Key takeaways
U.S. stocks are generally trending up so far this year.
Recent market volatility reflects concerns over policy moves by the Trump administration initiating higher tariffs on key trading partners.
After leading the market for the last two years, technology stocks lagged the broader S&P 500 in January 2025.
U.S. equity markets managed to generate modest gains through 2025’s opening month, a period notable for the transition of political power that occurred in Washington, D.C. On January 20, Donald Trump assumed office as president for a second time, backed by a Republican-led Congress, and immediately began implementing significant changes. Throughout January, markets were volatile, losing ground in the first half of the month, then rallying, before retreating again at month’s end.1
Upon regaining the White House, President Trump wasted little time issuing executive orders, many of which likely carry economic consequences. As January concluded, Trump spelled out his plans to implement higher tariffs on major trading partners Mexico, Canada and China. As a result, markets dipped on the month’s closing trading day, reducing January’s gains. After falling further on February’s first trading day, market losses were trimmed before day’s end on news from the White House that tariffs on Mexican imports would be delayed.1 Later, a similar delay was announced on Canadian import tariffs.
“The tariff issue raises a variety of market questions and could be challenging for corporate bottom lines,” says Rob Haworth, senior investment strategy director with U.S. Bank Asset Management. “It could drive commodity prices higher, which raises input costs for companies. It may result in higher selling costs for goods, which will dampen demand for those goods.” A third challenge, according to Haworth, is the impact of a stronger dollar. Nearly 30% of S&P 500 revenue is derived from overseas markets.2 Markets are concerned that tariff policies may boost the dollar’s value compared to other currencies. “The stronger dollar reduces the net impact of overseas revenues when those revenues are translated from local currencies into the dollar,” says Haworth.
Haworth notes tariffs are one issue adding to market uncertainty. “It’s fair to say that the markets are on higher alert today, though we haven’t yet seen this fully reflected in the price of risk as measured by the Volatility Index (VIX).” Haworth believes VIX, also referred to colloquially as the “fear index,” is a measure worth watching. He says if VIX rises into the 20+ range, it might indicate weakening equity market sentiment.
The S&P 500 is coming off two consecutive years of 25%+ total returns.1 A healthy labor market, steady consumer spending and a growing economy all contributed to favorable market conditions, much of which carries into 2025.
“Unemployment remains low, inflation remains modest, and the economy continues to grow at an above-average rate,” says Haworth.
“Unemployment remains low, inflation is modest, and the economy continues to grow at an above-average rate,” says Rob Haworth, senior investment strategy director with U.S. Bank Asset Management.
In the fourth quarter, the U.S. economy grew at an annualized rate of 2.3%, below the second quarter’s 3.0% reading and the third quarter’s 3.1% growth rate, but still considered solid growth.3 2024’s economic expansion contributed to ongoing corporate earnings growth.
January 2025’s equity market performance fueled questions about whether a market rotation was underway. The information technology sector, which led the market’s stellar 2023 and 2024 returns, lost ground in 2025’s opening month. Info tech, by far the largest of the S&P 500s eleven sectors (more than 30% of the index’s value) lagged the broader market notably in January.1
Technology stocks suffered a blow after the release of a new artificial intelligence (AI) large-language model from the Chinese company DeepSeek. The announcement was a revelation because of DeepSeek’s reported low development cost and the ability to generate results using less computing power. “There are lots of questions to be answered about DeepSeek and what the changes may mean for AI,” says Haworth. “However, at first blush, it appears to be more of a game-changer about whether the capacity needs for data centers and energy providers are as large as recently projected.”
With the large information technology sector dragging down the overall total return of the S&P 500 (2.78% in January), seven of the S&P 500’s eleven sectors outpaced the broader index.1
Another notable January equity market development was improved performance among small- and mid-cap stocks compared to large-cap stocks. Over the previous two years, large company stocks significantly outpaced mid- and small-cap stocks. In January, mid-cap stocks led the way, with small-caps and large-caps generating comparable total returns.4
“January’s results reflect that the struggling information technology sector is less of a factor in mid-cap and small-cap indices than it is in the S&P 500,” says Haworth. “We’ve seen the environment improve for industrial stocks, which would benefit small- and mid-cap results.”
