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Monthly Economic and Investment Outlook

February 2025 Economic and Investment Outlook

United States

stock market bull statue
  • The estimates of U.S. real GDP in 1Q provided by the Atlanta Fed GDPNow remain at +3% q/q. Thereafter GDP is expected to print more in the 2.0-2.5% range on a quarterly basis. Consensus is expecting north of 2.0% GDP growth in 2025.
  • President Trump was sworn into office at the end of January and the first three weeks in office have been a whirlwind start. Policy changes have already affected trade, immigration, and artificial intelligence.
  • Tariff policy has rattled markets. President Trump paused a 25% tariff on Canada and Mexico until March 6, 2025. A 10% additional tariff went into effect on China and just this week Trump imposed a 25% tariff on all steel and aluminum imports into the United States.
  • Tariffs are a one-time tax on the consumer and may risk the start of a trade war which can lead to a contraction in global GDP growth. It remains to be seen whether the new administration sees tariffs as a bargaining chip to extract concessions from key trading partners or sees them as a legitimate means to spur economic growth.

    Static Impact of Tariffs 
    Source: Stifel     
     

  • Upward revisions to the Bureau of Labor Statistics (BLS) jobs data have pushed trend job growth above 200,000 signaling the labor market is still quite strong. The majority of the gains in January’s report are in healthcare, retail, and federal, state, and local government.


    US Nonfarm payroll
    Source: Oxford Economics/BLS/Haver Analytics
     

  • Consumer inflation expectations both in the short term and long-term continue to rise which can become a self-fulfilling prophesy and is something the Fed needs to keep an eye on.


    University of Michigan household inflation expectations
         
    Source: Oxford Economics/Haver Analytics

Global

  • It is highly likely that President Trump will impose a 10% blanket tariff on imported goods from the EU and that they will become effective sometime in Q2. It is likely that the EU will retaliate with a targeted response for an equivalent amount. The EU 27 have a current account surplus with the US in most categories.

    EU27 Trade balance with the US
    Source: Oxford Economics/Haver Analytics
          

  • The old European value story shows a European discount that is approaching 45% to the U.S. market. The value overgrowth at any cost mentality does have some success stories.

    The European Tortoise and the US Hare     
    Source: StoneX Market Intelligence
                   

  • The US imposed an additional 10% tariff on Chinese goods. This took the effective tariff rate up to 29%. China responded by hiking tariffs on some US goods, including oil, natural gas, and coal. China also imposed non-tariff measures, including an antitrust investigation into Google.

    China Industrial production
    Source: Piper Sandler

                   

  • India’s strong GDP growth has slowed spooking investors and causing them to sell equities. Additionally, the US trade deficit with India and its much higher tariff rates is a source of contention with President Trump.

    Weighted Average Tariff Rate
    Source: Oxford Economics

                   

Fixed Income

  • The Fed maintained the range on Fed Funds at 4.25%-4.50% after cutting rates a combined 1.00% over the previous three meetings.
  • Chairman Powell noted that “the broad sense of the Committee is we don’t need to be in hurry to adjust the policy stance.”

     
    US FOMC diffusion index
    Source: Oxford Economics/Haver Analytics
           

  • The December Fed Dot Plot is showing a median of two rate cuts for 2025. The futures market is currently pricing in one interest rate cut. Powell indicated to Congress this week that he is no rush to cut rates.
  • The Fed talked about the difficulty in economic forecasting beyond just a month or two out and made mention of the fact that at this juncture there is elevated uncertainty because of significant policy shifts in the areas of tariffs, immigration, fiscal policy, and regulatory policy.
  • There is much uncertainty regarding the policy landscape and even the Fed indicated it is very much in the mode of waiting to see what policies are enacted.” We will monitor the situation and make tactical portfolio adjustments accordingly.
  • The Trump administration is moving aggressively to freeze certain spending and fire government workers. It has claimed to have already reduced $1 billion in government “waste.” The big question is whether such actions, which test the limits of executive power, will make a meaningful dent in federal spending.
  • The fight over Trump’s aggressive use of executive authority has quickly become the chief obstacle to getting a deal to fund the government in March and could lead to a prolonged government shutdown. It is highly unlikely that Democrats will agree to a deal to fund the government in which Trump can ignore spending on priorities that were passed by Congress. Democrats will not be advocating a shutdown simply adherence to laws as they are written.
  • It is likely that the administration will start to run up against the limits of its power. There have been and will continue to be lawsuits aiming to block the firing of certain workers, the proposed buyouts of federal workers and basically everything the government is doing.

