Market Outlook

Amy: Hello, everyone. I'm Amy Thomas, a strategist here at First Citizens Bank. Today's Wednesday, March 26th, 2025. I'm joined by our Chief Investment Officer, Brent Ciliano, and Director of Market and Economic Research, Phil Neuhart. And we want to welcome you to the March edition of our Making Sense: Market Update series. Each month, our team brings you an in-depth analysis of what's happening in the markets and the economy.

Before we get started, just a couple of reminders. The information you're about to hear are the views and opinions of only the authors at the time of recording and should be considered for educational purposes only. This information should not be considered as tax, legal or investment advice. If you have a question about any of the information you hear today, please reach out to your First Citizens partner. And Brent, with that, we're ready to go, so I'll turn it over to you.

Brent: Great. Thanks, Amy. Good afternoon, everyone. Hope you're well. Phil, it's great to have you back in the seat.

Phil: Happy to be here.

Brent: Yeah, I know that you were out on the West Coast getting to do a pulse check on what's going on with our clients in California. So glad to have you back.

Phil: Yeah, absolutely.

Brent: Well, I know we have an awful lot to cover today, and I think we decided to change it up, which I think is important. We're going to start first with a pulse check of what's going on. We've had some recent market volatility here. We're going to talk a little bit about that equity market sell-off, what might it potentially mean, and we're going to try and put these drawdowns in broader context.

Then we're going to shift back to what we normally do, Phil, which is give people a broad economic update and mosaic of what's going on. We'll highlight growth, inflation and interest rates. We'll talk a little bit about fiscal policy—tariffs, which is on everybody's mind—and certainly the labor market and the consumer. And then we're going to come back around and talk a little bit about broader market themes within equity markets and also fixed income. So let's jump right in and let's do that pulse check.

So what actually occurred, right? After equity markets hit their all-time high back on February 19th, from February 19th to March 13th we saw a 10.1% drawdown in equity markets. S&P 500 as well as Russell 3000 drew down over 10%, which officially put us into that correction territory, Phil. So you know, again, we'll get into just a moment. Is that what's on clients' minds? Is this portending something more extreme? Are we going to have additional drawdowns beyond this 10%? Or is this just normal bumps along the way? And we'll get to that in just a second.

But let's talk about where we are right now today since February 19th. And you can see when you look at that first column, US equities still have already started to recover a little bit. We've recovered almost about 4% of that 10% drawdown. So starting to get back on a path for US equities. But outside of US equities, look at how developed international and emerging markets have actually been positive while US equity markets have been a little bit under stress.

On the fixed-income side of the equation, taxable bonds have kind of provided their kind of correlation relationship. Where risk assets might get into trouble, bonds tend to be that little bit of a cushion. We've seen that actually happen with taxable bonds up about 1.2%. Municipal bonds have been about flat. When we take that, though, into the context of year to date, we are still almost flat. US equity markets down about 1.8%. But again, outside the United States, international markets have done quite well—up 10%, so almost 12% better than US markets year to date from a developed perspective and even an emerging—6.1%. Fixed income positive and municipal bonds positive.

And I think we talked about this, Phil, in our 2025 outlook when we did this back in December of last year. We talked about the potential for policy uncertainty coming into a post-election, into a new year with a new president. We talked about valuations in the Mag 7 and large-cap stocks. And we thought that we were a little susceptible to a drawdown. We also talked more broadly that expected returns over the next decade might be a little bit more in balance between stocks and bonds and that we would expect lower returns and that balance in portfolios was going to be important. And again, always that focus that it's time in the markets, not timing markets that's important.

But if we get to the next slide, Amy, and let's talk about, well, you know, Brent, is this something potentially more ominous beyond what's going on? Understand what we're looking at here is this bull market rally. And we hit a low on October 12th of 2022, which is when this bull market started. And you can see despite this 10% correction, we are still up 67% cumulative from that October of 2022 low.

And you can see along the way, we've had some pullbacks of similar deal. 10% drawdown back in October of 2023, a 5% one in ‘24, 8% drawdown. Again, all sort of in that normal range and below what we've kind of expected is sort of entry year drawdowns along the way.

Phil: So what's interesting is you see that 10% drawdown of late. We've seen quite a bounce back already. The market's only down, what, 6% from its all-time high in that context as we flip ahead. Well, what is normal, right? If you look back to 1990, on average, the S&P 500 draws down 15% in a given year. There's huge variability there, as you can see. But if you just are talking averages each year, you should go into the year and say, "We might draw down 15%." That would be average.

But on the positive side, counter-year returns, 78% of them are positive. So yes, the market has drawdowns. That does not necessarily mean it is a negative year. By the way, we do have negative years. And for long-term investors, they look through that and look to better times ahead. But a 10% drawdown is really just a return to normality. We all suffer from recency bias. I know we do as well.

And when you look at last year, coming into last year, what was the narrative? It was going to be a contentious election, lots of volatility. And the truth is, the max drawdown was 8.5% last year. We really had a pretty docile year given a lot of policy uncertainty throughout the year based on, of course, a pending election at the time. So we are seeing a return to normality of equities and things like fixed income are doing what they're supposed to do and provide some ballast.

