Assessing the equity market’s behavior since the last election, we can discern three distinct periods. Euphoria associated with the election results was largely responsible for the S&P 500 returning 7.98% between November 4, 2024 and the early 2025 market peak on February 19.
Despondency associated with fears regarding the worst outcomes that might be associated with a trade war and other government policies resulted in the S&P 500 returning -18.75% between the February peak and the market bottom on April 8. Since then, a belief (hope) that the final outcome of political and economic policy decisions will be largely workable and not be too disruptive to the broad economy resulted in the equity markets recouping its losses and then some.
Through July 23, 2025 the S&P 500 has returned 4.08% since the February high, 8.90% year to date, and 12.38% since November 4, 2024. While interest rates have eased somewhat over this period, they remain stubbornly high, as inflation holds above the Federal Reserve’s (Fed’s) target of 2% annually.
Forecasting the key drivers of equity market performance, including economic growth and the direction of interest rates is clouded by several key issues. These include the impact of tariffs, inflation, and deficits – all with the overhanging specter of international conflicts. We won’t dwell on those international conflicts, as the markets have seemed to dismiss them for now with the ending of the war between Israel and Iran. But, they can always become a factor going forward.
Tariffs, of course are a bigger ongoing issue with respect to the economy. By our own account, there have been over 40 major announcements and actions implemented with regard to tariffs since the president took office. To date, most of the potentially severe actions have not been implemented. The impacts we’ve seen on the economy have largely been limited to early buying and other inventory adjustments. Going forward, tariffs will likely impact inflation, availability of supply and the level and scope of investment in the domestic economy.
The inflation impacts are both direct, from higher prices after tariffs are included in final prices, and indirect from domestic companies having a cushion to raise prices and the cost of supplying goods from our country. There is currently a shortage of labor in the U.S. as birth rates are low and the baby boom retires. Current immigration policies don’t seem likely to ease the problem.
Offsetting some of these inflationary impacts is the growth of artificial intelligence (AI). Past technology breakthroughs have resulted in increased economic productivity which helps moderate inflation. We see this likely to be the case with AI. Overall, we are expecting a near term tariff shock and then ongoing inflation slightly above the Fed’s targets.
Budget deficits are historically high as a percentage of GDP, especially compared with past non-recessionary economies. Annual deficits are expected to be in the range of $2.0 – $2.5 trillion annually. The need to fund these deficits will put upward pressure on interest rates. Not only could higher interest rates be detrimental to the economy, but they could also negatively impact valuations on stocks.
All is not lost. There are several possibilities. First, the U.S. government could get greater fiscal discipline. The Fed could also aid in the process, though short-term fixes might cause more inflation and higher interest rates in the long run. It’s ironic given the current drive to bring down trade deficits, but higher trade deficits could also help. This is because foreigners get their dollars when they export to the U.S. If they have fewer dollars due to lower exports, they have less ability to purchase U.S. government debt.
We are not totally pessimistic. We believe that the bond markets will be at least partially successful in imposing discipline on government spending. This is what happened in the 1980s. When the bond markets were unhappy with the government’s fiscal or monetary policies, interest rates would spike, and the government reacted, usually appropriately. Back then those market players were known as the Bond Vigilantes.
We are also optimistic about the impacts of AI. We think we are on the cusp of a breakout in real world applications that will benefit broad economic growth and tamp inflation. Further, the worst aspects of the tariffs are likely to be, and so far some have been, whittled down. Further, trade wars are not a complete negative. Opening up of foreign markets to U.S. goods and services is a definite positive. We don’t know if agreements will stick in the future, but deals such as those with Japan seem promising. Indeed this last factor is what we believe has been driving equity markets upward over the past three months. Finally, we previously mentioned labor shortages. But the corollary to that is that employment should remain somewhat strong. And when employment is strong, we can expect consumer confidence and consumer spending to remain robust as well.
With all this said, what should investors do? As always, funds needed in the short-term should not be placed at risk. But for that portion of assets that can be invested with some risk, we recommend the following. The portion of portfolios that are earmarked for fixed-income (and not tied to some specific need at a particular time) should be laddered. This mitigates against some, though not all, of the larger interest rates moves in either direction.
With respect to equity markets, we are mildly bullish. Markets should be volatile as they have been with possible sharp moves in any direction. Those expecting big bull market returns with 20% – 30% returns annually may be disappointed.
Within the equity markets, we are clearly optimistic with respect to AI. However, many of these stocks have already moved significantly upward. We would say be careful about putting too many eggs in the AI basket. Look for companies that will benefit from using AI, not just players who will benefit directly. Also, it may be wise to wait for any market breaks or negative interim term developments before committing new or additional funds here. Please assess your own risk and consult your financial advisor. Beyond that sector, we think it important to broaden out one’s holdings across several business sectors. Our mantra, especially in these volatile and uncertain times remains DIVERSIFY, DIVERSIFY, DIVERSIFY.
Past performance does not guarantee future results. Pinnacle Capital Management is an SEC Registered Investment Advisor and proud member of the Pinnacle Family of Companies, an organization designed to provide a full range of financial solutions to individuals, businesses, and institutions. For more information on our member companies, visit Pinnacle-LLC.com. Opinions are our own and do not constitute financial advice. Talk to your financial professional for any advice specific to your situation.