At a glance

A pause in certain reciprocal tariffs by President Trump lifted equity prices last week, though consumer and small business confidence indicates significant uncertainty. The volatility also pushed U.S. Treasury yields higher.

Number of the week:

2.4%

The increase in the Consumer Price Index in March compared to a year earlier.

Term of the week:

United States-Mexico-Canada Agreement

A trade deal between the U.S., Mexico and Canada signed in November 2018 to replace the North American Free Trade Agreement (NAFTA).

Quote of the week:

U.S. small business and consumer sentiment remains under pressure. The preliminary April University of Michigan Consumer Sentiment Index fell to 50.8, just above its June 2022 record low of 50.0. One-year inflation expectations leapt to 6.7%, the highest since 1981, reflecting tariff concerns. The report also noted elevated labor market concerns. The March NFIB Small Business Optimism Index slipped to 97.4, just below the 51-year average of 98.0 on concerns about taxes and higher costs.

― Robert Haworth, CFA, Senior Vice President, Senior Investment Strategy Director, U.S. Bank

Global economy

Quick take: The ongoing adjustments to U.S. tariff policy dampened consumer and small business sentiment last week. Consumers are worried about future inflation, though March inflation data softened.

Our view: U.S. tariff announcements are tempering global economic growth prospects, with magnitude and duration of tariffs key factors driving near-term prospects. Asian economies are likely to see the biggest impacts.

  • On Wednesday, President Trump called a 90-day pause to reciprocal tariffs originally announced April 2. He set rates at 10% for all economies, outside of 145% tariffs on Chinese goods and Canadian and Mexican goods not covered by the U.S.-Mexico-Canada Agreement. Late Friday, the administration announced a temporary exemption for smartphones, flat-screen displays, laptops, semiconductors and other computer hardware. The administration indicated active negotiations with at least 15 countries, with dozens more lined up. In the meantime, average tariff levels remain significantly elevated compared to historical levels. Consensus economic growth expectations continue to moderate, with many upping recession risks.
  • U.S. inflation data eased in March, though tariffs are likely to lift prices over the remainder of the year. The Consumer Price Index fell 0.1% compared to February, slowing the year-over-year growth to 2.4%. Excluding the volatile food and energy components, prices slowed to 2.8% year-over-year in February. Weaker travel costs, used car and clothing prices overcame strength in rents. Producer prices, a measure of business input costs, also softened, rising 2.7% year-over-year through March on weaker energy and food costs.
  • U.S. small business and consumer sentiment remains under pressure. The preliminary April University of Michigan Consumer Sentiment Index fell to 50.8, just above its June 2022 record low of 50.0. One-year inflation expectations leapt to 6.7%, the highest since 1981, reflecting tariff concerns. The report also noted elevated labor market concerns. The March NFIB Small Business Optimism Index slipped to 97.4, just below the 51-year average of 98.0 on concerns about taxes and higher costs.
  • Chinese inflation continued to soften in March, ahead of U.S. tariff announcements. Consumer inflation dropped 0.1% year-over-year, compared to a 0.7% decline in February. Producer prices fell 2.5% year-over-year after a 2.2% decline in February. Tariffs are likely to moderate business activity as businesses adjust to new costs not yet embedded in the data.

Equity markets

Quick take: Tariff uncertainty reigns, negatively impacting investor sentiment, company outlooks and expectations for economic growth.

Our view: President Trump’s tariff initiative sparked fears of a global trade war resulting in rising inflation and slowing economic growth. At present, broad market performance is lagging while earnings projections are trending lower as companies suspend guidance.