As we flip ahead to the point of 10% drawdowns being fairly common, here you can see 10% drawdowns going all the way back to 1950. One, there's quite a few of them, right? It's not that it's every year, but there are a lot. We don't expect you to look at every number on this list. What we are going to focus on is that gray box in the lower right.

A few things to note. One, the months peak-to-trough on average is 7 months, but the median is only 3.4 months. It's not uncommon for these to be pretty quick. The average decline of 20%, median of 15%. But if you look at that next-to-last column on the right side, I think this is the most important column. One year—what is the percent recovery of the previous high? Have you gotten your money back? On average, it's 106%. On median, it's almost 110%.

In other words, you have more than passed that previous high on average. Are there exceptions? 100%. You can see the Great Financial Crisis here, the tech bubble. There are periods where we do not recover. But generally you see that recovery and the months peak-to-full recovery tend to be pretty short—14 months on average, just over a year. 9 months on median, which is, of course, why it's over 100% in terms of full recovery.

So lots of numbers here, but what we're trying to put in context is one, 10% drawdowns do happen. Two, generally for intermediate, long-term investors, which is what our investors are, our clients are, from an equity perspective, usually looking through the noise is a smart idea.

Brent: Yeah. And it's interesting when you look at that and you see a lot of the ones and you run your eyes down the column for the 10-percent-ish declines, they tend to be very quick, just like this one, right? We saw a drawdown over 22 days, which was the 6th fastest 10% correction in 75 years. So the speed of this drawdown has got people concerned. But again, looking at that last column as far as time to recovery—it's been relatively short as you're highlighting. So this is a great slide, I think, for everybody to kind of take out of this presentation deck and post up in their office.

So why don't we shift and get to the economy and talk a little bit about what's going on. Let's start first with global growth. Consensus coming into this year, Phil, was that global growth and US growth at the margin would moderate a little bit. So, you know, late in an economic cycle, an incredibly robust labor market that's starting to show some signs of deceleration and a very strong consumer that has continued to spend. Expectations were that it would be strong, but it would still moderate at the margin.

And you can see, expectations were that the global economies were going to slow from 3.2% down to 3%. The United States a little bit more from 2.8%, down to 2.1%. But again, still significantly growing above that sort of long-term trend that we like to see, which is about 2% or higher. But again, lately, the world's been awash in tariff discussions, and the expectations of what tariffs may or may not do to global growth has started to take an impact. And you can see where estimates are today.

Expectations for the world have only come down about a tenth, so modest deceleration from where we were back in December of 2024 as far as this year's expectations. But I think more significant with the United States, where we're expected to kind of come down about 0.4% from that original expectation. So if this plays out and we actually do see 1.7% growth for the US this year, you know, that's almost a 39% reduction from that 2.8% that we saw in 2024, so again we're going to have to see what the impact of tariffs are as it relates to global growth.

Phil: And this is driving a lot of the uncertainty in markets. It's just that policy can impact fundamentals, but we really don't know where policy is. So these numbers could change pretty rapidly on the upside or the downside. But it just shows that experts are paying attention, of course, to some of the rhetoric out there.

Brent: Yeah. And one of the other things sort of colliding with that potential slower growth picture is inflation. And that's certainly been on everyone's mind. So what are we looking at here? The dark blue line here is year-over-year CPI, Consumer Price Index. The gold line is that Fed's 2% target. But what I really want listeners to focus on is that dotted blue line, which is 3-month annualized inflation. So in essence, sort of, what is that potential trajectory of where inflation might head?

And you can see, obviously, we had this enormous comedown in inflation, which was good to see from the summer of 2022, down to a lower level. But from really the first half of 2023 to now, we've been sort of bouncing around in a range. Inflation today is still significantly above the Fed's target, sitting at about 2.8%. But I think what is interesting is that dotted blue line and that move up from July of 2024 to now. 3-month annualized inflation is sitting at almost 4.3%.

So something that we're going to be keeping an eye on, and that really hasn't felt the brunt of any potential tariffs or imposition, so far. So it's something that we're going to have to keep an eye on, and certainly the Fed is keenly looking at.

Phil: Certainly, a challenge for the Fed, and we'll talk about that more in a moment. What's happening with inflation expectations, as we flip ahead? Expectations matter, right? Because if people think inflation is rising, sometimes there's a self-fulfilling prophecy there, right? So if you just survey households. Next 5 years, what's happening with inflation expectations? It has shot up, right? Which, one, shows that they're paying attention to that 3-month moving average, but also shows that they're paying attention to headlines, right?

And there's a lot of headline risk right now with trade policy, et cetera, pushing up inflation expectations. What is interesting is if you look at the market breakevens—this is inflation breakevens—technical way of measuring market expectations around inflation remain fairly tame. They have risen. You can see that move up, which is consistent with what you showed in the last slide, but not a shot higher.

That is interesting to us, right? It shows that—and we see this in survey data around consumer sentiment. We see it around CEO sentiment. There is a disconnect right now between sentiment and maybe what markets are pricing. And this is something that we'll be watching very closely. But there's no question, whether you look at the market breakeven or household expectations, inflation expectations have risen. That makes the Fed's job very difficult.

