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.