An Environment of Uncertainty
As we approach the end of 2025’s first quarter, the primary focus of investors has been the impact of a heightened level of uncertainty. This uncertainty pertains to the policy decisions emanating from the new presidential administration, those being proposed, those that have been implemented, and those that have been altered.
The graph below demonstrates the heightened level of uncertainty. The basic component of this index is the search results of 10 major newspapers when it references various terms related to economic and governmental uncertainty. As depicted, the significant spike that occurred recently rivals the one that occurred during the COVID pandemic.
A long-held axiom regarding investments is that investors do not like uncertainty and a review of year‑to-date performance of domestic equity markets would confirm this long held belief. Both large cap and small cap equity indices have generated negative returns year-to-date (as of March 17, 2025). The Russell 1000 Index of large cap stocks has returned ‑3.3%, while the Russell 2000 Index of smaller companies has returned ‑7.0%.
A further illustration of the heightened uncertainty is seen in the graph below which provides readings for the Chicago Board Options Exchange Volatility Index (VIX Index) and ICE BofA MOVE Index (MOVE Index). These indices reflect the perception of risk from equity and fixed income investors. For equities, this measure is the VIX, while MOVE pertains to fixed income.
As stated earlier, the current heightened level of uncertainty is a by-product of the numerous policy changes being proposed or implemented by the presidential administration. A number of these policies pertain to trade, specifically tariffs. The tariffs include not only those being implemented by the United States but also to its trading partners who have initiated or altered their own tariffs on goods imported from the United States. There are many theories and postulations as to how the tariffs will impact the overall economy. At this time, our view is that the impact may reduce the rate of gross domestic product (GDP) growth in 2025, but it will not be large enough to push the economy into recession for the year.
Investors attempt to “read the tea leaves” to determine the appropriate course of action to manage risk and capture requisite return. Recent volatility coupled with the perception that a slowing-growth economic outlook may be indicative of a contraction in corporate profitability, resulting in the drawdown in equities previously mentioned. This may motivate investors to pursue a “risk-off” approach by reducing equity investments and reallocating to other assets classes.
The case for equities begins with corporate profitability. Note the following chart, which exhibits analyst estimates for year‑over‑year (YOY) growth in earnings-per-share (EPS) for the S&P 500 Index (U.S. large cap companies), the Russell 2000 (U.S. small cap companies) and the MSCI EAFE Index (foreign developed companies). For calendar year 2025, analysts estimate double‑digit growth in EPS YOY for each index. For calendar year 2026, analysts project solid EPS growth YOY for each index.
While equity valuations may recalibrate, slowing economic growth coupled with expectations for solid corporate profitability prompts consideration to maintain exposure to equities, both domestic and foreign, during this environment of uncertainty.
Risk is a fickle thing and while one may try to avoid near‑term volatility, abstinence of material changes in one’s strategic asset allocation may best enhance the probability of one’s future success.
Sources: BTC Capital Management, Bloomberg, FactSet, Policyuncertainty.com
The information provided has been obtained from sources deemed reliable, but BTC Capital Management and its affiliates cannot guarantee accuracy. Past performance is not a guarantee of future returns. Performance over periods exceeding 12 months has been annualized.
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