So speaking of some of that headline risk, let's talk tariffs.

Brent: Our favorite topic.

Phil: The favorite topic really it would appear of everyone currently. We've shown this chart before, but just a few things to remind you. This is the US-weighted average effective tariff rate, right? So it's weighting tariff rates by imports. What you'll notice here is you see that increase in the last bar, right, before this big range of possibilities, that was the increase in tariffs in the last Trump administration.

So when one says, "Well, those didn't have a major impact," it's because the truth is the tariffs, where the rubber hit the road was not that impactful. What we're talking about now is the range of possibilities for these the tariffs in 2025. That range is really wide. And that's because it basically encapsulates everything said on the election trail.

Unlikely that we were to hit the max there. If we were, of course, that's a hundred-year type event. What is more likely is what is being floated to date. And this pink line here in terms of what the administration has floated, this really should be a bar of uncertainty. Because the truth is, we don't know. These are negotiations. The nature of negotiation is we don't know where the tariff rate is going to land. And look, there is a world where high tariffs bring down or negotiate taxes that bring down tariffs globally. And this number falls.

But in terms of what's been floated to date, just to show you all, it would be the highest really since the 1940s. So for those on the call and for us in this room, at least in our working lives, this is fairly unprecedented and why it's driving some uncertainty in the marketplace. Does not mean we end up at that pink line. Want to be clear there. There's announcements coming on April 2nd. The truth is even how targeted those are is open to debate. We really don't know where we're going to land, but we do know—and we're seeing this even on the road—we do know that business owners and our clients and certainly markets are paying very close attention to this.

Brent: Yeah, and I think it's important to understand that there's going to be continued variability throughout the year as it relates to tariff discussion. So April 2nd isn't some magic, well, that's it, folks, and you're going to have everything clearly defined. I think it's part of what you just highlighted, which is broadly a negotiating tactic, which is likely to extend well-beyond April 2nd.

Phil: That's right. So it's hard to talk tariffs and focus on Washington without talking deficits. Another topic that is certainly on Americans' minds and the new administration's mind as well. So let's just look at the state of play. This is the federal budget for this fiscal year, 2025.

The left side is spending—$7 trillion federal budget, which is a big number, right? How does that break down? Well, discretionary, you can see at the top that's non-defense and defense spending. This is what is discretionary, meaning is not driven by a specific law, right? This is discretionary spending.

Unfortunately, that's only 25% of total spending. The other 75% is mandatory. That includes things like paying our interest—Social Security, Medicare, Medicaid are the biggest. Those are entitlements, things that have been guarantees to the American public, hence them being mandatory.

If you look at the right side, this is revenues. What you'll notice is that budget deficit is about $2 trillion. So $7 trillion budget, we're about $2 trillion short in terms of revenues. What are the biggest buckets there? Individual income tax, payroll tax are the biggest. Corporate income tax is a big bucket, but nowhere near as big as individual and payroll. You can see the little sliver pink line. That is tariff revenue today. The shaded is, again, extremely uncertain because we don't know what—

Brent: High degree of estimate error.

Phil: Yeah, estimate error, but potential tariff revenue. Now, the reason we say potential is even if you know what rate the tariff is, it doesn't account for the fact that businesses are going to change their supply chains potentially to avoid tariffs. And you could change to another country. You could onshore. There's all sorts of possibilities there. But what you'll notice is even if that pink line is fairly big, as we're showing, which is risk to that being lower, you still have a very big budget deficit, which is why the administration and certainly, I think, many Americans are also focusing on the left side. What can you do on the spending side?

You can drive efficiencies. But the truth is there's heavy lifting in some of those mandatory buckets that might not be popular, right? But might need to be tackled when you think about things like Social Security and Medicare, you still have a budget deficit issue, even if you find some efficiencies. And I think we're starting to hear that from the administration as well.

Brent: Oh, yeah. And the big uncertainty on the right side from a revenues perspective is the, you know, cliff coming up at the end of this year as far as the extension of the Tax Cuts and Jobs Act that, you know, depending on how that plays out will affect that. Obviously, this is under the current Tax Cuts and Jobs Act being enacted. If any of that were not to be extended that would certainly materially impact that revenue line item, so a whole lot of uncertainty that we're going to have to iron out as we get through the rest of this year for sure.

Phil: Massive, but certainly a major, major, major focus in the marketplace, especially compared to where we were, say, 20 years ago. We have a debt-to-GDP of a 100%, north of 100%. And that means that markets are paying attention.

Brent: Yeah, so another thing that I know that you and I are hearing on the road is what about DOGE? What's going on with potential cuts within the government? I know Blake and I covered that in depth in the last Making Sense where we talked about roughly 3 million governmental workers, roughly about 7 million government contract workers. So putting that all together, about 10 million people potentially affected as it relates to what DOGE is looking at.

What we wanted to try and do is bring forward—where are we today? So I want everyone to sort of focus on that black vertical line that extends January 1st of this year. Gold line is total US workers receiving jobless benefits. The light blue line is folks in Washington DC and the dark blue line is federal government workers.

