer response times from companies reporting payroll data can lead to greater revisions in the jobs data, like what occurred with the July report. Surveying other labor market reports, including from sources like ADP, can help paint a more holistic picture of the labor market. 

Any disruptions to the publication of labor market reports, whether due to data reporting issues or even a government shutdown, is likely to spur market volatility, given the significance of this data in assessing the health of the economy and driving monetary policy decisions.

Inflation – Inflation increased marginally over the quarter and remains above the Fed’s 2% target as tariffs wreak havoc on supply chains and shelter inflation remains problematic. The latest data in August shows headline CPI and PCE inflation measures at 2.9% and 2.7%, respectively. Core CPI and PCE inflation is marginally higher at 3.1% and 2.9%, respectively. These increases have been in-line with expectations and have not prompted major market reactions; however, the full impact of tariffs has likely not been felt, meaning inflation could tick higher in the coming months as these tariff-induced price increases continue to trickle through the system.

With the Fed cutting interest rates to stimulate the labor market and with tariffs still at play, worries are mounting that inflation could stick around for longer, highlighting the importance for the Fed to strike the right balance.

Economic Growth – GDP growth did a 180 in Q2, growing 3.8% after contracting 0.6% in Q1, but both quarters were muddled by tariffs. After seeing a surge in imports in the first quarter to get ahead of impending tariffs, the second quarter saw a major drop in imports, the largest contributor to the overall GDP figure in Q2. Consumer spending was relatively strong but was offset by a decline in investment in the second quarter print.

Source Link: BEA

While the stronger-than-expected Q2 GDP print signals continued economic growth, markets know this data was skewed by tariffs, putting greater emphasis on future quarterly growth data for a more accurate assessment of economic health. As of quarter-end, the Atlanta Fed is projecting Q3 2025 GDP growth of 3.8%, with more accurate readings expected as the quarter progresses.

Robust GDP growth makes the Fed’s job more difficult as interest rate cuts are typically carried out to help stimulate a struggling economy. With the U.S. economy continuing to hum along, it may make the Fed hard-pressed to cut rates unless the labor market experiences further weakness.

The Fed – All of these macroeconomic factors are causing the Fed to walk a tightrope as they attempt to balance their dual mandate. With trends in GDP growth and inflation conflicting with those in the labor market, the Fed must manage the path forward carefully, meaning every data point will be a crucial input to their decision-making.

If the Fed’s job was not hard enough over the quarter, they also sustained immense pressure from the Trump Administration to cut interest rates. The success of the Fed and their monetary policy lies in their independent decision-making, which can only occur when it is removed from politics.

Centura’s Outlook

Across our portfolios, we continue to maintain balanced allocations in line with our long-term targets. We are favoring high quality parts of the market and diversification across asset classes, both public and private. Moving into year-end, there are a multitude of scenarios that could play out, demonstrating the importance of carefully balancing today’s set of opportunities against their respective risks and further supporting our current positioning.

On the risk front, the labor market remains a crucial factor not only for the health of the American economy, but also for prospects of further rate cuts. As of quarter-end, markets are currently expecting two more 25-bps cuts, and this will be highly dependent on not just jobs data, but inflation and GDP growth data as well. Whether or not this data can be published remains a separate issue as markets digest an impending government shutdown at the end of the quarter, which could cause publication delays and consequently force a pause in interest rate reductions. The Fed meets twice through year-end, in October and December, and volatility is expected to surround these meetings.

Under the hood of the economy, weakness in the consumer, particularly the lower end consumer, remains a concern. Consumer confidence has plummeted in recent months and inflation expectations could be re-anchoring higher. Expectations can become self-fulfilling prophecies, and the Fed will want to manage inflation expectations carefully to prevent these additional inflationary pressures from filtering through the economy.

Fixed income markets remain an important indicator for potential weakness in the consumer, which has started to crop up in places like the auto loan industry, which saw two bankruptcies in September – an auto-parts maker and a subprime auto lender. While the higher-end consumer drives the economy, the lower-end consumer can disrupt the economy in more indirect ways, making the risk of an exogeneous credit event an important factor to consider in the current environment.

On the opportunities front, corporate earnings remain solid and market breadth is returning, with the Magnificent Seven stocks contributing to 45% of the overall returns in the S&P 500, compared to 55% and 63% in 2024 and 2023, respectively. This presents an opportunity for more unloved parts of the market to shine alongside tech names, like what was witnessed with small caps during the third quarter. And while the AI trade continues to prop equity markets up and is likely far from over, concentration risks remain prevalent, supporting the need for a more balanced allocation.

Overall, policy remains a key tenet driving markets, and the Fed must manage a balancing act if they are to successfully support the labor market while combating inflation. The famous adage “don’t fight the Fed” can serve as an important reminder – if the Fed must balance their decision-making, so too should investors.

Now is not the time to make major bets but rather maintain a highly diversified portfolio that can weather a variety of storms. This reminder is even more important today as markets enter October, historically the month with the highest amount of volatility.

Looking ahead, we remain committed to helping you navigate these challenging market conditions. Our team continues to monitor developments closely and stands ready to provide guidance tailored to your specific financial objectives. As always, thank you for your continued confidence and support. If you have questions or concerns, please contact your Centura Wealth advisor.

Additional Sources:

1. https://am.jpmorgan.com/us/en/asset-management/protected/adv/insights/market-insights/market-updates/economic-update/
2. https://yardeni.com/charts/magnificent-7/
3. https://www.barrons.com/livecoverage/august-jobs-report-data-today/card/u-s-economy-lost-nonfarm-jobs-in-june-21sxP6ISCqy31hG9MlIt
4. https://www.cbsnews.com/news/immigrants-us-labor-force-trump-census-bureau-data/
5. https://www.cnbc.com/2025/09/30/oil-gas-layoff-job-cut-opec-trump-wti.html
6. https://www.bea.gov/news/2025/personal-income-and-outlays-august-2025
7. https://www.morganstanley.com/insights/articles/us-dollar-declines
8. https://www.reuters.com/business/autos-transportation/us-auto-bankruptcies-show-rising-credit-pain-low-income-households-2025-09-30/
9. https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html

The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor.  

The views expressed in this commentary are subject to change based on the market and other conditions. These documents may contain certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.   All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed.  There is no representation or warranty as to the current accuracy, reliability, or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.

Centura Wealth Advisory is a registered investment advisor. Advisory services are only offered to clients or prospective clients where Centura Wealth Advisory and its representatives are properly licensed or exempt from licensure. 12255 El Camino Real, St. 125, San Diego, CA 92130.

At a Glance

Macro Indicators: Headline and core PCE inflation rose by 2.6% and 2.8%, respectively, in June, slightly above expectations and potentially demonstrating the beginnings of tariff-induced price increases. The labor market remains a concern for markets and economists, especially as tariffs threaten margins and Trump’s immigration policies take hold. The advance estimate of 2Q GDP growth printed at 3.0%, a rebound from 1Q’s print of -0.5%, with both data points muddied by the impact of tariffs.

Trump 2.0: The “One Big Beautiful Bill” (OBBB) was signed into law on July 4, extending most of the tax policies from Trump’s first administration, raising the debt ceiling, and much more. Tariffs continue to be top of mind for Trump, who implemented additional levies hours before they were set to take effect on August 1 after the initial 90-day “Liberation Day” pause.

Fed & Monetary Policy: The Fed held rates steady at the July FOMC meeting, citing a lack of evidence supporting interest rate cuts. Two Fed governors dissented with the decision in July; the first time two governors have dissented since 1993. Scrutiny is increasing on the Fed and its decision-making by both markets and the Trump Administration, with increasing pressure to cut rates. Fed officials remain squarely focused on inflation and employment data related to their dual mandate.

Capital Markets: U.S. equity markets hit multiple record-highs over July but ended the month on a sour note as the August 1 tariff deadline loomed. Fixed income markets remained volatile with muted to negative total returns over the month as macroeconomic data continued to give mixed signals about the economy.

Asset Class Performance

U.S. large cap equities posted the strongest returns in July but continue to lag international markets on a year-to-date basis by over 9%, signaling recovery but not a complete return to the “U.S. Exceptionalism” theme. Investment grade bonds had negative total returns over the month with high yield markets generating the greatest returns within the fixed income asset class, albeit at a paltry 0.45%.

