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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.
Next Post: June 2, 2025 – Just as the Soviets laid down the gauntlet in the 1960s starting the space race, China has caught up to us technologically in many ways and is still gaining ground in others. For the U.S. to maintain its leadership requires coordinated efforts from both the private and public sectors. Trying to erect barriers is not a winning formula. Rather, properly focusing resources to support the most strategic initiatives makes sense. »

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  • July 31, 2025 – The U.S. economy demonstrated a strong rebound in Q2 2025 with 3.0% GDP growth. Tech giants Microsoft and Meta significantly exceeded earnings expectations, fueled by the ongoing AI boom and robust cloud and digital advertising performance. While the current AI-driven market rally shows parallels to the dot-com era’s speculative growth, today’s tech giants exhibit stronger financial fundamentals than many during the earlier boom. Investors should balance the allure of high growth with valuation discipline and diversification to mitigate risks in this dynamic market.
  • July 28, 2025 – The world looks pretty healthy but rising speculation elevates our concern. When the amount of corporate money flowing into bitcoin is twice the amount raised in initial public offerings to date, that gets our attention. With that said the focus this week will be on earnings and a slew of economic data on inflation, interest rates, and employment, all of which can be market moving.
  • July 24, 2025 – Like the game of Go in China, or Igo in Japan, the evolving tariff negotiations between the U.S. and our trading partners are creating a constantly changing gameboard and continue to dominate the news cycle. Markets reacted positively yesterday to indications that Japan’s tariffs would be capped at 15%, less than the 25% expected, and a potential deal with the European Union. Tariffs are already having an impact on corporate earnings and outlooks, although equity markets continue to gain ground.
  • July 21, 2025 – Last week was a quiet week for news. The real heart of earnings season starts to kick in this week. Meanwhile the new crypto legislation signed into law last week is likely to change our lives a lot more than what we will learn from a few earnings reports.
  • July 17, 2025 – Stocks rebounded after President Trump clarified his stance on Federal Reserve Chair Jerome Powell. While consumer and producer price indexes suggest some inflation moderation, particularly in services, certain tariff-exposed goods continue to see price increases. Despite these pressures, the U.S. economy shows underlying strength, exemplified by strong bank earnings and robust consumer spending, though the long-term impact of escalating tariffs remains a key uncertainty.
  • July 14, 2025 – Tariffs and earnings will be in the bullseye of investor focus for the next three weeks. Earnings should be good with the weak dollar giving a boost to reported foreign results. As for tariffs, the announcements are likely to be scarier than the coming reality. But even with more muted final outcomes, the likely overall tariff picture will almost certainly be the most severe since the early 1930s. Tariffs will affect different companies in different ways, a factor likely to lead to an increasing dispersion in stock performance in the months ahead.
  • July 10, 2025 – Professional dodgeball exists in the form of the National Dodgeball League. The NDL was founded in 2004 and is the only professional dodgeball league in the US, sporting 24 professional teams. Investors, corporate management teams and our trading partners may feel like they are playing dodgeball this year due to shifting tariff policies. Market volatility has indeed been above average in the first half of 2025. So far, we have dodged a major economic slowdown, job losses or significant inflationary pressures from tariffs, although the second half of 2025 could witness a bounce in these metrics.
  • July 7, 2025 – Treasury Secretary Bessent talks of his 3-3-3 goals, 3% growth, 3% inflation and a reduction of the deficit-to-GDP ratio from over 6 to just 3. Those are mighty goals. The passage of the reconciliation bill may make short-term movement in the right direction but the ongoing buildup of debt may make reaching those long-term goals difficult.
  • July 3, 2025 – The second quarter of 2025 delivered a stellar performance for U.S. equities, with impressive gains across major indices driven by strong corporate earnings, AI enthusiasm, and eased trade tensions. Despite this rally, the market successfully navigated challenges including early tariff anxieties, signs of consumer stress, and geopolitical uncertainties. Looking ahead, investors are keenly watching the “One Big Beautiful Bill Act” and its potential impact on interest rates, inflation, and corporate profitability.
  • June 30, 2025 – Trump’s big beautiful bill is headed for the finish line. It isn’t done yet and likely will see further changes before it reaches his desk. As the administration buys the votes necessary for its approval, expect the impact on future deficits to rise. With that said, the bill will help to accelerate near-term growth. Second quarter earnings reports are just a couple of weeks away and they should be good. However, unlike Q1 when skepticism abounded, this time optimism is high. July is usually a good month for stocks but the sharp April-June rally may mute the pace of further gains.

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