And what you can see is interestingly from the beginning of this year to now, we've actually seen a reduction in total US workers receiving jobless benefits. So it's actually gone down as far as the percentage of workers actually receiving benefits. Obviously focused on where many of the governmental workers are and contractors are—which are in the District of Columbia, as well as federal government workers. And you can see the significant increase in employees receiving benefits in those areas and specifically within the government.

Time will tell. And certainly, again, another degree of uncertainty is how far and what specifically will DOGE focus on and what will have an impact on overall aggregate US employment. But again, to date, we've actually seen a reduction, not an increase.

Phil: Yeah, when you look at the US economy is very big, and it's not just made up of federal workers.

Brent: Yeah, 165 million workers.

Phil: That's right.

Brent: So taking that further, you and I have discussed this for quite a while. When I look at the broad unemployment rate, we're sitting at 4.1% today. It's kind of been in a range for the last number of months. What is interesting is after the low that we hit, back in 2024 at 3.4%, we've seen it move up. The good news is that expectations for this year and next year are still kind of around that 4.2%, 4.1%. So again, the time will tell whether or not we'll see any type of increase in unemployment. I know you and I have talked about cycle lows in the past as you run your eyes from right to left.

Anytime you had a cycle low, you've seen the unemployment rate move up at least to sort of that average or something worse. So again, time will tell. It's something that we've been keeping an eye on.

Phil: And something that makes this cycle a little unique is we've been in that 4% to 4.2% range since last May. Yeah, I mean, we're approaching a year. So in some ways, yes, DOGE may have an impact. We shall see, not a major impact in the data yet. But we have already pulled something off that's not very normal, which is the unemployment rate began to rise and then starts to move sideways now for quite some time. Next Friday, we get a fresh employment report. There will be a ton of focus on that because do we start to see federal data feed into that report?

So we mentioned the Fed, and let's dig in a little bit on what we're seeing. So as a reminder, the Fed started cutting the federal funds rate last September, has cut about 1% so far. What are expectations as we look forward? And we just had a Fed meeting. The Fed is a little bit between a rock and a hard place here.

Unemployment remains low. That is good. That's part of their dual mandate. But again, there's some signs there might be a little bit of softening when you look at consumer sentiment, et cetera. But not pure softening. But at the same time, inflation is above target. He talks about that 3-month moving average annualized rate. That is a real challenge for the Fed.

If you look at fed funds futures, they are pricing 2.5 cuts this year, really all in the back half of the year. The truth is the Fed's on hold. Looking to the end of the year is a bit unwise from our perspective. If anything, 2.5 cuts would indicate some pretty severe slowdown in the economy. Otherwise, how do they have a green light to cut with inflation well-above their target—makes their job very difficult. So we think the Fed's on hold for now. Yes, could they be cutting later in the year? Hopefully that's for the right reasons that inflation comes in below expectations.

We worry that it's for the wrong reasons, which is that growth falters. And we have seen with some of the growth expectations coming down, as you showed, Brent, an increase in the number of expected cuts, right? We were at one-and-a-half. Now we're at two-and-a-half. Why is that? There's some concerns around growth. But no matter how you look at it, look at where the fed funds rate is through 2026 relative to the 0% we had post-pandemic. So we are still in a situation where shorter-term rates are higher for longer most likely unless we see a real deterioration in the economy.

Brent: Yeah, and I give a shout out to you and Blake. You guys did a great job highlighting that in a recent note with Basis Points. I think certainly listeners who want to understand this a little bit more deeply should absolutely read that. And certainly, as you highlighted, the press conference from Chair Powell highlighted exactly the conundrum that they find themselves in where they're talking about, again, bringing back that T-word of transitory inflation. I heard that and I shuddered a little bit inside. Time will tell. But obviously, long-term inflation expectations, as you highlighted, are certainly well-anchored. And we're seeing that in market breakeven. So again, would not want to be in his position.

Phil: That's right. So let's talk about the consumer. And as a reminder, 70% of US GDP is personal consumption. So this is really what drives our economy or the majority of our economy, at least. You'll notice services spending still remains above that 20-year average, 20-year average of 4.9%. We're at 5.7% on services. Goods spending is doing okay, right? Has actually improved a little bit. The gap between services and goods has closed. But goods spending is still below average.

We've talked about this a lot, but a lot of good spending was pulled forward during the pandemic era, when we had so many people move, buy new furniture, outfit their home offices. So we had a bit of a pull forward there. But so far, when you look at the data, personal consumption is at least okay. I think that is a fair characterization.

What is interesting is something that we're seeing play out in the public is on the next slide, which is it is not widely spread, this increase in spending. So here we're, first of all, we're inflation-adjusting retail spending by household income—so adjusting for the fact that prices have gone up quite a lot.

If you look at the bottom line, that's low income. That has not grown in 3 years. So when you think about a populace that's very frustrated and very mad about inflation. This is why—they've not increased their spending in 3 years. Middle income has increased a bit more over the last year-and-a-half or so. High income has actually done quite well, right? That has been the main driver.