Source: YCharts. Asset class performance is presented using total returns for an index proxy that best represents the respective broad asset class. U.S. Bonds (Bloomberg U.S. Aggregate Bond TR), U.S. High Yield (Bloomberg U.S. Corporate High Yield TR), International Bonds (Bloomberg Global Aggregate ex-USD TR), U.S. Large Cap (S&P 500 TR), U.S. Small Cap (Russell 2000 TR), Developed International (MSCI ACWI ex US TR), Emerging Markets (MSCI EM TR), and Real Estate (Dow Jones U.S. Real Estate TR).

Markets & Macroeconomics

More Policy Implications

On July 4, President Trump signed the One Big Beautiful Bill Act (OBBB) after weeks of deliberation in Congress. The passage of this bill was a milestone for the administration who has been talking about certain provisions, particularly extending the 2017 Tax Cuts and Jobs Act (TCJA), since the campaign trail. In addition to the extension of the TCJA, the OBBB includes provisions surrounding spending cuts on Medicaid, increased taxes on college endowments, an increase in the debt ceiling, and much more. The passage of the OBBB has important implications for consumers and the economy, with the most glaring impact on the federal deficit. The Congressional Budget Office estimates that the OBBB will add $3.3 trillion to deficits over the next 10 years, increasing the federal net debt as a percent of GDP from around 100% today to over 120%, illustrated in Exhibit 1. While the market contends with the long-term effect of increasing federal deficits, the passage of OBBB means that tax policy is largely in the rearview mirror for the Trump Administration, allowing the focus to shift to other items on his policy agenda, with tariffs and international trade policy continuing to be a key initiative. ​

Exhibit 1: Federal Net Debt

Source: JPM Guide to the Markets

The Trump Administration continued to make progress on trade negotiations over the month after extending the initial 90-day pause of “Liberation Day” tariffs to August 1, the day the tariffs are set to take effect on those countries without trade deals. It is clear that tariffs will remain in place, particularly as President Trump announced a flurry of tariffs to end the month. Tariffs are another policy initiative whose effects are only just starting to be felt, particularly in GDP and earnings data, and they are a phenomenon that continues to perplex the Federal Reserve on how to approach its own policy decisions.

Over the month, the Fed continued to debate the macroeconomic impacts of the Trump Administration’s policy initiatives. At their July FOMC meeting, the Fed opted to hold interest rates steady – a decision that drew dissent from two Fed governors, marking the first time since 1993 that two governors opposed a policy move. The Fed remains data dependent, focused on inflation, labor market, and GDP data. The first (advance) estimate of 2Q GDP printed at 3%, demonstrating a bounce back after slowing in 1Q to -0.5%. However, tariffs once again muddied the GDP print as 2Q’s growth was largely driven by a plunge in imports, creating a positive impact on overall GDP, illustrated in Exhibit 2. This GDP print also saw a positive contribution from consumer spending despite consumer sentiment indicators exhibiting weakness in recent months, which was offset by a decline in investment expenditures, demonstrating a hesitancy from U.S. businesses to spend.

Other items on the policy docket that have not garnered a lot of attention is President Trump’s promise to de-regulate, which could be a boon to U.S. businesses. Coupled with potential interest rate cuts later this year, it is likely that the back-half of 2025 will continue to be dominated by policy. While markets may have gained greater policy certainty, including on tariff outcomes, the economic implications of those policies remains unclear.

Exhibit 2: Contributions to Percent Change in 2Q 2025 GDP

​

Source: BEA

The Bottom Line: Policy decisions, whether coming from the Trump Administration or the Federal Reserve, continue to dominate headlines and major initiatives, like tax policy, tariffs, and interest rates have important economic implications, both in the short- and long-term and are likely to continue driving volatility in markets.

Looking Ahead

Is Market Breadth Coming Back?

U.S equity markets have largely been dominated by seven stocks since 2023, and while those Magnificent Seven continue to defy expectations in the current environment, market breadth has shown signs of life. A measure of market participation, market breadth can provide signals on whether movements in an index like the S&P 500 are more broad-based or concentrated in nature. While concentration continues to plague U.S. equity markets, with the Magnificent Seven representing ~33% of the S&P 500 as of month-end, there are signs that the concentration between these seven stocks is breaking up, and the other 493 stocks in the index may be starting to pull their own weight. ​

There are numerous measures of market breadth, and one such measure is the percentage of stocks in the S&P 500 that are closing above their 50-day moving average, which has moved higher since April’s market sell-off, starting July at an intra-month high of nearly 80%, illustrated in Exhibit 3, before moving lower to end the month. Typically, in technical analysis, a 50-day moving average above 70% signals broad market strength. For comparison, this figure was 17% to start the year, providing an indication for how far market breadth has come just in the first half of 2025.

Exhibit 3: Percentage of Stocks in S&P 500 Closing Above 50-day Moving Average​

Source: Wall Street Journal

While Q2 earnings look muted for the rest of the 493 stocks in the S&P 500, with estimates calling for growth of 3.4% (versus 14.1% for the Magnificent Seven), expectations point to a reacceleration of growth through year end and into Q1 2026, which will coincide with moderating earnings growth for the Magnificent Seven stocks, illustrated in Exhibit 4. Valuations also point to potentially better opportunities in the S&P 500 ex-Magnificent Seven with the top 10 stocks in the index currently boasting a 28.7x forward P/E ratio, compared to 22.5x for the entire index and 21.0x for the remaining 493 stocks.

Another potential sign of market breadth is the fact that, through July of this year, the Magnificent Seven have only contributed ~39% to the overall returns of the S&P 500, compared to 55% and 63% in 2024 and 2023, respectively. Couple this fact with the latest all-time record high for the S&P 500 set on July 28, implying that there are potentially more companies driving the index higher. While the market breadth story is encouraging, there are still numerous factors at play, including lingering policy decisions surrounding tariffs and interest rates. A particularly important factor moving forward for equity markets will be the ability of companies to effectively manage the impact of tariffs, making future earnings seasons and management commentary even more important to follow, and diversification across and within equity markets an important consideration.

Exhibit 4: Share of Magnificent Seven Returns in S&P 500

​

Source: FactSet

The Bottom Line: While it may be too early to tell, market breadth in U.S. equity markets is showing signs of life, with various indicators, including 50-day moving averages and forecasted earnings growth, pointing to more broad-based strength in comparison to the heavily concentrated markets seen in recent years. Monitoring these indicators will provide important clues to whether we will finally see a break in the Magnificent Seven’s reign.

Capital Markets Themes

What Worked, What Didn’t

•Growth Comes Back in Favor: Growth and tech names performed well over the month with markets seeing a return to the “risk on” environment after April’s lows.

•Short Duration More Favorable: While producing lackluster total return results, short duration securities outperformed longer duration bonds over the month with yields continuing to support the income-generation story.​

•Munis Edge Out Taxable Bonds: Municipal bonds eked out a slightly better total return than taxable counterparts but remain negative on a total return basis. The Muni/Treasury ratio is above 90% at the longer-end of the curve, providing attractive relative value opportunities.

Source: YCharts. Data call-out figures represent total monthly returns.

On Alternatives

Gaining Exposure to AI with Infrastructure​

The infrastructure asset class encompasses those physical or real assets that are essential to the everyday functioning of our society, including assets tied to transportation, utilities, communication, and energy. More specifically, this includes essentials like power and water utilities, renewable energy generators, and data centers whose demand is increasing to power artificial intelligence (AI) needs. ​

Similar to real estate and particularly for those investors with a longer time horizon, infrastructure investments can serve as an inflation hedge, offer diversification benefits, and provide a stable income stream. Demand for infrastructure is inelastic, or less impacted by changes in prices, causing these types of investments to be potentially more resilient during economic downturns or recessions.