  • U.S. equity performance reflects broad-based weakness. The popular broad-based U.S. indices ended last week 3% to 7.5% lower so far in April and are down 5.5% to 16.6% year-to-date. In April, the Energy sector is down 15.3%, partly due to increasing concerns about lessening demand associated with looming economic weakness. Meanwhile, year-to-date, the Information Technology and Consumer Discretionary sectors have retreated 15.3% and 17.0%, respectively. They’re among sectors most negatively affected by tariffs.
  • The largest 20 S&P 500 companies continue to lag. These firms, representing roughly 45% of the index’s market capitalization, are down 10% for the year as of Friday versus the 8.8% decline of the index. Four of the five largest (Apple, NVIDIA, Amazon and Alphabet) are down between 16% and 21%. It is hard to envision the S&P 500 trading meaningfully higher without improved performance of these mega-cap companies.
  • Earnings projections for 2025 are trending lower. Consensus projections currently reflect S&P 500 earnings of approximately $266 per share for 2025, according to Bloomberg, FactSet and S&P Cap IQ, reflecting roughly 9% year-over-year growth. With companies tempering or suspending guidance, it is difficult to make a valuation call. At present, the S&P 500 trades at approximately 20 times current estimates, still above the 35-year historical average of 16.5 times.
  • The first quarter reporting period ramps this week. As of Friday’s close, approximately 6% of S&P 500 companies have released results; 31% expect to release the next two weeks. FactSet projects sales and earnings to advance 4.2% and 7.0%, respectively. Select airlines and money center banks report softening consumer and business spending trends; some companies suspended guidance, noting a widening range of outcomes. Uncertainty and volatility likely remain elevated until clarity around tariffs improves.

Bond markets

Quick take: Treasury yields rose last week, weighing on bond returns. Shorter-term bonds, which are less sensitive to yield changes, performed the best while longer-term bonds lagged. The increase in Treasury yields dragged on high-quality corporate bond prices, but riskier high yield bonds and bank loans rebounded somewhat alongside investor sentiment.

Our view: High-quality bonds generate consistent income that can smooth portfolio returns during periods of heightened market volatility. Esoteric bond categories like non-agency mortgages and collateralized loan obligations (CLOs) can experience price swings in the short term but generate meaningful additional income, which bolsters long-run return opportunities.

  • Bond yields reflect investor expectations for three Federal Reserve (Fed) interest rate cuts this year. Investors dialed back rate cut expectations after President Trump’s tariff pause announcement alleviated some economic growth concerns. The 10-year Treasury yield ended last week up almost 0.5%, but this may reflect temporary distortions from investor repositioning. The Fed’s March meeting minutes noted high economic uncertainty requires a cautious approach to monetary policy. Last week’s slower inflation data is constructive for rate cuts this year, but the Fed will need to navigate price distortions from tariffs. The European Central Bank (ECB) meets on Thursday, and markets expect a 0.25% rate cut. ECB officials have increasingly emphasized downside risks to economic activity from tariffs, and an interest rate cut could help support growth.
  • Bond valuations are back to historical norms while fundamentals remain solid. Bonds across numerous fixed-income categories have become less expensive this year. In terms of fundamentals, corporate debt issuers broadly have low to normal leverage relative to the past and generate adequate cash flow to service debt. Municipal bonds also have strong fundamentals, since most states have healthy cash balances. Structured credit categories like non-agency mortgages and high-quality CLOs incorporate structural protection from underlying loan losses. Reasonable valuations and solid fundamentals create compelling return opportunities despite recent volatility.

Real assets

Quick take: Fluctuations in real asset prices continued last week in response to sporadic tariff headlines, cautious investor risk appetite and Treasury yield swings. Publicly traded real estate prices fell but are still outperforming broader equity indices year-to-date. Strong gold performance and falling oil prices suggest investors remain cautious of geopolitical risks weighing on economic growth.

Our view: Real estate investment trusts (REITs) entered 2025 with broadly constructive fundamentals evident in positive rent growth and healthy vacancy rates for most property types. REITs can generate steady income for portfolios, supportive of constructive long-run returns despite recent price swings.

  • REIT prices fell 0.6% last week. REITs faced headwinds from rising Treasury yields last week. Higher yields can hurt REITs by raising borrowing costs for property owners. Higher rates can also draw investor demand away from REITs and into bonds that represent a competing income source for investors. At current prices, broad REIT exposures generate around 6% in net operating income annually. This steady income supports solid return opportunities and can benefit investors during periods of market uncertainty. Slowing economic growth that weighs on real estate rental income remains a risk but that could be partially offset if the Fed cuts rates later this year.
  • Broad commodity exposures gained last week while investors digest tariff policy impacts on economic growth and inflation. Oil prices fell again last week, dropping year-to-date performance to -12% on concerns that slower economic growth could weaken oil demand. Higher output from the Organization of Petroleum Exporting Countries (OPEC) also contributed to lower prices. Natural gas prices fell after the U.S. Energy Information Administration reported higher-than-expected natural gas inventories. Precious metals like gold and silver rose and continue to benefit from elevated trade and economic uncertainty. Industrial metal prices rose last week after previous declines, reacting positively to the announced pause in certain tariffs.
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Based on our strategic approach to creating diversified portfolios, guidelines are in place concerning the construction of portfolios and how investments should be allocated to specific asset classes based on client goals, objectives and tolerance for risk. Not all recommended asset classes will be suitable for every portfolio. Diversification and asset allocation do not guarantee returns or protect against losses.