Now, spending in America is top heavy, right? High income has a massive share of spending that has pulled spending up, but it does help to explain what we see in sentiment surveys and worry about inflation. And really, honestly, what we hear when we're on the road is that this is not everyone participating. It really is driven by the upper quintiles of wealth.

Brent: And speaking of sentiment, because we as consumers tend to behaviorally feel better taking that extra vacation, buying that additional durable good or potentially even a car, right, when we feel good about our personal financial condition. And on the next slide, Amy, what we wanted to highlight is a new slide that kind of gets into household net worth. So what are we actually looking at here? Dark blue line is net worth as it relates to household real estate. So I think your home—

Phil: Kind of a purple line.

Brent: Yeah. Purple line, right, for those colorblind people like myself. The gold line is household net worth for equities, mutual fund shares. Blue line is deposits, cash on hand, treasuries. And what you'll see is certainly a lot of variability in those numbers, but as it relates to equities and mutual fund shares, we hit the second highest level ever recorded at 26.3%. Second only to what we saw back in June of 2021 when it hit about 26.5%.

But what I really want listeners to focus on is where that bluish, dark purple line collides with the gold line. When you combine household net worth as it relates to real estate, plus the equities and mutual funds in your portfolio, and you made them into one line, they would be sitting at 52%.

So the confluence of real estate, your home, your investment property, plus what's in your financial account is at the highest level ever recorded. So that certainly has an influence as it relates to sentiment for high income folks like you highlighted continuing to spend.

Phil: Yeah, we call this a wealth effect, right, in economics. And certainly not all Americans own equities or own real estate. But for those that do, there is a real positive wealth effect that can find its way to spending. Spending is not just driven by wages. It is driven by how we feel about our wealth. There's a lot of evidence and a lot of research on that. So this positive wealth effect certainly has helped to support.

Why do we see sentiments, whether it's CEO sentiment—which of course would be wealthier individuals talk about their businesses—or consumer sentiment fall when the stock market sells off? Well, this is part of the reason, right? That wealth effect can take hold on the other side of that coin.

Brent: So it's not all positive as we're highlighting here on the next slide. So if we sort of look at that, middle-income, lower-income households on the left. We're looking at that gold line, which is auto loan delinquencies, that darker line, which is credit card loan delinquencies. And you can see both have risen pretty significantly.

And when you actually sort of look under the hood at the Fed data, you can see that much of that increase in both auto loan delinquencies and credit cards are FICO scores 680 and below, right. So you're sort of looking at that lower end consumer household who might be struggling with making ends meet as prices and inflation have gotten a little bit out of control and being sort of stretched as far as their capacity to pay.

And when you look at the right and you look at the Fed survey about the likelihood of a consumer being able to come up with a $2,000 unexpected sort of emergency dollar amount within the next month, you can see how that's come down and sitting at about, you know, 63%. It's one of the lowest levels ever recorded. So across the board, sort of that lower-income, middle-income household are seeing the effects of inflation, Phil, bite into their household finances.

Phil: Absolutely. So let's talk about the market a little bit. We previewed a lot of this earlier in the presentation, but let's dig into some of the details in terms of what we're seeing under the hood in the market. So if you look at 2024—and this is just focusing on US—you'll notice that the highest performer by a pretty wide margin was large-cap growth, right? Think the Magnificent Seven, these big tech names performing quite well.

The truth is there was participation outside of that. But when you look at growth versus value, you're talking about what—roughly a 20% spread. Growth really outperform value, even though value had a good year. This year we've really seen a complete rotation. This is similar to what you said about US versus international, international really outperforming this year.

It has been the case—and still unbelievably early in the year, not even quite a quarter in—but large-cap value has outperformed growth pretty substantially. You see outperformance in mid and small value as well, but nowhere near the spread we are seeing. So it's not that all equities in the US are down. It's really that a lot of those big growth names have underperformed their value brethren—still outperformed in recent years pretty dramatically, but we have seen some rotation this year. And honestly that's probably healthy from a market perspective to see participation outside of just those largest names.

To the point of market health, let's talk valuation. So when we talk valuation, we're talking about things like price-to-forward earnings. Price-to-forward earnings, as a reminder, is the price you're willing to pay for a dollar of earnings. When this number is high, it means that the market is more expensive. When it's low, the market is cheaper.

We have seen that valuation tick down, right, because we had a market correction. But still pretty high—over one standard deviation above the average. That's where we've been for some time. One thing we like to point out is you'll hear a pundit say things like "The market is expensive," or in different times, "Cheap versus the average." What we like to point out is the market rarely trades at the average. It can be expensive or cheap for many years, for decades, for decade plus—that is not the whole story of valuation in terms of short-term performance.

So the overall market's expensive. What about in the details, as we flip ahead? This is a chart we've shown before, but we really think it's important. And we're showing price-to-forward earnings again, but if you look at those largest ten names, yes—they're less expensive than they were a few months ago—but yes, they are expensive versus their own history.