Exhibit 5: Global Infrastructure Returns​

Source: JPM Guide to Alternatives​

This feature is well illustrated by the gray bars in Exhibit 5, which shows that even during periods of market turmoil, like in the aftermath of the Great Financial Crisis (GFC) in 2009 and the COVID-19 global pandemic in 2020, infrastructure investments maintained a stable income stream. In today’s environment, there are many relevant use cases for infrastructure, but one such use case that is garnering significant attention is the demand for data centers to help power AI. Large-scale AI models are highly complex, operate on vast datasets, and demand immense processing power at extremely high speeds. To function effectively, they rely on large-scale data centers capable of meeting these intense computational requirements. ​

This has led to a surge in demand for data center infrastructure among major technology companies or “hyperscalers” competing in the AI space, such as Microsoft, Google, and Meta. The substantial growth in capex of major tech companies is illustrated in Exhibit 6, with expectations of continued and hyperbolic growth in coming years. Importantly, these data centers typically have longer-term contracts with high switching costs for tenants, like the Metas of the world, making them more defensive from an investment perspective. Investors can gain diversified and stable exposure to transformative market themes like artificial intelligence, not by trying to pick winners and losers in the equity markets, but by investing in the critical infrastructure that supports the entire ecosystem. Much like selling picks and shovels during the gold rush, investing in the physical backbone of AI – such as data centers – offers a way to participate in the long-term growth while avoiding the volatility and uncertainty of choosing individual tech leaders.

Exhibit 6: Capex at major tech companies

Source: JPM Guide to the Markets

The Bottom Line: Infrastructure can be an attractive asset class to include in a portfolio for those investors looking to diversify, hedge inflation, and receive a stable income stream, all while providing exposure to emerging themes, like AI.

Asset Class Performance Quilt

Markets are ever-changing, making diversification across asset classes and sectors a critical component to portfolio construction. As illustrated below, a Balanced 60/40 portfolio provides greater consistency of returns and less volatility over time. ​

Source: YCharts. Asset class performance is presented using market returns from an exchange-traded fund (ETF) proxy that best represents its respective broad asset class. Returns shown are net of fund fees for and do not necessarily represent performance of specific mutual funds and/or exchange-traded funds recommended by Centura Wealth Advisory. The performance of those funds may be substantially different than the performance of broad asset classes and to proxy ETFs represented here. U.S. Bonds (iShares Core U.S. Aggregate Bond ETF); High Yield Bonds (iShares iBoxx $ High Yield Corp Bond ETF); Intl Bonds (Invesco International Corporate Bond ETF); Large Growth (iShares Russell 1000 Growth ETF); Large Value (iShares Russell 1000 Value ETF); Mid Growth (iShares Russell Mid-Cap Growth ETF); Mid Value (iShares Russell Mid-Cap Value ETF); Small Growth (iShares Russell 2000 Growth ETF); Small Value (iShares Russell 2000 Value ETF); Intl Equity (iShares MSCI ACWI ex US ETF); Emg Markets (iShares MSCI Emerging Markets ETF); and Real Estate (iShares US Real Estate ETF). The return displayed as “60/40 Allocation” is a weighted average of the ETF proxies shown as represented by: 40% U.S. Bonds, 12% International Stock, and 48% Large Blend.

At a Glance

Macro Indicators: Headline and core PCE inflation rose by 2.1% and 2.5%, respectively, in April, a slight decline from March’s figures. The PCE data showed a slowdown in consumer spending and an increase in the personal savings rate, both reflecting a gloomier consumer outlook. Despite the gloom, the labor market remains on solid footing with jobs added in April exceeding expectations. GDP growth in 2Q also points to a rebound into positive territory according to the Atlanta Fed’s GDPNow tool, reversing 1Q’s negative reading that showed a surge in imports due to tariff front-running.

Trump 2.0: Trade negotiations continue to play out amid a recent federal judicial panel ruling that Trump’s tariffs are illegal. Chinese tariffs were slashed but trade talks remain on rocky footing. Meanwhile President Trump doubled down on steel tariffs, proposing to increase them from 25% to 50%. The budget bill, which also includes tax policy, was passed by the House and moved forward to the Senate, where it continues to face criticism for not doing enough to help balance the budget.

Fed & Monetary Policy: The Fed held rates steady at the May FOMC meeting, citing a continued concern in inflationary pressures surrounding tariff uncertainty. Expectations for interest rate cuts have been pushed out to later in the year, with the next rate cut anticipated in September according to CME Group’s FedWatch tool.

Capital Markets: After a rocky April, U.S. equities had their best May since 1990, with the S&P 500 up over 6% as trade talks progressed and some tariffs were alleviated. Tech stocks staged the largest comeback, with the Nasdaq-100 up around 9% for the month. On the other hand, fixed income markets saw greater volatility as uncertainty mounted related to the U.S. deficit and Moody’s published a downgrade in U.S. sovereign debt, both of which likely point to higher long-term interest rates moving forward.

Asset Class Performance

Equities bounced back in May, particularly within the U.S., with large caps and small caps up over 6% and 5%, respectively. International equities had a more muted month compared to the U.S. but continue to show strong positive returns on a year-to-date basis. Fixed income markets had more tepid returns in May, especially in the investment grade sector.

Source: YCharts. Asset class performance is presented using total returns for an index proxy that best represents the respective broad asset class. U.S. Bonds (Bloomberg U.S. Aggregate Bond TR), U.S. High Yield (Bloomberg U.S. Corporate High Yield TR), International Bonds (Bloomberg Global Aggregate ex-USD TR), U.S. Large Cap (S&P 500 TR), U.S. Small Cap (Russell 2000 TR), Developed International (MSCI ACWI ex US TR), Emerging Markets (MSCI EM TR), and Real Estate (Dow Jones U.S. Real Estate TR).

Markets & Macroeconomics

Why the Moody’s Downgrade Matters

On May 16, Moody’s became the last credit rating agency to strip U.S. sovereign debt of its AAA status, citing a decades-long increase in “government debt and interest payment ratios to levels that are significantly higher than similarly rated sovereigns,” like Denmark and Australia. The reasons for the downgrade should not have come as a surprise to markets, but the timing of the downgrade is significant. Credit rating agencies Fitch and S&P already downgraded U.S. debt in 2023 and 2011, respectively, but Moody’s decision to cement the downgrade at a time when the Trump Administration is working on a budget package seems poignant. This downgrade sent a clear signal to markets and policymakers that applying additional pressure to the federal deficit – specifically trying to add trillions of dollars to the deficit over the next 10 years, as analyzed by the Congressional Budget Office (CBO) via the current budget bill – will have consequences on the economy.

The key concern isn’t necessarily that the U.S. will default on its debt, but, rather, they will have greater difficulty in servicing their debt because of higher interest rates paid on the debt and ballooning U.S. interest costs. According to the CBO, the current debt-to-GDP ratio is ~100%, just shy of the level during World War II (106%), and projections are calling for this ratio to increase to nearly 120% in the next 10 years, illustrated in Exhibit 1. Servicing sovereign debt means garnering demand for it, and if the credit risk of U.S. sovereign debt is higher, as cited by (now) all three major credit rating agencies, two things could happen: there could be less demand for U.S. bonds than there historically has been, and/or investors could demand a higher yield for taking on the additional risk now associated with U.S. debt. 

Exhibit 1: Federal Debt Held by the Public

Source: Congressional Budget Office

This is why Treasury auctions have become more interesting to watch. Even prior to the Moody’s downgrade, an auction for 20-year debt showed lackluster demand and caused longer-term Treasury yields to move higher. The 10-year yield touched above 4.5% and the 30-year yield breached 5.1%, its highest level since 2007, illustrated in Exhibit 2. Ultimately, the Moody’s downgrade has amplified concerns surrounding the “safe haven” status of the U.S. and its “risk-free” assets.

Exhibit 2: 10- and 30-Year Treasury Yields

Source: YCharts

The lack of fiscal responsibility in the U.S. as well as the more recent protectionist stance resulting from tariffs is causing some investors to diversify away from U.S. assets. Like the credit rating agencies, some investors feel these recent trends make the U.S. less desirable for their investments than it has been historically. We are seeing this sentiment manifest in broader outflows from U.S. assets, like equity markets and the U.S. Dollar Index in the short-term, and it could result in Treasury yields fetching a higher premium moving forward. All in all, investors should watch the progress of the current budget bill floating in Congress and consider diversification in fixed income portfolios.