Tactical Fixed Income Allocation

  • Neutral duration to the fixed income strategy’s respective benchmark as the Fed remains on an easing path, even if rate cuts might be shallower than expected a few months ago. At the same time, U.S. fiscal deficits and debt concern us.
  • Slight overweight to short-term investment grade corporates versus the respective benchmark to capture additional income with minimal incremental risk.
  • Allocation to short-term Treasury Inflation Protected Securities (TIPS) due to risk of sticky inflation exacerbated by inflationary policies.

Equity Market

  • On the 20th of January, Chinese AI Company DeepSeek launched a new generative AI model that put US AI related stocks, primarily Nvidia, into a tailspin. DeepSeek’s R1 model achieved similar performance to OpenAI’s model but, most importantly, it claimed to be trained on a fraction of the resources.
  • The risk, of course, is that the Mag 7 have been over-investing in expensive compute capacity, and this has caused investors to re-evaluate whether investors are over-estimating the returns from these investments.
  • DeepSeek’s model is MIT open sourced, so it can be freely used, with users only needing to pay for its relatively modest compute needs. In this way, US AI players can reverse engineer the model and apply superior compute power. There is also the open question about whether the training data has been illegally obtained from OpenAI.
  • Cuts in capex do have implication for NVidia’s expected revenue growth especially given that DeepSeek’s model can run on both older NVidia and AMD graphic processing units (GPUs).

          
    Total Capex
    Source: ASR Research
              

  • While next 12 months Earnings per Share (EPS) estimates for mega cap and large cap stocks have declined, they continue to rise for mid and small cap stocks albeit off a very low base, signaling an expected broadening in the market.



    NTM EPS by Size
    Source: Piper Sandler


Tactical Equity Allocation

  • Overweight to U.S. Large Cap stocks with an emphasis on equities with quality, cyclical, and strong cash flow characteristics.
  • Underweight to International Developed with no exposure to Emerging Markets. Although valuations remain attractive relative to U.S. equities, these asset classes may be pressured by a stronger U.S. Dollar and slower economic growth.
  • Slight exposure to gold to serve as a hedge, in a geopolitically tense global environment, and supported by strong central bank buying.
Notices & Disclosures

Products and services offered through F.N.B. Wealth Management are not FDIC insured; and are not insured by any Federal Government Agency, are not deposits or obligations of or guaranteed by First National Bank of Pennsylvania or its affiliates and may go down in value.

This report reflects the current opinions of the authors. It contains forward-looking statements which are based on assumptions and are speculative in nature, and actual outcomes may materially differ from our expectations. Opinions, forward-looking statements, and assumptions are subject to change without notice, and various factors including changes in market conditions, applicable laws, or other events may render the content no longer reflective of our positions. Information in this report is based upon sources believed, but not guaranteed, to be accurate and reliable. Investing involves risk and past performance is no guarantee of future results, and there can be no assurance that any investment, strategy, allocation, or product referenced in this report will be profitable, equal any historical performance, or be suitable for your portfolio or individual situation. The S&P 500 Index, generally considered representative of the large-cap U.S. equity market, is an unmanaged, value-weighted index of 500 common stocks. Indices are not available for direct investment, and index performance does not reflect the expenses or management fees associated with investing in securities.

Allocations in this report reflect FNBWM’s current positioning for the referenced strategies and are provided for informational purposes only. The report does not constitute an offer, solicitation, or recommendation to buy or sell any security or take any particular action, nor does it include personalized investment advice or account for the financial situation or specific needs of any individual. You are encouraged consult with your investment professional regarding its applicability to your individual situation.

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