But look at the 490. The other 490 are not that expensive versus their own history. And you might say, "Well, does that just mean there's only 10 good companies in America?" The short answer is no. In fact, if you look at the largest 3,000 US equities, a bigger sample size than even we're showing here, 25% have gross margins over 60%. So for all of you business owners on the line, 60% gross margin is pretty great. 25% of 3,000 have gross margins above 60%.

There are a lot of good companies in the US. The truth is that the very largest companies have, in many cases, what appears to be unlimited pricing power, massive market share. Those are unique cases. Does not mean, though, there's not other good companies. Let's talk about some of those fundamentals under the hood in terms of earnings.

Brent: Yeah, right. I mean, it's getting to the end of the first quarter, which is hard to believe that we're almost done.

Phil: Earnings season right around the corner.

Brent: That's right. So let's talk about that. So what are we looking at? Let's talk about full year. 2025 is estimated to come in at about 11.4%. And certainly if you remember back to when we were discussing this in the fall of last year, that number was between 14% and 15%. So earnings expectations for this year have come down. And more specific to what you just highlighted, which is Q1, the estimated growth is they only expect to be 7.1%. Which is, as you can see, below the long-term average.

So expectations is somewhat of a lowered bar for this quarter. We'll see whether or not S&P 500 companies can outperform that. But what that tells me mathematically is that in order to hit 11.4%—if I have 7.1% in the first quarter—it's very back-ended. So there's a lot of expectations built into the second half of the year. So my sense tells me that we might actually see this estimate come down a little bit more. But certainly time will tell as analysts sharpen their pencil.

Looking forward to 2026, I still think it's way too early. And you've seen this time and time again. Expectations are quite lofty for next year at 14.2%. But as we've seen trend, we're likely to see that number come down as well. But again, putting it into context, Phil, relative to the long-term average since 1950 of 7.6%, I'll take 11.4% or something less than 14.2%. If that's where we end up.

Phil: I mean, the truth is with some of the uncertainty and some of the "wait and see" we're seeing from corporate America, even high single digits would be really a win this year, I think from a market perspective.

Brent: And then on the right, a little new graph, you can kind of see how analyst expectations and that sharpened pencil have kind of come into play where we were back in the fourth quarter of last year, almost $280 a share, now down to almost $270 a share. So again, sharpening that pencil and expectations have fallen as far as corporate earnings.

Phil: Yeah. Falling a few percent doesn't mean that they could not come in more, but from a market perspective in some ways this is a good thing because it's a little bit of a return of rationality that earnings are not just going to go up 15% every year—we can't expect that.

Brent: And again, the market from a price perspective has corrected for that. We saw a drawdown 10.1%. So that adjustment—as far as valuation and fair value—is starting to come into play.

What are we hearing on earnings calls from corporations? Tariffs, tariffs, tariffs, tariffs and the potential impact on what tariffs may or may not do to earnings and future profitability. So you can see what we're showing here is mentions of the word tariff on S&P 500 corporate earnings calls. And you can see, significantly elevated—and even elevated above where we were back in the 2018 period where we first had that sort of escalation under the first Trump regime coming into play. So again, it's on the minds of corporate officers and what might actually happen. Again, time will tell.

Phil: And look, we have an earnings season about to start in a couple of weeks here. We say this every earnings season, so I hesitate to even say it, but it's an important earnings season. Look, the results matter, but we're very interested in what we're hearing from management commentary. Are managers, C-suite executives changing supply chains, for example, the manufacturing space? Are we seeing a pull forward? Was there buying ahead of potential tariffs, meaning inventories are going to rise?

Brent: We saw that in the net exports number in a big way.

Phil: Are they seeing some of the sentiment shift we have seen among consumers—which we mentioned before—are they seeing that in consumer behavior? It really is going to be a very interesting earnings season. I have a feeling in 6 weeks or so when earnings season wraps up, we'll have a little better sense of where we stand economically than we might today.

Brent: Yeah. And one thing I would say is that corporations in America are very very adaptable, right?

Phil: Yes.

Brent: So regardless of what's coming down the pike from an uncertainty perspective, corporations in the United States have proven time and time again that they're able to look through that and adapt whether that's to your point switching supply chains, repricing things, doing things in a way to make sure that they can hit the numbers that they need to hit.

Phil: Yeah. And to that point with tariffs, something that—a question we've certainly been asked is sort of, you know, "Is this the end of American exceptionalism?" We want to be clear. We do not think so.

Brent: No.

Phil: International equities outperforming US equities—that could be based purely on valuation, right? That could be based on many things. The idea that this is still not the home of innovation and really exceptional corporations—we don't think that that has changed at all over the last few months.

Let's talk about our price target. So we update our forward 12 month. Remember this is a forward 12 month, not a year-end price target. We update this on a quarterly basis. Today, I'm not going to spend much time on this because we're barely changing it. The bear and the bull case are the same. Base case, we adjusted to 6,300. That's just based on some of the earnings revisions and moves in multiples. I would describe that as a pretty modest adjustment. We are not taking the bait that a sell down is pushing us to dramatically change our price target—up about 9.2% from the close on March 24th.