The Bottom Line: Moody’s downgrade of U.S. sovereign debt this month is an important reminder that America has become too complacent with its federal debt levels, and investors worried about knock-on effects could consider further diversification, particularly as budget bill negotiations play out.

Looking Ahead

Q1 Earnings Reveal Resilience For Now

First quarter earnings season is coming to a close and earnings growth figures have stunned to the upside, growing 13.3% on a year-over-year basis, nearly double initial projections, showcasing the resilience of U.S companies. This quarter’s earnings announcements took place as tariff policy was roiling markets, providing a potentially stark contrast between strong current, and weaker future, business conditions, should policy uncertainty remain.

While the strongest earnings reports came from major technology companies who continue to outline capital expenditures in AI-related initiatives, there is no doubt that the uncertain macroeconomic backdrop is making forecasts for future earnings growth muddled, if not impossible, paralyzing companies until additional clarity is gained. According to FactSet research, only 3% of companies in the S&P 500 withdrew EPS guidance for fiscal year 2025, with those that did withdraw largely citing tariff uncertainty as the primary culprit. On the flip side, over 50% of companies who issued guidance for 2025 chose not to update them this quarter, illustrated in yellow in Exhibit 3, showcasing how tariffs have caused companies to pause amid the uncertainty. This reaction makes current projections potentially inaccurate as they are “pre-tariffs,” meaning we could see adjustments to the downside moving forward if tariffs remain a factor, putting even greater emphasis on future earnings seasons as a barometer for the broader U.S. economy.

Exhibit 3: S&P 500 Companies Who Issued 2025 Guidance

Source: FactSet. Data as of May 23.

A key factor at play directly impacting U.S. businesses is the health of the U.S. consumer, which is showing signs of weakening in survey data amid the macroeconomic uncertainty. A weaker consumer could spell trouble for consumer-led sectors, like consumer discretionary and even pockets of consumer staples, especially if margins are further strained from pending tariffs. Monitoring these businesses and their future earnings will provide important insights into whether policies, like tariffs, are impacting the economy and creating a pinched consumer. A prime example we have already seen is in the airline industry, with major airlines reducing the number of domestic flights offered as consumers cut back on travel.

Another tariff fallout that could challenge the resilience of U.S. companies is whether businesses are forced to implement cost cutting measures like layoffs or a reduction in capital expenditures to offset tariff price increases. The Q1 earnings season did reveal some layoffs from companies, but for more idiosyncratic or company-specific reasons, and, as of now, we aren’t seeing broader layoffs to offset the additional costs brought on by levies. All the more reason to continue watching labor market data moving forward. 

Lastly, just like 1Q GDP growth, 1Q earnings illustrated a “pull-forward” in demand in anticipation of potential tariffs, which is expected to reverse in future quarters, potentially creating earnings volatility for those businesses more reliant upon international trade. As trade negotiations are carried out and we approach the initial 90-day deadline for “Liberation Day” tariff implementation in early July, commentary from U.S. companies will provide important insight into whether the earnings resilience we have witnessed in recent quarters will persist.

The Bottom Line: Looking ahead, earnings will be an important indicator of U.S. economic health, and the resilience displayed by U.S. companies in recent quarters is expected to be challenged by tariffs and the ongoing policy uncertainty in upcoming quarters, doubling the importance of monitoring future earnings announcements.

Capital Markets Themes

What Worked, What Didn’t

•U.S. Equities Stage Comeback: After a volatile April, U.S. equity markets made up ground in May as news of trade negotiations and tariff alleviations moved markets, with large cap stocks, particularly growth companies, making up the most ground.

•Fixed Income Worries: News of the U.S. sovereign debt downgrade, the impending budget bill floating around Congress, and Fed concerns over rising inflation caused volatility in fixed income markets in May. Long duration bonds detracted over the month versus short duration bonds, and investment grade bonds underperformed their high yield counterparts as the “risk-on” appetite took hold.

•International Equity Still Looks Strong: International equity markets, both developed and emerging markets, returned over 4% in May despite a retracement in U.S. equities into positive territory.

Source: YCharts. Data call-out figures represent total monthly returns.

On Alternatives

Finding Opportunities Within Private Equity

Coming into 2025, expectations regarding a thaw in the initial public offering (IPO) market were high, which has been roiled by high interest rates and a slow exit environment in recent years. Unfortunately, 2025’s monetary and fiscal policy uncertainty have thus far hampered a broader return in dealmaking activity. M&A activity is largely in-line with activity seen last year and this lack of activity is creating challenges for private equity investors, causing them to seek out other areas of the market that are providing more compelling opportunities or liquidity. One such place is the secondaries market, which witnessed transaction volume growth of 45% from 2023 to 2024, according to Jefferies and illustrated in Exhibit 4 below.

Exhibit 4: Total Secondaries Transaction Volume

The secondaries market is largely categorized into two buckets: general partner (GP) led and limited partner (LP) led. The difference in these types of transactions lies in who initiates the deal – the GP, or manager of a private equity fund, or the LP, the investor in a private equity fund. In recent months, LP-led secondaries have witnessed a surge in demand, primarily for liquidity reasons, which has pushed prices higher, and subsequently pinched the discount opportunity in the asset class, making relative value opportunities much harder to uncover. The GP-led secondaries sector has also seen increased demand and growth, particularly from traditional buyout private equity sponsors who are grappling with lackluster M&A activity. Part of the interest in GP-led secondaries is related to the increased use of continuation vehicles (CVs). CVs allow the GP to hold onto a portfolio company, typically a better-performing, trophy portfolio company, for a longer period by moving it into a new investment vehicle, the CV. Of the $75 billion in GP-led transactions in 2024, illustrated in Exhibit 5, 84% came from CV transactions.

Exhibit 5: GP-Led Transaction Volume

Source: Jefferies

The use of continuation vehicles allows GPs to provide liquidity to LPs in their legacy fund and can also give GPs additional time and capital to nurture a portfolio company, or companies, prior to sale. This can be advantageous if market conditions are less favorable for dealmaking, like what we are experiencing today.

Given the amount of uncertainty related to fiscal and monetary policy, it is largely expected that slow M&A activity will persist in 2025; however, should the Trump Administration turn its attention to de-regulation, this could be the catalyst that dealmakers have been waiting for. On the flip side, if we see greater economic deterioration, or a slowdown, there will likely be an even greater need for liquidity in the asset class, underscoring the need for opportunities within private equity, like what we are seeing in the secondaries market today.

The Bottom Line: M&A activity has remained relatively subdued with a slow exit environment which is not being helped by high interest rates and an uncertain macroeconomic environment, but private equity investors may still find opportunities in the market, as exemplified by recent trends in both LP- and GP-led secondaries.

Asset Class Performance Quilt

Markets are ever-changing, making diversification across asset classes and sectors a critical component to portfolio construction. As illustrated below, a Balanced 60/40 portfolio provides greater consistency of returns and less volatility over time.

Source: YCharts. Asset class performance is presented using market returns from an exchange-traded fund (ETF) proxy that best represents its respective broad asset class. Returns shown are net of fund fees for and do not necessarily represent performance of specific mutual funds and/or exchange-traded funds recommended by Centura Wealth Advisory. The performance of those funds may be substantially different than the performance of broad asset classes and to proxy ETFs represented here. U.S. Bonds (iShares Core U.S. Aggregate Bond ETF); High Yield Bonds (iShares iBoxx $ High Yield Corp Bond ETF); Intl Bonds (Invesco International Corporate Bond ETF); Large Growth (iShares Russell 1000 Growth ETF); Large Value (iShares Russell 1000 Value ETF); Mid Growth (iShares Russell Mid-Cap Growth ETF); Mid Value (iShares Russell Mid-Cap Value ETF); Small Growth (iShares Russell 2000 Growth ETF); Small Value (iShares Russell 2000 Value ETF); Intl Equity (iShares MSCI ACWI ex US ETF); Emg Markets (iShares MSCI Emerging Markets ETF); and Real Estate (iShares US Real Estate ETF). The return displayed as “60/40 Allocation” is a weighted average of the ETF proxies shown as represented by: 40% U.S. Bonds, 12% International Stock, and 48% Large Blend.