Can U.S. stocks maintain the momentum of the last two years in 2025? “Inflation is waning, interest-rate cuts are in motion and earnings are trending higher, all of which bolster sentiment and provide (stock) valuation support,” says Terry Sandven, chief equity strategist for U.S. Bank Asset Management.
Yet potential new Trump administration policies remain a critical wild card, as evidenced by the market’s volatile performance around the President’s tariff plans. “Markets are still trying to evaluate how serious the tariff threat is,” says Haworth. “If fully implemented as planned, it will have a meaningful change in how we do business, from sourcing materials to supply chains.”
Haworth says it’s important to see how any changes are reflected in corporate earnings, which ultimately have the biggest impact on stock prices. “We’re early in the 4th quarter earnings season,” notes Haworth. “We won’t fully know where fourth quarter earnings stand until March.”
Anticipating continued solid economic growth, investors may wish to consider an equity overweight allocation, trimming fixed income positions within a diversified portfolio. “Our position is to own a globally diversified equity portfolio, not specifically focusing on U.S. stocks or particular sectors,” says Haworth. “It appears even though stocks have risen significantly for two years in a row, more upside potential remains.”
“We still think it’s a great time to be invested and for those with money in cash, it represents an opportunity to put capital to work in longer-term assets,” says Eric Freedman, chief investment officer with U.S. Bank Asset Management. He encourages investors to view markets with a long-term lens. “Timing the markets and trying to be precise on when to be in and when to be out is challenging,” says Freedman. “Investors should be aware there’s a lot of noise. We urge clients to take a deep breath, go back to your plan. That will increase your odds of success.”
This is an important time to check in with a wealth planning professional to make sure you’re comfortable with your current investments and that your portfolio is structured in a manner consistent with your time horizon, risk appetite and long-term financial goals.
The S&P 500 Index consists of 500 widely traded stocks that are considered to represent the performance of the U.S. stock market in general. Diversification and asset allocation do not guarantee returns or protect against losses. The Russell MidCap Index provides investors with a benchmark for mid-sized companies. The index, which is distinct from the large-cap S&P 500, is designed to measure the performance of mid-sized companies, reflecting the distinctive risk and return characteristics of this market segment. The Russell 2000 Index refers to a stock market index that measures the performance of the 2,000 smaller companies included in the Russell 3000 Index.
Stocks are shares of publicly traded companies can be bought and sold. These transactions occur on exchanges and over-the-counter (OTC) marketplaces. The activity of pricing, buying and selling stocks is all activity that occurs in what is generally called “the stock market.”
Stocks frequently move up and down. Between November 2023 and November 2024, the stock market trended higher (following a generally downward trend between August and October 2023), except for modest setbacks in April and October 2024.1 Solid U.S. economic growth, which helped boost corporate earnings, appears to be fueling today’s stock market rally. In addition, the Federal Reserve (Fed) reversed its longstanding interest rate policy that, for more than a year, held the target federal funds rate at a top level of 5.50%. In September, November, and December 2024, the Fed cut interest rates a total of 1.0%, its first rates cut in more than four years. However, the Fed scaled back expectations for 2025, projecting just two additional rate cuts in the new year.5 “The Fed’s interest rate stance is a prime consideration for equity investors in today’s market,” says Haworth.
These three indices are frequently quoted on daily news reports reflecting daily performance of the stock market. The Dow Jones Industrial Average, perhaps the most quoted index, reflects the performance of 30 prominent stocks listed on U.S. exchanges. The Standard & Poor’s 500 tracks a broader universe of 500 large U.S. stocks. The NASDAQ Composite Index provides a measure of performance of 2,500 stocks listed on the National Association of Securities Dealers (NASD) Automated Quotations exchange. These represent small-, mid- and large-cap stocks. Investors often track these indices, particularly over time, to measure broader stock market performance.
With the stock market up, inflation retreating and interest rates in flux, how should investors position their portfolios to capitalize on potential opportunities, while guarding against risks?
A fresh look at managing your cash and investments in today’s changing interest rate environment can help support your pursuit of the goals that matter most to you.
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