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Monthly Economic and Investment Outlook

March 2025 Economic and Investment Outlook

United States

stock market bull statue
  • Tariff uncertainty continues. 25% tariffs were imposed last week on Mexico and Canada only to be amended twice in the following days. First, carmakers compliant with the USMCA were given a one-month exception, later expanded to all USMCA compliant goods.

    US Effective tariff rate 
    Source: Oxford Economics/BLS/Haver Analytics
     

  • Our base case is that both Mexico and Canada will see 25% tariffs (10% for Canadian energy and transport equipment). Additional reciprocal tariffs and product specific tariffs are now set to go into effect April 2.
  • These almost daily changes in tariff policy have left both businesses and investors highly uncertain and caused growth estimates to be revised down.


    US Components of GDP
    Source: Oxford Economics/BLS/Haver Analytics
     

  • There is likely a floor in growth if the new U.S. government creates new cushions with tax policy and cheaper energy.
  • The University of Michigan and the Conference Board measures of consumer sentiment both fell in February, with the forward-looking components showing more weakness than those assessing current conditions.
  • While the labor market appears to be strong, job openings are rising and the headline job quits rate ticked up from 1.9% to 2.1% in January there do appear to be some cracks developing in the labor market.
  • Unemployment rose from 4.0% in January to 4.1% in February. A measure of the underemployed has also spiked to 8%.


    US Underemployment Rate
    Source: Strategas, BLS/Macrobond     

  • These data points do not reflect the increased labor frictions from DOGE and tariff uncertainty. It is likely job openings will decline with uncertainty near the highest on record, and small business hiring plans down.

Global

  • Change in the U.S. administration is forcing change abroad. In Europe, U.S. tariffs look inevitable, local defense spending looks more necessary and the regulatory environment is showing some signs of easing.
  • A major shift in foreign policy has made Europe realize it can no longer count on the United States to shoulder the burden of its defense. German Chancellor Merz said last week that the “rule for our defense now has to be ‘whatever it takes’”.
  • Markets are pricing in an increase in fiscal spending across Europe based on the potential of Germany relaxing its “debt brake” for defense and infrastructure spending.

    Eurozone Ten Year Govt Bond Yields
    Source: Oxford Economics/Haver Analytics
          

  • The Trump administration has threatened 25% tariffs on Europe though the base case is still for 10% tariffs.
  • Robust growth in industrial production in Germany suggests we may be at a turning point in the German industrial cycle, suggesting that industrial output may be bottoming after a torrid three years of decline.
  • Tariffs imposed by the United States on China have encouraged the Chinese government to implement offsetting policies which ultimately are a positive for Chinese GDP and global GDP growth.
  • China’s roughly 5% real GDP growth target for 2025 will be accomplished via more government spending. China raised its budget deficit plan from 3% of GDP to 4%. The deficit will be funded via ultra-long-term government debt and local government debt. More money will be raised to recapitalize the state banks shoring up the financial system.
  • Chinese commitment to consumer, opening markets, and property reform and a shift away from development may show that the Chinese Communist Party has finally accepted what it takes to internally balance its economy and can help offset the effects of the Trump tariffs.

    Key word count     
    Source: Goldman Sachs
                   


             

Fixed Income

  • The Fed has paused their rate cut cycle. The market is pricing in three cuts with the first expected in June.
  • Tariffs typically result in a one-off rise in the level of prices. However, a rise in inflation expectations is a key channel through which they can boost future inflation. Therefore, signs that inflation expectations are becoming unanchored would push the Federal Reserve to leave policy at restrictive levels for longer, even if the economy shows signs of weakening.
  • Ordinarily, the Federal Reserve would opt to "look through" one-off increases in the price level caused by tariffs or other supply shocks and focus on the hit to the economy. That is because policy affects the economy with a lag. Once the initial inflationary impact of tariffs feeds through, the weakness in the economy, coupled with adjustments to exchange rates, means inflation falls back over the medium term.
  • However, if tariffs cause a sustained increase in inflation expectations, there is a risk that the initial burst of inflation would linger, with inflation running hotter for longer.

     
    US Median Inflation Expectations
    Source: Oxford Analytics, U.S. Census Bureau
           

  • Predicted inflation, with the exception of major crises, closely tracks actual realized inflation.

     
    US Year ago predicted inflation
    Source: Oxford Analytics, U.S Census Bureau
           

Tactical Fixed Income Allocation

  • Neutral duration to the fixed income strategy’s respective benchmark as the Fed remains on an easing path. 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

  • US Equity markets peaked relative to international markets on Christmas Eve 2024. In dollar terms, the U.S. index has fallen 12% versus the rest of the world excluding U.S. markets. That’s been exacerbated by the dollar losing 4.3% year to date.

          
    Style Ratios
    Source: LSEG Datastream, Yardeni Research
              

  • Thus far we have not seen major earnings revisions with most of the revisions coming from the 1H of the year and not the 2H. Earnings are still expected to grow at around 10% for the year.
  • All major U.S. equity indices reached fresh year-to-date lows, with notable weakness in high-beta and momentum-driven sectors of the market.
  • Technology still remains the most expensive sector in the index both on an absolute and relative basis despite its decline of 14%.
  • We do not think the Fed will cut rates just to stabilize the markets as they have many times before. The Trump administration also does not seem concerned with the market decline.
  • US equity markets still trade at more than 21 times forward earnings, whereas international markets ex-US are trading at 14 times forward earnings. There is a huge valuation gap so the margin of safety is greater with international equities.



    Forward PE Ratios
    Source: LSEG Datastream, Yardeni Research


Tactical Equity Allocation

  • Overweight to U.S. Large Cap stocks with an emphasis on equities with quality, cyclical, strong cash flow characteristics and lower volatility.
  • Neutral International Developed stocks with no exposure to Emerging Markets. We remain concerned about reciprocal tariff policy as it impacts Emerging Markets.
  • 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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