The first quarter of 2025 was marked by heightened volatility across global markets, driven by escalating trade policies and shifting investor sentiment. The uncertainty related to tariff decisions, including surrounding President Trump’s “Liberation Day” tariff announcement on April 2, dominated sentiment over the quarter, causing both the S&P 500 and the Nasdaq 100 to enter correction territory. This rampant uncertainty and subsequent volatility prompted asset managers like Goldman Sachs to slash their year-end target for the S&P 500 to 5,700 on heightened recession risks, which would only represent a ~1.5% increase from quarter-end levels.

Signs of defensive rotations emerged over the quarter, as investors flocked to gold (up 19% YTD) and Treasury bonds (10-year yield down 35 bps YTD) while high-quality/low-volatility stocks outperformed their growth counterparts, illustrating a broader flight to safety. Below are highlights from the first quarter of the year.

1. The S&P 500 and Nasdaq 100 hit correction territory in March, dropping more than 10% from February’s peak. At their worst, on March 13, the S&P 500 and Nasdaq 100 were down 10.03% and 13.23%, respectively, from their peaks on February 19. The declines were largely driven by uncertainty surrounding impending tariffs, while negative performance in the tech-heavy Nasdaq 100 was driven by significant setbacks in tech mega-caps due to rising competition and valuation concerns.
2. Tariff Turmoil Reshapes Markets: The Trump administration’s planned reciprocal tariffs (targeting 25% on auto imports and 20% on various “country-based” levies) created crosscurrents: U.S. energy producers rallied on potential Russian crude restrictions; the “Magnificent Seven” stocks extended their quarterly rout to nearly 16%; market correlations plunged to 25-year lows as investors scrambled to price disparate sector impacts; and the S&P 500 underperformed foreign equities by the largest margin since 2009.
   
   
   Source Link: Bloomberg
   
   Despite this turmoil, Morgan Stanley’s Mike Wilson noted, “This isn’t a market falling apart; it’s a market fighting through uncertainty” with recent geopolitical developments heavily influencing market dynamics. President Trump’s tariffs have stirred anxiety across global markets as investors weigh the potential economic fallout, with many sectors preparing for the implications of increased trade barriers
3. European nations initiated major fiscal reforms aimed at bolstering infrastructure and defense spending, creating opportunities for domestic industries amid global uncertainty. U.S. equity markets have been particularly reactive to these developments, exhibiting pronounced swings due to potentially adverse impacts on U.S. economic growth and corporate earnings. While the Stoxx Europe 600 Index continues to benefit from renewed fiscal confidence, reinforced by Germany’s expansive infrastructure investment plans, U.S. indices grapple with regulatory and trade uncertainties. The crosscurrents between domestic and international equity markets reflect broader macroeconomic challenges as policymakers and investors navigate the evolving landscape of global trade and fiscal policy responses.
4. Chinese startup DeepSeek emerged as a disruptive force with its advanced AI model. This development triggered a significant tech selloff, with the Nasdaq 100 experiencing a 3% drop in a single trading day. The announcement of DeepSeek’s low-cost, energy-efficient AI technology raised serious concerns over the valuations of U.S. tech giants that have dominated the AI landscape. Notably, Nvidia Corp., a key player in AI hardware, faced a dramatic market value reduction, losing almost $600 billion during this period. This unprecedented loss marked Nvidia’s worst performance since the initial pandemic-related market responses in March 2020. DeepSeek’s advancements have prompted a reevaluation of the high spending trajectory adopted by major companies like Microsoft Corp., Meta Platforms Inc., and Alphabet Inc., challenging their investment strategies in AI infrastructure and highlighting potential shifts in future technology investments.
5. Cryptocurrency, once considered an ultra-high-risk investment, is gaining greater acceptance among retail and institutional investors. Despite the fluctuations in adoption, institutional interest in cryptocurrencies remains intact, demonstrated by recent fund inflows into crypto investment vehicles. A major example is BlackRock Inc. (BLK), who made headlines by announcing a significant expansion in its cryptocurrency offerings, attracting institutional investors and spurring additional fund inflows into the asset class, including the recent launch of a European Bitcoin ETP or exchange-traded product. Product expansions in this space underscore the sustained institutional interest in cryptocurrencies, with market analysts emphasizing the continued importance of monitoring regulatory dynamics and macroeconomic pressures as key drivers of cryptocurrency performance moving forward. Despite this recent momentum, Bitcoin (BTCUSD) is down nearly 11% to start the year.
6. Geopolitical Tensions and Volatility: Mounting uncertainties within the financial markets due to global tariff dynamics and geopolitical tensions have added another layer of complexity to the investment environment. The tension between Israel and neighboring countries has intensified, impacting regional stability and influencing energy markets amid concerns over supply disruptions. Additionally, the war in Russia/Ukraine wages on with no clear path to a resolution, particularly after a heated discussion between President Trump and Ukrainian President Zelensky in February. These geopolitical strains have contributed to increased volatility in commodity prices, particularly oil, as market participants closely monitor developments for any potential escalation that could further disrupt supply chains. As countries in the regions navigate these challenges, investors are advised to remain cautious, considering the geopolitical risk premiums that might affect market sentiment and valuations.
7. Gold prices set a new record in Q1 2025, surpassing $3,100 per ounce. The precious metal’s value soared more than 19% this quarter, marking its largest three-month gain since 2011. This substantial rise was fueled by heightened market uncertainty from U.S. tariff policy and geopolitical tensions, prompting investors to seek refuge in safe-haven assets. The rally in gold was further bolstered by significant inflows into bullion exchange-traded funds, which received $12.7 billion over the quarter, reflecting investor sentiment favoring risk-averse strategies amid the volatile economic landscape.
8. The U.S. Dollar experienced notable fluctuations throughout Q1 2025, recording its worst first-quarter performance since 2017. The Bloomberg Dollar Spot Index, which rose slightly by 0.2% in the last week of the quarter, reflected broader concerns about rising tariff-related risks and global economic uncertainty. The Dollar’s declining strength can be attributed to increasing investor anxiety over President Trump’s trade policies, leading to movements toward safer currencies such as the Japanese yen and Swiss franc. These two haven currencies appreciated 1.8% against the Dollar amid escalating geopolitical and economic tensions.

Market Recap 

Equities – Equities in the U.S. struggled as the threat of trade wars and conflicting monetary and fiscal policies proved too much for stocks, resulting in their worst quarter since 2022. Under the hood of broad market performance, markets witnessed varied sector performances, painting a more nuanced picture of market dynamics in the current environment. The S&P 500 faced challenges, finishing the quarter down 4.27%, highlighting investor apprehension over President Trump’s evolving trade policies. The Nasdaq 100 experienced its worst quarterly performance in nearly three years, declining 8.07% amid fears of an AI investment bubble and uncertainties surrounding tech spending and valuation metrics.

Meanwhile, defensive sectors such as healthcare, utilities, and consumer staples thrived as investors flocked to safer corners of the market in response to mounting risks. Overall, the first quarter underscored the complexities and crosscurrents facing investors, with varied sector performances highlighting the necessity of strategic positioning in response to evolving fiscal policies and global economic dynamics. As Q2 unfolds, market participants remain vigilant, focusing on geopolitical developments and macroeconomic indicators to navigate the ongoing volatility in addition to sector diversification.

Bonds – The bond market also experienced significant volatility in Q1 2025, and, like its equity counterparts, this volatility was driven primarily by shifting economic expectations and geopolitical uncertainties. U.S. Treasury yields fluctuated notably, with the 10-year yield trading within a 65-basis point range, ending the quarter at approximately 4.23%. The uncertainty surrounding President Trump’s tariff policies has raised concerns about potential economic disruptions and inflationary pressures. As investors sought safe-haven assets amid these uncertainties, Treasury bonds saw increased demand, leading to periodic declines in yields and a positive 2.78% return in bonds, as measured by the Bloomberg U.S. Aggregate Bond Index.

High yield credit markets also faced turbulence, as spreads widened 63-basis points (0.63%) from 2.92% to 3.55%, the highest level since August 2024. Concerns over economic growth and corporate earnings, magnified by geopolitical tensions and trade policy shifts, contributed to a risk-averse sentiment that impacted credit markets. Despite these challenges, high yields bonds exhibited relative stability and still produced a 1.00% return over the quarter.

