We employ two distinctive dynamic market exposure models in our strategies: one tailored for growth-focused investors seeking aggressive opportunities and another designed for those with a more defensive approach, prioritizing capital preservation. *For illustrative purposes only.
May 2025 saw a robust rebound of the U.S. equity market, with the S&P 500 Index and the Dow gaining 6.3% and 4.2%, respectively, while the tech-heavy Nasdaq outperformed by rallying 9.7%. The Market sentiment was boosted by the de-escalation of the US-China trade war and easing trade tensions. The overall strong Q1 earnings report also helped to support market confidence. On the other hand, Moody's U.S. debt downgrade from Aaa to Aa1 has intensified concerns about US fiscal policies and ballooning debt. Looking ahead, we believe investors still face downside risks from trade policies, interest rates, and fiscal concerns, as well as a potential economic slowdown. U.S.-China trade negotiations have begun, but we don't expect a finalized agreement until the July 8 deadline. While valuations have improved and Q1 corporate earnings remain relatively strong, further market upside could be limited, as earnings growth may face challenges from supply and transportation disruptions. We also expect consumer prices to face upward pressure as the April CPI data has not fully reflected the effects of higher tariffs. During the month's market rebound, we took the opportunity to trim our equity exposure from 60% to 54% in our defensive, tailored approach.
Tariffs: The aggressive U.S. tariff announcements in April triggered dramatic equity market volatility, but a subsequent pause and cut in tariff rates were essential in restoring investors' confidence and driving the equity recovery in May. On May 12, 2025, the U.S. and China agreed to suspend most of the recent high tariffs for 90 days, with the U.S. lowering tariffs on the majority of Chinese goods from 145% to 30%, while China cut tariffs on U.S. imports from 125% to 10%. Both countries will maintain a 10% base tariff on each other's products during the period. Also, China agreed to ease certain non-tariff barriers, including resuming rare earth exports to the U.S., which are critical for some high-tech products such as computer chips. U.S. equities responded positively to the news as the Nasdaq rallied 7.2% for the week, and the S&P 500 Index and Dow climbed 5.3% and 3.4%, respectively. Other developments, such as a delay of the 50% tariff on imports from the European Union, also contributed to the market's upbeat momentum. Overall, the de-escalating U.S.-China trade war reduces recession risks by lowering uncertainty, improving business and consumer confidence and reducing the threat of supply chain disruptions, though further tariff negotiations remain uncertain.
Fed: As widely expected, the Federal Open Market Committee (FOMC) held its primary policy rate unchanged at its May meeting, with the target range for the fed funds rate at 4.25% to 4.5%. This decision reflects a cautious “wait and see” stance among policymakers after a 100-basis points rate reduction in the final three meetings last year. In the press conference, Chairman Powell stressed that due to the overall resilience of the economy, there was “little to no cost” to wait for further clarity on how trade policy would affect the economy. Policymakers also highlighted economic uncertainty and rising risks of higher inflation and unemployment. A period of above-target inflation and high unemployment - a stagflation scenario - could make the central bank’s job more challenging. We expect two interest rate cuts from the Fed in the latter half of the year, with slowing economic growth and increasing jobless rates.
Corporate Earnings: As of May 30, among the 98% of S&P 500 companies that have reported Q1 results, 78% have reported a positive EPS surprise, and 64% have reported a positive revenue surprise. The blended YOY earnings growth for the S&P 500 is 13.3%. The Communication Service sector reported the most significant earnings increase, while the earnings growth of the Financials sector rose from 2.6% earlier in the quarter to 7.1%. Health Care saw substantial positive earnings surprises, notably from Pfizer, CVS Health, and Bristol Myers Squibb. Corporate earnings have mostly exceeded expectations in Q1 2025, contributing to the recent equity market rebound. However, analysts have revised their profit growth projections for the year, which could make further market gains more challenging. The market’s forward P/E ratio has risen, reflecting both optimism and heightened valuation risk.
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As of 5/31/25. Data provided by Bloomberg, NorthCoast Asset Management, Federal Reserve History.
The NorthCoast Navigator is a market barometer displaying NorthCoast's current U.S. and international equity exposure and outlook. This aggregate metric is determined by multiple data points across four broad market-moving dimensions: Technical, Sentiment, Macroeconomic, and Valuation. The daily result determines equity exposure in our tactical strategies.
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