Past performance is no guarantee of future results. All performance data, while obtained from sources deemed to be reliable, are not guaranteed for accuracy. Indexes shown are unmanaged and are not available for direct investment. The S&P 500 Index consists of 500 widely traded stocks that are considered to represent the performance of the U.S. stock market in general. The Consumer Price Index is a measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food and medical care. It is one of the most frequently used statistics for identifying periods of inflation or deflation. The Michigan Consumer Sentiment Index is a monthly survey of consumer confidence levels in the United States conducted by the University of Michigan. The survey is based on telephone interviews that gather information on consumer expectations for the economy. The National Federation of Independent Business Small Business Optimism Index is a composite of 10 seasonally adjusted components. It provides an indication of the health of small businesses in the U.S., which account for roughly 50% of the nation's private workforce.

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This information represents the opinion of U.S. Bank Wealth Management. The views are subject to change at any time based on market or other conditions and are current as of the date indicated on the materials. This is not intended to be a forecast of future events or guarantee of future results. It is not intended to provide specific advice or to be construed as an offering of securities or recommendation to invest. Not for use as a primary basis of investment decisions. Not to be construed to meet the needs of any particular investor. Not a representation or solicitation or an offer to sell/buy any security. Investors should consult with their investment professional for advice concerning their particular situation. The factual information provided has been obtained from sources believed to be reliable but is not guaranteed as to accuracy or completeness. U.S. Bank is not affiliated or associated with any organizations mentioned.

Based on our strategic approach to creating diversified portfolios, guidelines are in place concerning the construction of portfolios and how investments should be allocated to specific asset classes based on client goals, objectives and tolerance for risk. Not all recommended asset classes will be suitable for every portfolio.

Diversification and asset allocation do not guarantee returns or protect against losses.

Past performance is no guarantee of future results. All performance data, while obtained from sources deemed to be reliable, are not guaranteed for accuracy.

Equity securities are subject to stock market fluctuations that occur in response to economic and business developments.

International investing involves special risks, including foreign taxation, currency risks, risks associated with possible differences in financial standards and other risks associated with future political and economic developments. 

Investing in emerging markets may involve greater risks than investing in more developed countries. In addition, concentration of investments in a single region may result in greater volatility.

Investments in fixed income securities are subject to various risks, including changes in interest rates, credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications and other factors. Investment in fixed income securities typically decrease in value when interest rates rise. This risk is usually greater for longer-term securities. Investments in lower-rated and non-rated securities present a greater risk of loss to principal and interest than higher-rated securities.

Investments in high yield bonds offer the potential for high current income and attractive total return, but involve certain risks. Changes in economic conditions or other circumstances may adversely affect a bond issuer’s ability to make principal and interest payments.

The municipal bond market is volatile and can be significantly affected by adverse tax, legislative or political changes and the financial condition of the issues of municipal securities. Interest rate increases can cause the price of a bond to decrease. Income on municipal bonds is free from federal taxes, but may be subject to the federal alternative minimum tax (AMT), state and local taxes.

There are special risks associated with investments in real assets such as commodities and real estate securities. For commodities, risks may include market price fluctuations, regulatory changes, interest rate changes, credit risk, economic changes and the impact of adverse political or financial factors. Investments in real estate securities can be subject to fluctuations in the value of the underlying properties, the effect of economic conditions on real estate values, changes in interest rates and risks related to renting properties (such as rental defaults).

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The information provided represents the opinion of U.S. Bank and is not intended to be a forecast of future events or guarantee of future results. It is not intended to provide specific investment advice and should not be construed as an offering of securities or recommendation to invest. Not for use as a primary basis of investment decisions. Not to be construed to meet the needs of any particular investor. Not a representation or solicitation or an offer to sell/buy any security. Investors should consult with their investment professional for advice concerning their particular situation.

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