Market participants are closely monitoring the Federal Reserve’s policy stance and anticipated economic data releases, which will likely influence bond market dynamics in the coming months.

Source: YCharts. The Bloomberg US Aggregate Index was used as a proxy for Bonds; the Bloomberg US High Yield 2% Issuer Capped Index was used as a proxy for High Yield Bonds; the Russell 2000 Index was used as a proxy for Small Cap Equities; and the MSCI ACWI Ex USA Index was used as a proxy for Foreign Equities.  All returns are based on total return levels as of 3/31/2025.

Economy: GDP and Consumer Spending in Q1 2025

Consumer spending in the first quarter of 2025 demonstrated subdued growth, reflecting a cautious atmosphere among consumers due to economic uncertainty and rising inflationary pressures. After declining 0.6% in January, inflation-adjusted consumer spending edged up merely 0.1% in February, revealing hesitation in household expenditures. February was notably challenging, as Americans reduced spending on services for the first time in three years, a direct result of persistent price increases and economic concerns. The slow pace of consumer spending highlights mounting anxieties over the broader economic landscape, which is becoming further complicated by significant geopolitical and domestic policy challenges, including ongoing tariff disputes.

The challenges faced by the U.S. economy in the first quarter of 2025 were further demonstrated in the projections for real GDP growth. According to the GDPNow model estimate from the Atlanta Fed, real GDP growth for Q1 2025, as of March 28, is projected to be -2.8%, representing a stark contrast from the same model’s forecast on February 21, which projected the U.S. economy would grow at +2.3% annualized rate. This downturn also marks a notable shift from previous quarters, reflecting widespread economic uncertainties and the impact of tariff policies. The alternative model forecast, which accounts for imports and exports of gold, adjusted the decline to a milder -0.5%, a further illustration of investors’ flock to safety over the quarter.

Factors contributing to this sharp decline include a notable reduction in net exports, which dragged down GDP growth by an estimated -4.79% in the standard model. While we believe the economy is slowing and facing several headwinds marred with uncertainty, we recognize that the estimates from the Atlanta Fed may be more dire than we actually experience, particularly since the spike in imports is a result of companies accelerating purchases ahead of tariffs, which will likely be offset in the Inventories measure and result in a more negligible outcome than the Atlanta Fed model is forecasting. The ongoing trade tensions, particularly those involving tariffs, cast a shadow over economic activities, leading businesses and consumers to exercise caution. As these dynamics unfold, market participants should closely watch for potential policy responses and economic indicators that could signal recovery or further challenges in the quarters ahead. Additionally, as clarity is gained on tariff policy, we expect some of these trends to reverse or improve.

It is worth mentioning that the implementation of tariffs is largely motivated by reducing the federal trade deficit, which has been in deficit since the 1970s, meaning that the U.S. has been importing more than it has been exporting for decades. Observing this trend helps explain why President Trump is aggressively pursuing tariffs to help accomplish his “Make America Great Again” agenda – bringing manufacturing jobs back to America and incentivizing the consumption of domestic goods should theoretically improve the U.S. economy in the long-term, all while reducing the trade deficit. Additionally, when imports exceed exports, foreign economies benefit more, and the domestic government must stimulate domestic growth in other ways, typically through government spending, which ultimately can lead to budget deficits. This means that trade deficits are connected to budget deficits, so reducing the trade deficit through tariffs should bode well for the U.S. economy in the long-term, but, as President Trump has indicated, the consumer may feel some pain in the short-term.

Labor Market Dynamics

A mix of growth and challenges characterized the labor market in the first quarter of 2025, as the U.S. economy navigated the broader economic uncertainties. Nonfarm payrolls increased by a seasonally adjusted 151,000 in February, representing a stable yet cautious expansion versus expected figures of 170,000. Despite this positive trend, the unemployment rate edged higher to 4.1%, indicating some softening in labor market conditions.

Within this landscape, specific sectors exhibited varying employment trends. Healthcare continued to lead job creation with 52,000 new positions, followed by gains in financial activities and transportation. However, sectors such as retail and government experienced declines, reflecting the impact of administrative changes and fiscal policies being carried out by the Department of Government Efficiency (DOGE), led by Elon Musk. The reductions made by DOGE caused federal government employment to drop by 10,000 jobs as efforts to reduce the federal workforce began to manifest, with future reductions anticipated. These efforts, part of a broader initiative to streamline government operations and improve efficiency, are expected to continue over the coming months, potentially impacting labor market trends and federal services.

Market participants are keenly observing upcoming jobs report releases for signals of employment trends, especially as economic conditions remain highly influenced by geopolitical and domestic fiscal developments.

Inflation, Stagflation, and Monetary Policy

In the first quarter of 2025, inflation trends exhibited volatility, impacted by persistent economic uncertainties and evolving trade policies. Core inflation, as measured by the Personal Consumption Expenditures (PCE) price index, accelerated to 2.8% annually in February, indicating heightened inflationary pressures that outpaced the Federal Reserve’s 2% target. The rise in core inflation was driven by sustained increases in the costs of goods and services, fueled partly by anticipatory spending ahead of tariff implementations. February’s higher inflation reading, paired with retaliatory tariff projections and slowing consumer spending, has evolved into concerns about stagflation — a troubling combination of slowing economic growth and persistent and elevated inflation. These concerns were underscored by a Bloomberg Economics analysis, which warned that the anticipated tariffs could elevate U.S. tariff rates significantly, creating a drag on GDP of up to 4% and pushing inflation higher by about 2.5% over several years.

The consumer spending lethargy reflected heightened household budget constraints alongside an uptick in inflation expectations to a nearly 30-year high, as surveyed by the University of Michigan. Given these dynamics, combined with mounting consumer and business anxieties over Trump’s trade policies, economists are forming a growing consensus that the U.S. economy could face both a slower growth trajectory and elevated price levels, challenging policymakers to navigate these choppy economic waters effectively.

Though mostly taking a backseat to President Trump in the first quarter, monetary policy remained a focal point as the Federal Reserve maintained its benchmark interest rate in the 4.25% to 4.50% range at their March Fed Meeting. Central bank officials expressed concern over the potential inflationary impact of tariffs, with conflicting views on whether these price pressures would be transient or more persistent. Interestingly, Atlanta Fed President Raphael Bostic highlighted a cautious stance, refraining from labeling the inflationary effects as “transitory,” a word steeped in history. The Fed had initially termed the recent post-COVID inflation surge as transitory, when it ended up being the worst bout of inflation the U.S. has seen since the 1980s and a fight the Fed is still fighting today, so markets are sensitive to the use of this word in today’s environment. This cautious monetary approach indicates the Federal Reserve’s intent to closely monitor forthcoming data and global economic developments closely, ensuring that policy adjustments align with evolving inflation trends and economic conditions.

The Fed’s updated Statement of Economic Projections confirmed their pace of rate reductions in 2025 of 50 basis points or two potential 25 basis point cuts. The Federal Reserve updated its economic projections to reflect its concerns about a slowing economic environment, as evidenced by its lower real GDP outlook, higher unemployment, and elevated inflation estimates. As market participants navigate these nuanced dynamics, attention remains focused on future monetary policy decisions and their implications for broader economic stability. We anticipate the Fed to maintain its patient and methodical approach to future rate reductions, particularly in the absence of clarity on fiscal policy.

Centura’s Outlook

As we wrote in our letter to clients addressing the market volatility and correction in mid-March, “Ultimately, in the absence of clarity on the path of fiscal and monetary policy, now is not the time to make drastic changes to investment positioning.”

Unfortunately, the outcomes expected to result from proposed political changes are in direct conflict with the Fed’s dual mandate of maximizing employment and achieving price stability, at least for the near future. For example, sweeping tariffs on U.S. trading partners are likely to increase prices, stoking the very inflation that the Fed is trying to tame. This contrast has led investors to react to speculation and flock to safe-haven investments like bonds and gold. Given the erratic decision-making of our Commander in Chief, we expect volatility to continue to plague markets until more clarity is provided. As discussed, several potential risks are looming and investors should proceed carefully.