As a reminder, we set our price target for the year—which was 6,400—in December. That was only up single digits, mid-single digits. Why was that? And we said this a lot. We expected a much more volatile year this year. Here we are down year to date, 6% off highs. And that, of course, pushes the percent gain on our price target. So I describe this more as an adjustment than any sort of change in underlying view. So what about rates?

Brent: A lot of volatility.

Phil: Yeah, a lot of volatility. For a long time, we were showing the yield curve and showing highs last year, et cetera. We decided this time around to just show what have we seen this year, 2025, right, in the course of just under a quarter.

So first, as a reminder, this is the yield curve. The vertical axis is Treasury yields. The horizontal axis is the maturity date of those Treasuries, 1-month all the way out to 30-year. So the latest data, that's gold, right? You can see the 10-year around 4.3%. But look at what the recent high was on January 14th. 10-year at 4.8%, right? Big move up.

The recent low, which was on March 3rd, 10-year at 4.2%. We're talking, what, a month-and-a-half. That was a 60-basis-point move. And now we're sort of in between the two. Look, uncertainty does not just drive moves in equities. It can drive moves in fixed income as well, and we certainly have seen that play out.

Back to our point on the Fed, something that often clients ask is, you know, "When are rates going to—mortgage rates, for example—when are they going to go back to where they were?" We don't think they are anytime soon. I mean, there's really an argument for higher-for-longer here. The short term, there's a floor under how low the Fed can go outside of real cataclysm. And that finds its way into the Treasury yield curve.

We think the Treasuries, there's real support underneath the current yield level and do not expect massive moves lower. We can move lower. We were lower just last fall, but not dramatically, anywhere close to where we were a few years ago.

Brent: Yeah, and I think it's important, right? I mean, we certainly had a lot of talk from Treasury Secretary Bessent or President Trump as far as wanting to see rates lower. But I think certainly it's in our interest when we think about what you covered as far as fiscal deficit.

Phil: Interest expense.

Brent: Interest expense has ballooned up to almost 14% of annualized expenditure. So we all want to see, you know, rates kind of come down, right? Because obviously as rates fall, bond prices go up. So that's a good thing for bondholders. I think on this next slide, Amy, I think what we wanted to highlight is what we kind of covered in our 2025 outlook, which is balance in portfolios, right?

So yield to worst or yield to maturity—or in essence, the starting or purchase yield for a fixed-income investment—is a very, very good prognosticator as far as forward expected returns. And you can see where we are right now, aggregate bonds, taxable bonds sitting at 4.7%. Municipal bonds have been bouncing around between 3.8% and 4%. If you tax adjust municipals, depending on your tax bracket whether you're in the 35% tax bracket or 37% tax bracket, that's almost a 6%, you know, tax-equivalent yield. That's a pretty good starting point.

And when we talked about in our outlook, if I sort of pull together the 41 firms in that Horizon Actuarial studies that relates to expected returns for US stocks over the next decade, around 6.5%. We're a little higher for ours personally. But again, the relative spread differential between expected returns on equities relative to the starting point on fixed income lends itself to being able to A) sleep better at night by having balance in your portfolios—but having more diversification, as well.

Phil: Absolutely. I mean, we're coming out of an era when yields were very low, where as you always said, TINA—There Is No Alternative to equities. Well, now there is an alternative, and there is suddenly some yield within fixed income that makes balanced portfolios far more interesting.

Brent: So Amy, why don't we turn it back over to you and take us to the Q&A section.

Amy: Yeah, thanks guys. Thanks for going through all of that. Before we jump into the next segment, just a reminder to everyone, if this is your first time joining us, we do have several publications available throughout the month.

You can use the QR code on the screen to get signed up for our subscription service or visit FirstCitizens.com/MarketOutlook. Also there, you'll see an area where you can submit questions if you have specific questions for Brent and Phil and Blake around markets and the economy. We do go through those questions each month.

One thing that was a little bit different this time around for this month is that all of the questions are kind of in the same ballpark. And Phil, I think you're seeing something similar on the road. I kind of want to do something a little bit different today and just turn it back over to you and hear what you're hearing from our folks on the road.

Phil: Yeah. I've had the pleasure of being on the road a lot this quarter, dozens of client meetings and presentations. What I'm noticing is, probably done this for about 20 years, highest point of any point in my career of a policy focus. All eyes are on DC. You see that during election years, usually it fades pretty quickly after you get past an election. Now it is real focus on policy and policy uncertainty.

Us as market folks, we don't necessarily love all eyes on DC. We'd rather all eyes be on fundamentals, earnings, et cetera. But there's a few points that of course people are really focused on. One tariffs, right? A lot of our clients are business owners. What's the impact of tariffs, where do they settle? And unfortunately the answer is, as we covered, we shall see. That will certainly persist.

DOGE, to a certain extent, clients very focused on government efficiency, which makes a lot of sense given our deficit levels, which again, we're speaking to the fact that there is heavy lifting there, not necessarily an easy answer. We are noticing among clients, one, that some have even pointed out from an invoice perspective tariff lines and renegotiations of input costs into their business.

But also we are—and this is a broad generalization, it's different for every client and prospect—but there are many that they're taking a little bit of a "wait and see" approach. They want to see the dust settle. Where do we land on things like tariffs? Where do we land on policies, regulation, M&A? And there is a bit of a "wait and see approach." That is showing up in the data as well.

