At EsqWealth, we recognize that understanding market trends is essential for making informed financial decisions. While the fundamentals of sound investing remain constant, shifts in inflation, interest rates, and global trade policies can impact portfolios in unexpected ways.
As we enter 2025, markets are experiencing a mix of optimism and volatility. Corporate earnings remain strong, economic growth continues, and the Federal Reserve is holding its stance on interest rates. However, the introduction of new tariffs and geopolitical developments have sparked uncertainty among investors. In this article, we break down key market trends and their potential implications, helping you stay informed and confident in your financial strategy.
Inflation, Interest Rates, and Tariffs
What fueled the modest advance in the S&P 500 Index in January? Well, for starters, the narrative hasn’t changed since the calendar flipped to 2025 —with one key exception: tariffs. Here were the numbers in January:
| Index | YTD % |
| Dow Jones Industrial Average | 4.7 |
| NASDAQ Composite | 1.6 |
| S&P 500 Index | 2.7 |
| Russell 2000 Index | 2.6 |
| MSCI World ex-U.S.A.** | 4.9 |
| MSCI Emerging Markets** | 1.7 |
| Bloomberg U.S. Agg Total Return | 0.5 |
Source: The Wall Street Journal, MSCI.com, Bloomberg, MarketWatch
YTD returns: December 31, 2024–January 31, 2025
**in US dollars
Fueled by higher consumer spending, the economy is expanding, as evidenced by an annualized increase of 2.3% in fourth-quarter Gross Domestic Product (GDP), according to the latest data from the U.S. Bureau of Economic Analysis. Meanwhile, corporate profits are exceeding expectations, per data from LSEG, and inflation, while still elevated, does not show signs of accelerating.
The Fed Catches Its Breath
As was widely expected, the Federal Reserve held the fed funds rate at 4.25–4.50% at its end-of-January meeting, and Fed Chief Powell signaled the Fed is in no hurry to reduce interest rates. However, he did not rule out further rate hikes this year, even as prospects for future rate cuts remain limited.
Last month, however, did provide some unexpected drama. On Monday, January 27th, a Chinese start-up announced that its DeepSeek’s AI models offered performance comparable to the world’s leading AI programs at a fraction of the price, power, and energy. Semiconductor shares tumbled, and Nvidia (NVDA $120, 1.31.25), which is one of the largest stocks in the S&P 500 Index, shed 17%, or nearly $600 billion in market cap, per CNBC.
While the Nasdaq Composite and the S&P 500 Index ended the day down sharply, the Dow actually closed up, according to MarketWatch. Notably, Bloomberg reported that a majority of S&P 500 stocks ended the day higher despite the sharp decline in the S&P 500. Over the past 20 years, there has never been a positive advance/decline when the S&P lost 1.5% or more.
In other words, the selloff wasn’t simply indiscriminate selling. Instead, it was a sector rotation—investors moved money out of high-flying tech winners and into market underperformers. How the DeepSeek announcement will shape the AI sector for the rest of the year remains uncertain.
While we rarely dive into the granular day-to-day action, we want to point out that the extreme market divergence on January 27th illustrates the benefits of diversification. It also emphasizes that investors remain optimistic about U.S. economic prospects.
Investors Take Stock of Tariffs
That brings us to the February 1 announcement by President Trump that he planned to enact a sweeping 25% tariff on Canadian and Mexican imports and a 10% tariff on imported goods from China. Oil would be taxed at 10%.
Canada and Mexico struck deals with the Administration that secured a 30-day pause in new tariffs on their products. China imposed retaliatory tariffs on a few U.S. products.
The prospect of such sweeping barriers to trade unsettled investors amid concerns such levies will boost prices at home and slow economic growth.
Why are investors fretting over new trade barriers? Well, there is no modern precedent for such action, and it’s difficult to predict how a trade war, once it starts, might conclude. The market is worried that significantly higher taxes on imported goods will drive inflation higher, while the likelihood that Mexico and Canada will respond in kind with their own tariffs could sap demand for U.S. exports.
In other words, investors are concerned that we could see higher inflation and slower economic growth, at least over a shorter period. In turn, that could force investors to re-evaluate U.S. economic prospects.
Legal experts have said that the president, who referenced the International Emergency Economic Powers Act (IEEPA) for the new levies, will likely encounter challenges in court, as the tariffs are not industry-specific and instead are quite broad. However, courts have traditionally deferred to presidents during emergencies. Thus, the final legal outcome remains uncertain.
Some analysts believe the president is enacting tariffs strategically, with no intention of maintaining them over an extended period. Others, however, point to Trump’s positive remarks about the benefits of tariffs and the necessity to generate revenue to reduce the deficit and fund his proposed tax cuts.
While the trade situation remains fluid, the good news is that the U.S. economy has proven resilient and is less dependent on trade compared to many of our trading partners.
Final Thoughts
A diversified portfolio cannot completely shelter you from market pullback, but it can help lower volatility and has historically been the most effective path to achieve one’s financial goals. Our approach is guided not only by our experience but also by the weight of academic research. We recognize that stocks are not immune to periods of subpar returns, but patient and disciplined investors have historically been rewarded.
Market fluctuations and economic shifts are inevitable, but a well-structured financial plan helps investors stay focused on long-term goals. At EsqWealth, we emphasize strategic diversification and disciplined decision-making, ensuring that our clients are well-positioned to navigate uncertainty and capitalize on opportunities.
As we monitor developments in inflation, interest rates, and global trade, our commitment remains the same—helping you build financial security and confidence in your future. If you have any questions about your investment strategy or would like to review your financial plan, our team is here to support you.