Prospects of a U.S. recession are mixed, not only among economists, but asset classes as well. As Chris Ellis, a high-yield bond portfolio manager at Axa Investment Managers stated, “Credit markets in the U.S. are pricing in a much lower chance of a recession than equity markets are and something has to give.” In mid-March, a JPMorgan Chase model indicated the S&P 500 was pricing in a 33% probability of a recession, while credit markets are implying a recession probability of 12%. While markets observed a selloff in high yield credit spreads along with equity markets, history would indicate a significantly larger selloff would need to occur to start sounding the recession alarm bells. Credit spreads generally foreshadow a recession when the premium for junk bonds approaches 8%, or 800-basis points. The current credit spread is 3.55%. The health of today’s credit markets illustrates how equity investors are likely overreacting to speculation surrounding the long-term impacts of the policies. While we don’t believe a recession is imminent, we are closely monitoring any further deterioration in credit as policies unfold.

On a more positive note, the downward pressure on the price of stocks factored with stronger than expected earnings growth has brought valuations in line with more reasonable levels. According to FactSet, the forward 12-month price-to-earnings ratio (P/E) declined from 22.3x at year-end to 20.5x as of March 28, which is now only slightly higher than both the 5-year and 10-year averages of 19.9x and 18.3x, respectively. As we witnessed in the first quarter, valuations continue to pose a risk to the market, as negative sentiment can lead to sharper sell-offs on overvalued securities. While the concentration of the top 10 largest stocks in the S&P 500 fell in Q1 2025, they still pose a significant risk. According to JPMorgan, the 10 largest constituents represent 35% of the index, as of March 31, slightly down from 38.7% at year-end.

As we communicated in our 4Q 2024 Market Wrap, and reiterated in our March client letter, concentrations like this make the index vulnerable to significant changes in those underlying companies, particularly when those 10 companies are more overvalued than the remaining 490 companies. The P/E of the top 10 is currently 24.4x, while the remaining stocks currently boast a P/E in line with their 10-year averages of 18.3x. Concentrations like this are precisely why we favor global diversification across several asset classes – both public and private – and helped support our decision to reduce both large-cap and large-cap technology stock exposure in our allocations at the beginning of the year.

In the face of higher costs, corporate profits remain resilient, as illustrated by the sixth consecutive quarter of positive earnings growth by the S&P 500, rising a remarkable 18.2% in the fourth quarter. As of March 28, FactSet estimates first-quarter earnings to expand at a slower pace of 7.3% year-over-year. Earnings season will kickstart in early April, where we will be keying in on management’s commentary on the impacts of fiscal and monetary policy changes on forward-looking earnings projections and capital expenditures (investment), and we fully anticipate witnessing revisions to the downside.

From the political leader changes in France, Germany, and Canada to the ongoing armed conflicts, notably in the Middle East, where tensions between Israel and Iran remain escalated, and in Russia-Ukraine where discussions are evolving between Putin, Zelensky, and Trump – international markets remain on fragile ground despite their strong first quarter returns. As these international disputes unfold, they have a cascading effect on market sentiment, influencing everything from currency valuations to sector performance.
The specter of further geopolitical instability remains a crucial factor to monitor, particularly in retaliation to the unveiling of “Liberation Day” tariffs on April 2. Potential policy responses from global leaders are poised to have far-reaching consequences for economic forecasts and asset allocations worldwide. We anticipate that both the announcement of the “Liberation Day” tariffs and global leaders’ responses will generate increased market volatility, further supporting the case for global diversification across both public and private markets.

In conclusion, Q1 2025 started on a sour note, and until we have clarity surrounding fiscal and monetary policy, we expect sentiment to deteriorate further. Our allocations remain balanced and in line with our long-term targets. We expect volatility to remain in the short-term as markets work through the political noise and reassess potential economic ramifications; however, in the longer-term, we expect solid earnings growth to drive equity markets. Diversification across several public and private market asset classes should serve clients well in 2025 as we navigate this complex investing environment. As always, investors should remain vigilant to potential risks while positioning themselves to capitalize on opportunities in the evolving market landscape.

Thank you for your continued confidence and support. If you have questions or concerns, please contact your Centura Wealth advisor.

The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor.  

The views expressed in this commentary are subject to change based on the market and other conditions. These documents may contain certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.   All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed.  There is no representation or warranty as to the current accuracy, reliability, or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.

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At a Glance

Macro Indicators: Headline and core PCE inflation rose by 2.5% and 2.6%, respectively, in January. These increases matched expectations but, combined with higher CPI data, grew consumer worries that inflation may remain elevated. The January jobs report gave mixed signals, with only 143,000 jobs added in the labor market (vs. a 169,000 forecast), but another drop in the unemployment rate to 4.0%. Atlanta Fed GDPNow estimates for Q1 2025 GDP surprisingly turned sharply negative as of month-end.

Trump 2.0: Tariffs dominated headlines over the month, with a 10% tariff on China currently in place and possibly more tariffs coming on countries like Mexico, Canada, and the EU, in addition to reciprocal tariffs.

Fed & Monetary Policy: The Fed continues to reiterate its patient approach to interest rate cuts. The minutes from the January FOMC meeting revealed that tariffs are troubling the Fed, which could potentially result in fewer interest rate cuts than initially projected this year. As of the December “Dot Plot,” Fed officials have projected two 25-bps cuts in 2025.

Equity Markets: Major U.S. indices finished February in the red after a volatile month. The Q4 2024 earnings season is nearly wrapped up, with 97% of companies in the S&P 500 having already reported. The current quarterly earnings growth rate on a year-over-year basis is 18.2%, well above initial expectations.

Asset Class Performance

Somewhat surprisingly, Trump’s tariff announcements over the month hit U.S. equity markets hardest, whereas international equity markets posted modest growth. Real estate was the best performer over the month, a likely result of heightened inflation expectations, and bond markets saw positive growth, with investment grade outperforming high yield.

Source: YCharts. Asset class performance is presented using total returns for an index proxy that best represents the respective broad asset class. U.S. Bonds (Bloomberg U.S. Aggregate Bond TR), U.S. High Yield (Bloomberg U.S. Corporate High Yield TR), International Bonds (Bloomberg Global Aggregate ex-USD TR), U.S. Large Cap (S&P 500 TR), U.S. Small Cap (Russell 2000 TR), Developed International (MSCI ACWI ex US TR), Emerging Markets (MSCI EM TR), and Real Estate (Dow Jones U.S. Real Estate TR).

Markets & Macroeconomics

Trump’s Approach to Tariffs

February brought lots of action on the tariff front. President Trump applied tariffs on China (with possibly more to come) and threatened tariffs on neighboring countries Canada and Mexico, as well as commodities, like aluminum and steel. The administration also launched an investigation into the trading practices of copper, and in retaliation from impacted countries, Trump announced potential “reciprocal” tariffs, which could affect U.S. goods like electronics, motor vehicles, and pharmaceuticals. While most of these policies have not been implemented, taken in total, they could push tariff rates to their highest level since the 1930s, begging the questions: why higher tariffs now and should markets be concerned?

In answering the first question, it is important to remember that a tariff is a tax on imports, which typically raises prices for domestic consumers, but, theoretically, allows domestic producers to better compete globally – a stance that supports Trump’s “Make America Great Again” mantra. Higher tariffs should support domestic production of goods, making the U.S. less reliant on imports, hopefully to the dual benefit of promoting U.S. manufacturing and reducing the country’s trade deficit, which has been in deficit since the 1970s, illustrated in Exhibit 1. Trump’s tariffs are also meant to curb “national security” threats, including illegal immigration and drug trafficking, from places like China, Canada, and Mexico. When Trump focuses on “national security” measures, he is using tariffs as more of a negotiating tactic to end unfair trade practices and impose stricter border controls, all while producing government revenue to offset spending in other areas of his fiscal policy agenda. Whether or not all of Trump’s proposed tariffs will be implemented, there is no doubt that higher tariffs represent a departure from the low tariff environment that characterized much of the American 20th century, illustrated in Exhibit 2.

