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May 30, 2025 – Amidst a volatile market, significant economic risks such as high interest rates and trade policy are creating a tense environment where stock market gains may be capped. Key sectors, like housing, are already showing signs of strain from elevated rates, while the bond market remains turbulent. Therefore, a diversified and defensive investment strategy is recommended, emphasizing fundamental analysis and valuation discipline for stocks while holding high-quality bonds to navigate the expected volatility.

//  by Tower Bridge Advisors

2025’s Crosscurrents: Markets in tension

The current investment landscape presents a series of complex and often conflicting signals. While the S&P 500 has impressively recovered to within 4% of its February highs, a palpable sense of tension remains present. This environment is characterized by a tug-of-war between persistent economic risks and resilient asset prices, creating a challenging backdrop for investors. Restrictive interest rates and the administration’s shifting trade policies each pose tangible economic risks in the months ahead. As a result, long-term investors are forced to weather a period that we know will include potentially violent swings in stock and bond prices.

Now that the stock market has recovered from the sharp decline earlier this year, the best-case scenario for the remainder of the year may be one in which stocks simply go nowhere. In my view, the S&P 500 appears to be caught in a valuation dilemma. On the one hand, persistent economic strength could keep bond yields elevated, compressing the high valuations investors are currently paying for stocks. On the other hand, hawkish tariff talk threatens to dampen economic growth, which would, in turn, pressure corporate earnings growth. With the market no longer priced for a recession, the S&P 500 index may be confined to a wide range, potentially between the April lows near 4,800 and the February highs around 6,000.

Interest rate market

The volatility in the interest rate market is the biggest factor supporting this view. In particular, sharp swings in 10- and 30-year U.S. Treasury yields, which have been largely driven by uncertainty surrounding new tariff policies and the Fed’s decision to pause rate cuts, are key drivers to the market’s quandary. The Federal Reserve finds itself in a precarious position. The March FOMC meeting’s economic projections reflected this challenge, with forecasts for growth revised downward while inflation and unemployment were revised up. This has created a critical debate over the future path of monetary policy, leaving investors to determine the “real” sustainable level of interest rates.

This interest rate story is further complicated by a lack of alignment between monetary and fiscal policy. While the Fed contemplates the timing and magnitude of future rate cuts to achieve a neutral policy stance, the U.S. government is projected to run a budget deficit of nearly $2 trillion. Based on the contents of the proposed new tax bill, it appears that hopes for a deficit reduction have transformed into a deficit expansion. With the national debt now approaching $37 trillion, the sheer volume of government issuance could force long-term interest rates higher as investors—the so-called “bond vigilantes”—demand greater compensation for the risk. The administration wants the Fed to lower rates to stimulate economic activity. But, if the Fed attempts to lower short-term rates while the market pushes long-term rates higher, the yield curve will likely steepen.

Housing market

The real-world consequences of this monetary and fiscal tension are already visible in the U.S. housing market. Despite a recent report that showed a significant 30.6% Y/Y increase in the inventory of homes for sale—a post-pandemic high—buyer activity has fallen sharply. In fact, pending home sales fell 6.3% Y/Y, the largest monthly decline since 2022. The reason is clear: elevated mortgage rates, which are a direct consequence of the broader interest rate environment, are keeping potential buyers on the sidelines. According to the National Association of REALTORS®, a meaningful reduction in mortgage rates is essential to stimulate demand and absorb the growing supply.

Stock market

While home prices may be reaching a near-term peak in pricing, stock prices have risen by almost 20% since the April lows. The S&P 500 trades for 22x projected earnings for 2025 as compared to its historical average of 16-17x over the last 25 years. A higher PE multiple may be warranted given the increasing concentration of high-growth technology companies that constitute a record weighting within the index. There is no right answer to what the PE “should be” and there are many inputs that factor into reasonable valuation judgments such as interest rates, earnings growth rates, etc. However, the argument that the market is currently trading near historically high levels is not generally disputed.

Given this backdrop—a U.S. stock market with a potential ceiling, a volatile bond market, and a housing sector hampered by affordability—investors must remain vigilant and mindful of their risk tolerance. The forces that propelled the domestic bull market since late 2022 may be waning, suggesting that leadership may be shifting. Fortunately, opportunities to diversify and generate returns remain, even if the potential for big stock market gains like we have seen over the last couple of years have diminished.

In our view, the current environment calls for a defensive and diversified strategy, especially for investors that target capital preservation as a key objective. While corporations remain financially healthy and credit markets are not showing signs of significant stress at the moment, the headwinds are undeniable. We are focused on navigating this range-bound, volatile market by reducing over-concentration in high-priced speculative companies and emphasizing valuation discipline, while also exploring investments that have secular growth qualities and inflation protection attributes. For fixed income, the elevated yields on short-dated, high-quality bonds present the best opportunity in over two decades to lock in attractive returns. Navigating the road ahead will undoubtedly be a bumpy ride, but challenges also present opportunities.

Birthdays:

Actress and singer Idina Menzel turns 54 today, singer CeeLo Green turns 50, singer Wynonna Judd turns 61, and former Yahoo CEO Marissa Mayer turns 50.

Christopher Gildea 610-260-2235

Tower Bridge Advisors manages over $1.3 Billion for individuals, families and select institutions with $1 Million or more of investable assets. We build portfolios of individual securities customized for each client's specific goals and objectives. Contact Nick Filippo (610-260-2222, nfilippo@towerbridgeadvisors.com) to learn more or to set up a complimentary portfolio review.

