S&P 500’s worst month since December 2022
The S&P 500 index extended February’s losses to March as uncertainty about forthcoming tariffs spooked investors. Our forecast for the average of March was nearly a 2 percent drop over the average of February. In reality, the S&P 500 had its worst month since December 2022. The S&P 500 index’s monthly average fell 5.9 percent over February. When the end of the month is considered, the drop was similar.
The reason for the market sell-off was the uncertainty regarding Trump’s comments on new tariffs affecting “all countries”. The tariffs are to be announced on April 2, or as Trump put it, on “Liberation Day”. Investors do not like uncertainty, so, rather than the actual state of the economy, speculations about the impact of a global trade war on inflation and growth have been fuelling the sell-off.
Investors try to second-guess the Fed’s monetary policy with this uncertainty regarding a stagflating economy. We believe a US recession is unlikely. Nevertheless, we expect the US GDP growth to slow down in 2025 Q1. US consumer confidence seems to be at its lowest point in 12 years. This may not impact consumer spending in the near term if consumers had been spending more on things like European autos before the tariffs took effect. However, sooner or later, consumer spending is expected to lose steam as prices increase and job creation numbers fall.
PMI improves but consumer outlook deteriorates further
The Chicago Purchasing Managers’ Index (PMI) increased to 47.6 in March 2025 from 45.5 in February. This was well above the market anticipation of 45.2. The index’s long-term average from 1967 to 2024 is 54.7. Hence, the current value still indicates a contraction in business activity.
The Conference Board’s consumer confidence index declined by 7.2 points in March to 92.9 (1985=100). The Present Situation Index—based on consumers’ assessment of current business and labor market conditions—decreased to 134.5 (1985=100) from 138.1 in February. Furthermore, the Expectations Index—based on consumers’ short-term outlook for income, business, and labor market conditions—dropped sharply to 65.2 (1985=100) from 74.8 in February. This was the lowest level in 12 years.
A reading below 80 for the Expectations Index would indicate that consumers are concerned about a recession. The index was over 80 at the beginning of the year, so the latest monthly deterioration is significant. Consumers’ gloomy expectations reflect pessimism about the worsening business conditions coupled with worsening employment prospects.
Inflation cools slightly, GDP growth is revised up
The annual inflation rate in the US fell to 2.8 percent in February, compared to 3 percent in January, below the market expectations of 2.9 percent.
The Federal Reserve’s preferred metric — the personal consumption expenditures price index rose 2.8 percent in February, up from 2.6 percent in January, above the market analysts’ projection of 2.7 percent.
The United States’ Gross Domestic Product (GDP) expanded at an annual rate of 2.4 percent in the fourth quarter of 2024, according to the final estimate (Source: the Bureau of Economic Analysis (BEA)). This was an upward revision of the second estimate (2.3 percent).
Although growing slower than 2024 Q3, the US economy remains on solid footing with the unemployment rate stable at 4.1 percent. Fed did not cut the interest rates in March as expected. The fact that the US inflation remains tame but not approaching the Fed’s target of 2 percent, the Fed’s future rate cuts are likely to be delayed until the end of the second quarter.
S&P 500 index approaches fair valuation
According to Factset Insights from March 28, the forward 12-month P/E ratio for the S&P 500 is 20.5. This P/E ratio is above the 5-year average (19.9) and above the 10-year average (18.3). Although still overvalued, the index is closer to its 5 year average than the last few months.
Assuming that there is no more tariff uncertainty after April 2, the stock market should slightly recover based on the relatively strong economic fundamentals. After the three consecutive interest rate cuts in 2024, the Fed’s data-dependent policy remains cautious. The policy makers can only evaluate the consequences of President Trump’s protectionist policies once they are implemented. Currently, there seems to be no urgency in cutting the interest rates as the economy remains on strong footing, despite some loosening in the labor market.
Our monthly S&P 500 forecast is a model-based fair-value estimate. Based on the economic fundamentals, our forecasts indicates a slight recovery in April. Irrational momentum-driven rallies are beyond the scope of our model.
The possible impact of geopolitical tensions is fed into the model through keyword searches (Google clicks) and the advanced retail sales index. However, these variables perform better in normal times. Our quarterly S&P 500 forecast discusses these issues in more detail.