Exhibit 1: U.S. Goods Trade Balance to GDP

Source: Federal Reserve Bank of St. Louis

Tariffs in the context of 2025, however, have introduced concerns on their impact to inflation and economic expansion. So, should markets be concerned? The answer boils down to maybe. Tariffs can increase prices for the domestic consumer, and while this doesn’t always have a broader inflationary impact, they could threaten the progress the U.S. has made on inflation in the past two years, which investors worry could result in a potential slowdown in growth. If tariffs are indeed being used as a negotiating tactic, it could also spark trade wars with key trading partners (think China), which could have more lasting economic impacts. As with anything related to politics, uncertainty is perhaps the only thing that is certain, and investors should continue to focus on the potential economic impacts of tariffs while filtering through the political noise as best as possible. Tariffs are not the end of the world, but American consumers may feel some pain if (and when) implemented.

Exhibit 2: U.S. Average Effective Tariff Rate

Source: The Budget Lab

The Bottom Line: Tariffs are being used by the Trump Administration as a negotiating tactic to promote his “Make America Great Again” agenda and generate additional revenue for the government, prompting concerns from investors on the economic impacts to inflation and growth. The actual impact of tariffs remains uncertain, particularly as Trump continues to add to the tariff pile, potentially sparking trade wars with unknown timing and outcomes.

Looking Ahead

The Consumer Turns Gloomy

The American consumer has endured a great deal over the past few years: higher interest rates, which have raised financing costs (including the cost of owning a home), as well as inflation, which has resulted in higher prices in almost every pocket of the economy. Despite these trends, the consumer has remained steadfast in their spending and stayed relatively positive about the state of the U.S. economy, but uncertainty related to both fiscal and monetary policy in 2025 is causing the consumer to re-evaluate everything. There are multiple surveys and indicators that measure consumer confidence and expectations, which can provide important insight into what consumers are thinking, which is ultimately what drives consumer behavior and subsequently market performance and economic growth

Exhibit 3: Consumer Inflation Expectations

Source: The University of Michigan

The latest Consumer Confidence Index reading came in below forecasts, registering the largest decline since 2021. Similarly, the University of Michigan’s survey of consumer inflation expectations signified heightened uncertainty surrounding future inflation, illustrated in Exhibit 3. The results of these two surveys indicate that consumers have become more pessimistic about the future economy, and this is likely driven by multiple factors, including stubborn inflation that is causing the Fed to keep interest rates at current levels, in addition to a high degree of uncertainty coming from the White House, with policies that could negatively impact both inflation and growth.

Additionally, the yield curve, which normalized in August 2024 after being inverted for over 2 years, re-inverted in the 10-year to 3-month portion of the curve on February 26. Yield curve inversions are a well-known recession indicator, and the latest inversion added fuel to the consumer-gloom-fire. While the latest consumer data is concerning, the danger with measuring expectations is that they can sometimes become a self-fulfilling prophecy. Today, history can provide an important lesson and perhaps a potential opportunity: when consumer confidence bottoms, positive equity market returns have typically followed, illustrated in Exhibit 4.

Exhibit 4: Consumer Confidence vs. S&P 500

Source: J.P. Morgan Guide to the Markets

Even when consumer sentiment is negative, it remains critical to stay invested in markets because exiting the market could mean missing out on potential strong equity returns, like what was witnessed after the 2022 equity market bottom. Whether the U.S. is headed for a recession will depend on macroeconomic variables like inflation, the labor market, and GDP growth, not the results of consumer surveys, even though they can provide insights. Despite what consumers may believe, the U.S. economy is still faring relatively well, and while that doesn’t mean there aren’t risks, monitoring the incoming data and staying diversified will remain critical in both the current and future environments.

The Bottom Line: The most recent readings of consumer surveys indicate growing pessimism about the future state of the U.S. economy, but investors should remember that markets are subject to extremes, and it is better to stay prudently invested during these times of uncertainty to avoid missing out on the positive equity returns that can follow.

Capital Markets Themes

What Worked, What Didn’t

•Values Bests Growth (Again): Growth stocks continue to struggle in 2025, as AI and Mag 7 darlings couldn’t keep pace with high market expectations, continuing to support the story of equity market breadth, or broader participation.

•Flight to Quality: Investment-grade bonds outperformed high-yield counterparts by about 130 bps over the month, emphasizing the importance of maintaining core exposure to bonds.

•Long Duration Looks Favorable: Longer-duration bonds performed well over the month, an important reminder that this positioning stands to benefit from an investor flight to safety and even interest rate cuts.

Source: YCharts. Data call-out figures represent total monthly returns

On Alternatives

Private Versus Public Equities

Public equity valuations remain rich, with the S&P 500 trading at 21.2x forward earnings as of month-end, above both the 5- and 10-year averages of 19.8x and 18.3x, respectively. Looking under the hood, the top 10 stocks in the index have a combined price-to-earnings ratio of 26.7x. The current state of public equity markets highlights the need for diversification in other, more favorably valued markets.

Looking at the broad private equity asset class, valuations are certainly more favorable, trading in the 47th percentile versus the 96th percentile for the S&P 500, illustrated in Exhibit 5. Looking only at valuations, private equity appears to be the more attractive choice, particularly when considering the level of concentration in technology stocks in public markets today. However, just as investors want to diversify concentration risk in the public tech sector, private equity markets are also dealing with their own concentration struggles as it relates to the limited partner (LP) secondary market.

The secondary market facilitates the trading of stakes in private equity funds by LPs, or investors, in those funds. This market has witnessed a surge in demand, resulting in higher, and, in many cases, less favorable pricing, with all secondary-focused funds trading at 88% of net asset value as of the most recent data, illustrated in Exhibit 6.

Exhibit 5: Equity Valuation Percentiles

Source: Bow River Capital

This supply/demand imbalance in the secondary market is a direct result of the slow exit environment seen in recent years, which has forced LPs to source liquidity in other parts of the market, like secondaries, often at a discount. General partner (GP)-led secondary funds have also seen increased interest, illustrated by record fundraising for private equity behemoths Ardian and Lexington, who raised a combined $51 billion last year. This surge in fundraising has added to demand pressures in the secondary space, making the asset class less attractive than other parts of private equity.

On the macro front, elevated interest rates are not helping the current situation, but Trump’s potential deregulation policies could incentivize activity in the initial public offering (IPO) market, which may help accelerate exits and bring much-needed supply to the private equity market. Investors don’t want to wait indefinitely for interest rates to drop or for a more favorable regulatory environment, and while parts of both public and private equity markets are overvalued today, opportunities still exist.

When valuations are high and activity is concentrated in one sector of the market, selectivity and quality become even more important, as does managing concentration risks—regardless of whether an investor is looking at private or public markets.

Exhibit 6: LP Secondary Portfolio Pricing

Source: J.P. Morgan Guide to Alternatives

The Bottom Line: Whether investors are looking at public or private markets, valuations and concentrations remain a critical determinant in the investment decision-making process, with caution warranted in the overvalued parts of any market, like tech in public equity and secondaries in private equity markets today.

Asset Class Performance Quilt

Markets are ever-changing, making diversification across asset classes and sectors a critical component of portfolio construction. As illustrated below, a Balanced 60/40 portfolio provides greater consistency of returns and less volatility over time.

Source: YCharts. Asset class performance is presented using market returns from an exchange-traded fund (ETF) proxy that best represents its respective broad asset class. Returns shown are net of fund fees for and do not necessarily represent performance of specific mutual funds and/or exchange-traded funds recommended by Centura Wealth Advisory. The performance of those funds may be substantially different than the performance of broad asset classes and to proxy ETFs represented here. U.S. Bonds (iShares Core U.S. Aggregate Bond ETF); High Yield Bonds (iShares iBoxx $ High Yield Corp Bond ETF); Intl Bonds (Invesco International Corporate Bond ETF); Large Growth (iShares Russell 1000 Growth ETF); Large Value (iShares Russell 1000 Value ETF); Mid Growth (iShares Russell Mid-Cap Growth ETF); Mid Value (iShares Russell Mid-Cap Value ETF); Small Growth (iShares Russell 2000 Growth ETF); Small Value (iShares Russell 2000 Value ETF); Intl Equity (iShares MSCI ACWI ex US ETF); Emg Markets (iShares MSCI Emerging Markets ETF); and Real Estate (iShares US Real Estate ETF). The return displayed as “60/40 Allocation” is a weighted average of the ETF proxies shown as represented by: 40% U.S. Bonds, 12% International Stock, and 48% Large Blend.