If you look at M&A activity so far this year, it is lower than it was last year in which M&A activity was low. Something that we certainly felt and most experts felt coming into this year is that a pickup in M&A activity was likely because the new administration would have less regulation. But the truth is when you have so much uncertainty, it's very difficult to do a merger and acquisition, broadly speaking.

So that doesn't mean we don't see a pickup as we look towards the back half of the year. I certainly think we could. But it is a reminder that market participants—we see this in CEO confidence surveys, which have taken a big hit—market participants like certainty. And that is where we are seeing clients stand.

Brent: And to highlight that, let's take the other side of that, which is markets, which many listeners are very much focused on. I don't want listeners to wrongly conflate that uncertainty equals bad forward returns in equity markets. It's actually the opposite. When you go back through time and you look at periods of heightened uncertainty, the forward returns on a 3-, 6-, 12-month basis actually tend to be higher, not lower.

So again, let's make sure you do things where you sit down with your First Citizens team. You sit down with your financial planning team to make sure that your plan is thoughtfully put in place. Your goals and objectives are clearly and succinctly documented. And for us, most importantly, that your investment strategy is fundamentally congruent to that plan of attack to make sure that you can stay and sort of tie yourself to the mast that regardless of what's coming down the pike, you're thoughtfully and appropriately allocated for the future.

Phil: Times of uncertainty are a reminder of why we have financial plans for individual investors, why we have investment policy statements as institutional investors. It's times like this that remind you of why that is. A return to a bit of normality in equities—which is what volatility is—is not necessarily a negative. As a reminder, our price target is up, right? Doesn't mean we're right, but we remain cautiously optimistic just as we were coming into the year. But we did expect higher volatility this year. And so far that has occurred. Does not mean we have a smooth ride, but we do think that as long as fundamentals remain in place, knock on wood, there are reasons to see upside. But again, equities as Brent alluded to are long-term investments. That needs to be the focus, certainly from an investor perspective.

Brent: For sure.

Amy: Well, thank you both for taking the time to go through that in-depth analysis of markets and the economy. And Phil, thank you for sharing what you're hearing on the road. Just a reminder, we will be back again next month, and we want to thank everyone, all of our listeners, for trusting us to bring you this information. That's something that we never take for granted.

Stay Informed with Our Latest Releases

Making Sense

In Brief – A look at the week ahead in under two minutes every Monday morning

Q&A Videos – Monthly conversations covering 2-3 of the top questions we're hearing from clients.

Market updates – Monthly interactive discussions with in-depth analysis of markets and the economy

Articles – Often coinciding with market or economic events

Authors

Brent Ciliano CFA | SVP, Chief Investment Officer

Capital Management Group | First Citizens Bank

8510 Colonnade Center Drive | Raleigh, NC 27615

Brent.Ciliano@FirstCitizens.com | 919-716-2650

Phillip Neuhart | SVP, Director of Market & Economic Research

Capital Management Group | First Citizens Bank

8510 Colonnade Center Drive | Raleigh, NC 27615

Phillip.Neuhart@FirstCitizens.com | 919-716-2403

Blake Taylor | VP, Market & Economic Research Analyst

Capital Management Group | First Citizens Bank

8510 Colonnade Center Drive | Raleigh, NC 27615

Blake.Taylor@FirstCitizens.com | 919-716-7964

Important Disclosures

This material is for informational purposes only and is not intended to be an offer, specific investment strategy, recommendation or solicitation to purchase or sell any security or insurance product, and should not be construed as legal, tax or accounting advice. Please consult with your legal or tax advisor regarding the particular facts and circumstances of your situation prior to making any financial decision. While we believe that the information presented is from reliable sources, we do not represent, warrant or guarantee that it is accurate or complete.

Your investments in securities and insurance products and services are not insured by the FDIC or any other federal government agency and may lose value.  They are not deposits or other obligations of, or guaranteed by any bank or bank affiliate and are subject to investment risks, including possible loss of the principal amounts invested.

About the Entities, Brands and Services Offered: First Citizens Wealth™ (FCW) is a marketing brand of First Citizens BancShares, Inc., a bank holding company. The following affiliates of First Citizens BancShares are the entities through which FCW products are offered. Brokerage products and services are offered through First Citizens Investor Services, Inc. ("FCIS"), a registered broker-dealer, Member FINRA and SIPC. Advisory services are offered through FCIS, First Citizens Asset Management, Inc. and SVB Wealth LLC, all SEC registered investment advisors. Certain brokerage and advisory products and services may not be available from all investment professionals, in all jurisdictions or to all investors. Insurance products and services are offered through FCIS, a licensed insurance agency. Banking, lending, trust products and services, and certain insurance products and services are offered by First-Citizens Bank & Trust Company, Member FDIC, and an Equal Housing Lender, and SVB, a division of First-Citizens Bank & Trust Company. icon: sys-ehl

FirstCitizens.com/Wealth/Disclosures

SVB.com/Private-Bank/Disclosures/Form-ADV