# – This security is owned by the author of this report or accounts under his management at Tower Bridge Advisors.

Additional information on companies in this report is available on request. This report is not a complete analysis of every material fact representing company, industry or security mentioned herein. This firm or its officers, stockholders, employees and clients, in the normal course of business, may have or acquire a position including options, if any, in the securities mentioned. This communication shall not be deemed to constitute an offer, or solicitation on our part with respect to the sale or purchase of any securities. The information above has been obtained from sources believed reliable, but is not necessarily complete and is not guaranteed. This report is prepared for general information only. It does not have regard to the specific investment objectives, financial situation or the particular needs of any specific person who may receive this report. Investors should seek financial advice regarding the appropriateness of investing in any securities or investment strategies discussed in this report and should understand that statements regarding future prospects may not be realized. Opinions are subject to change without notice.

Filed Under: Market Commentary

Previous Post: « May 27, 2025 – The House has passed Trump’s big beautiful bill and moved it on to the Senate. It’s a budget buster that offers something for all but will expand deficits meaningfully. It’s a bit of a mess that can be fixed if the Senate has the backbone to fix it. Wall Street will be watching, especially bond investors.

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  • May 30, 2025 – Amidst a volatile market, significant economic risks such as high interest rates and trade policy are creating a tense environment where stock market gains may be capped. Key sectors, like housing, are already showing signs of strain from elevated rates, while the bond market remains turbulent. Therefore, a diversified and defensive investment strategy is recommended, emphasizing fundamental analysis and valuation discipline for stocks while holding high-quality bonds to navigate the expected volatility.
  • May 27, 2025 – The House has passed Trump’s big beautiful bill and moved it on to the Senate. It’s a budget buster that offers something for all but will expand deficits meaningfully. It’s a bit of a mess that can be fixed if the Senate has the backbone to fix it. Wall Street will be watching, especially bond investors.
  • May 22, 2025 – Memorial Day Weekend is typically the unofficial start of summer for many. However, this year has been anything but typical. Corporate earnings have been holding up based on recent company reports and outlooks. Tariffs have dented a few earnings reports, but the consumer continues to spend. Credit spreads are not indicating a recession yet, although interest rates have been on the rise as Congress works on a spending resolution bill. Markets gave back some of their recent gains yesterday but are still only about 5% from their all-time highs. Not quite bear market territory. Anyone traveling this weekend to a national park should remember to bring their bear spray.
  • May 19, 2025 – Stocks have clawed back all their post-Liberation Day losses as the perceived impact of tariffs have lessened. But now comes the hard part. Whatever tariffs are imposed will have economic consequences that we are only just starting to see. The big tax bill as originally proposed is a budget buster. 10-year Treasury yields are now back above 4.5%. With hindsight equity investors overreacted after Liberation Day. The subsequent rally may have gone too far as well.
  • May 15, 2025 – Following a big rebound, the S&P 500 is flat YTD but trades at a high valuation of 23x forward earnings. Consumer spending faces headwinds from rising student loan defaults and a cooling housing market. While recession fears have eased, the economy is slowing and inflation trends remain uncertain.
  • May 12, 2025 – China and the United States have agreed to reduce tariff rates on each other by 115% leaving our tariff rate on Chinese goods at 30%. Since shortly after the shock of Liberation Day that sent equity investors into panic mode, there has been a gradual retreat from an overbearing tariff framework outlined that day. Today’s suspension of tariffs, pending further negotiations may not be a final step. But it comes right out of the Trump playbook that shoots for the moon first and then settles into a much more compromised reality later. While tariff negotiations continue not only with China but the rest of the world, investors can now focus on the next leg of the Trump agenda, tax cuts.
  • May 8, 2025 – The Federal Reserve on Wednesday held its key interest rate unchanged in a range between 4.25%-4.5% as it awaits better clarity on trade policy and the direction of the economy. While uncertainty about the economic outlook has increased further, the Fed is taking a wait and see stance toward future monetary policy. Meanwhile, the S&P 500 Index has just about fully recovered its losses following the April 2nd “Liberation Day” when major tariffs were announced on U.S. trading partners. The bounce in risk assets is welcome, but we are still looking for white smoke signals showing that progress on inflation and tariffs is being made.
  • May 5, 2025 – Investors overreacted to Trump’s early tariff overreach but may have gotten a bit too complacent that everything is now back on a growth path. While there are few signs of pending recession, the impact of tariffs already imposed are just starting to be felt. So far, no trade deals have been announced although the White House claims at least a few are imminent. The devil is always in the details. Congress will start to focus on taxes. Conservatives may balk but there is little indication to suggest they won’t acquiesce to White House pressure once again.
  • May 1, 2025 – U.S. GDP unexpectedly contracted by 0.3% in the first quarter, the first decline since 2022, largely due to a surge in imports ahead of anticipated tariffs. Despite this GDP contraction, major tech companies like Alphabet, Microsoft, and Meta reported quarterly earnings, indicating continued strength in areas like advertising and cloud computing. However, concerns remain about the broader economic outlook due to uncertainty surrounding tariffs, potentially leading to higher prices, weaker employment, and a challenging environment for the Federal Reserve regarding inflation and interest rate policy.
  • April 28, 2025 – Markets rallied as the Trump Administration suggested tariffs might be reduced against China and that ongoing negotiations with almost 100 countries are progressing, although no deals have yet to be announced. But even with tariff reductions, the headwind will still likely be the greatest in a century. So far, the impact is hard to measure as few tariffed goods have reached our shores. Early Q1 earnings reports show little impact through March, although managements have been loath to predict their ultimate impact. Stocks are likely to stay within a trading range until there is greater clarity regarding the impact of tariffs.

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