Key Takeaways from Strategas Research Areas

Investment Strategy

Jason Trennert, Chairman, Chief Investment Strategy

Tariffs. It’s safe to say that the animal spirits spawned by President Trump’s election have given way to concerns about the economy. At the heart of these concerns is a question: Has the administration’s tariff policy been a bluff designed to drive a hard bargain in negotiating with foreign powers, or is the president ideologically wedded to tariffs as the basis for a new economic system? If the first Trump term was any indication, a case can be made for this term’s tariffs being a bare-knuckled negotiation tactic that will resolve favorably for most of America’s trading partners, apart from China.

Uncertainty. There is little question that tariffs are having a chilling effect on business and consumer confidence. We have increased our recession odds to 25% (from 15% at the start of 2025) largely based on risks to business investment. Having said that, our Holy Trinity of economic indicators—unemployment claims, corporate profits, and corporate credit spreads—suggest that the economy is in fine shape in absolute terms. Tariff announcements expected on April 2 will be critical in determining the scope of future tariff policy, and whether prolonged tariff anxiety will further affect our odds of recession (more on this in the next section, but we believe that reciprocal tariffs are likely to be far less disruptive to the global economic system than universal tariffs).

Fiscal. We are concerned about the spiraling interest costs of U.S. debt given the short-term nature of much of the outstanding debt. Without productivity or employment growth, the bill for past spending will eventually come due, either through higher interest rates, higher inflation, or the crowding out of public spending and private investment.

Valuation. Economic worries seem to be refocusing investor attention on valuation. By almost any metric, the S&P 500 is trading rich relative to its history. It is difficult to make a strong case for multiple expansion when we’re starting from an S&P 500 price-to-earnings ratio of 20.8x (next-12-months) and a 10-year Treasury yield of 4.3%. From here, returns in line with earnings growth are more likely than multiple expansion. We estimate that S&P operating earnings will be up about 10% in 2025, falling to 2% if all proposed tariffs are put into place. However, given the low levels of long-term interest rates (relative to history), we believe the market can stay “expensive” longer than what would have been possible in the past.

Government. Structural issues may make it difficult for the Fed to ease as much as the market anticipates. We now expect three additional rate cuts this year. A potential offset could be easing of regulatory policy for companies in the Financials sector (especially regional and community banks) and the Energy sector (midstream energy, coal, and liquefied natural gas exporters).

Economics

Don Rissmiller, Chief Economist

Growth. U.S. data have shown rolling weakness in housing and manufacturing. There is further downward pressure on activity in 2025, including post-election fiscal tightening. We are using a 25% chance of a U.S. recession, 60% soft landing, and 15% upside surprise in 2025. For 2026, our odds are 20% recession, 60% soft landing/expansion, and 20% upside.

Inflation. The first wave of U.S. inflation appears to be over (inflation expectations still look anchored), but history suggests that once inflation gets going, a second wave tends to build over the next several years (87% of the time, globally). We’re in the lull between waves, but remain attentive longer-term, especially to factors that have heavy weights like rents. Supply chain problems due to trade disruptions could also create upward price pressures over time.

Policy. 2024 saw the Fed lower rates, justified first by inflation coming down and reinforced by cracks in the employment situation. Getting monetary policy back to a neutral setting would likely require several more rate cuts in 2025.

Risks. Fiscal supports that allowed prior growth have not been cost-free. The U.S. federal budget deficit remains large and threatens to crowd out other economic activity (though this does not appear to be happening yet). Fixing this abruptly risks an economic stop. Alternatively, inflation could return.

Hope. Productivity could mitigate a second inflation wave by allowing workers to produce more goods and/or services for a similar or lower cost profile. Too much money chasing too few goods (i.e., inflation) can be stymied…by producing more goods. While there is promise on this front from technological advances, we need to see better and more pervasive performance in the economic data. We would like to see the profits of both the producers of AI technology and the users of that technology growing at the same time. There’s promise, but it is early to see how new technologies such as AI will ultimately change the labor landscape.

Technical Strategy

Chris Verrone, Head of Macro And Technical Strategy

Correction. After a -10% correction, the market is in the ballpark of a tactical low—last Friday’s strong response (91% of S&P 1500 advancing) was a helpful first step in establishing a good first quarter low. The sentiment call is also coming together. Excessive enthusiasm was the big risk entering the year but after a sharp drawdown, we now have investor surveys, volatility, and volumes all showing bearishness—a contrarian indicator that’s positive for forward returns. However, corrections are a function of price and time. On the price side we’re likely in the ball park, but we wonder if the time consideration lingers.

Recession? Credit and Financials were not immune to market weakness, but the level of weakness was in line with what’s historically been seen in -10% corrections. It’s important that credit and Financials both remain firm in the weeks ahead, as deterioration would lead us to wonder if something more serious is lurking out there. So far, we’re okay. From a risk perspective, we also think it’s important for Bitcoin to hold here, major support in the $70- 80k range. Gold is in a clear bull market but flows are now aggressive. Finally, Industrial Metals are improving, which makes it difficult to suggest global growth is materially slowing.

Sectors. Technology and Financials are equally flushed and likely to rally, with an important distinction—Financials entered this correction as a sector leader (and has held its own), while Technology’s relative performance peaked all the way back in July 2024. We’d be surprised if Tech came out of this again carrying the flag of leadership. (As an aside, Tech’s relative peak in July 2024 also coincided with the peak in U.S. dollar vs. Japanese yen. We have been and remain yen bulls; it should not be underestimated the degree to which a stronger yen is impacting how capital flows around the world after decades of hyper-low interest rates in Japan.)

Rates and international. On interest rates, we lean bullish and would be surprised to see 10-year yields breach 4.50% on the high side. Japanese and German yields look different, however. Speaking of international, we have been and remain Chinese equity bulls. It’s not been for the faint of heart (or even for most individual investors), but we continue to believe a major turn has taken shape over the last 12 months and we’re encouraged to see that Chinese 2-year bond yields are now on the rise.