At a glance

Geopolitics remain investors’ primary focus, with corporate earnings and macroeconomic data releases deferential to the latest tariff and trade headline. We see three scenarios unfolding in the months ahead, but despite the wide span of countries involved, U.S. and Chinese relations will be the key outcome. Our baseline scenario, or what we deem most probable, centers on aggregate/average tariffs above pre-April 2 levels but below the administration’s ceiling levels announced post-April 2 for those countries that do not retaliate with the administration’s April 2 stated levels. Those headline tariff levels would likely fall in the 10%-20% range. The positive capital market scenario is a fast détente, with resultant tariffs below 10%. The negative capital market scenario envisions a sustained push to onshore manufacturing with headline tariff rates close to or exceeding the April 2 baseline, and countries beyond China challenging the current administration’s posture.

Within the baseline scenario, we see asset prices stuck in a defined range that is below the pre-tariff announcement day. The 90-day tariff implementation pause offers a range of possibilities, but the longer it takes to lower aggregate tariff rates, the greater the scar tissue for businesses and consumers who may anchor on higher costs impacting their spending decisions. The positive scenario likely pushes riskier asset classes higher than early April levels, but unless that scenario develops quickly and the administration can begin to implement more perceived pro-growth policies like corporate and personal tax rates, gains may follow a gradual ascent higher. The negative scenario anticipates the global economy enduring a significantly higher cost structure and asset prices falling further.

Investors need to revisit tried and true disciplines in all environments, including this one: Remaining communicative on liquidity needs and risk tolerance, establishing and revisiting a formal financial plan and separating the emotional highs and lows that can accompany large swings in asset prices. The content below is our latest thinking as of early April, but the dynamic environment we expect to persist warrants frequent updates. We look forward to engaging with you and appreciate your trust.

― Eric Freedman, Chief Investment Officer, U.S. Bank

Global economy

Quick take: U.S. tariff announcements are dampening global economic growth prospects with the magnitude and duration of tariffs key factors driving near-term prospects. Asian economies, including China, are likely to see the biggest impacts with more modest hits to European growth.

  • Recent tariff announcements are dampening growth prospects, with uncertainty downgrading solid corporate fundamentals and stable consumer activity. President Trump announced reciprocal tariffs on April 2 with 10% tariffs on all countries and higher rates for countries identified with trade barriers exceeding that level. While the administration announced a 90-day pause to those tariffs on April 9, the forward view remains shaped by tariff implementation timing and magnitude. U.S. consensus economic expectations call for moderating but still-positive economic growth as restrictive Federal Reserve (Fed) interest rates gradually slow economic activity, with tariffs uncertainty a challenge for growth through higher costs. Softening consumer and small business surveys reflect unease around policy uncertainty but may warn of further slowing ahead. Historically, correlations between sentiment-based surveys and forward asset returns are low, but we must look for corroboration (or lack thereof) via economic data such as retail sales that reflect changing behavior. Despite weak confidence surveys and elevated inflation concerns, consumers remain healthy with respect to pre-April 2 data, with rising inflation-adjusted incomes supporting spending. Recent comments from retailers, restaurants and airlines regarding early signs of slower activity bear monitoring. Concurrently, U.S. corporate fundamentals and profitability remain solid, as well, but have downside risk as they incorporate tariff costs.
  • Economies outside the U.S. experienced slower growth, with global trade headwinds offsetting some of the prior lift from an improved fiscal outlook and a consumer recovery. Consensus economic forecasts shifted to flatter growth prospects across the globe as economists catch up to potential tariff impacts and offsets. The largest downgrades are across Asia given the large U.S. tariffs on China. The U.S. is China’s second-largest export market after the Association of Southeast Asian Nations. Growth expectations for the eurozone and the United Kingdom (U.K.) remain modest, with both likely to avoid recession helped by lower interest rates and slowing inflation. A peaceful resolution to the Russia/Ukraine conflict could boost investor sentiment and economic prospects, but the ultimate outcome remains unclear. Pre-tariff announcement, China’s government reiterated its goal for 5% economic expansion in 2025 and expressed a willingness to use fiscal and monetary policy tools to improve consumption, but the magnitude and duration of tariffs remain the biggest swing factor for near term prospects.

U.S. equity market

Quick take: Tariffs and associated economic growth and company profitability risks are weighing on investor sentiment, elevating U.S. equity price volatility, while consumer and business spending will determine medium- to longer-term price movements.

  • Wide ranging potential policy outcomes cloud U.S. equities’ near-term outlook. Prior to the April 2 tariff announcements, solid business and consumer spending coupled with stable inflation and anticipated Fed policy easing informed analysts’ positive U.S. large-company earnings growth forecasts for 2025. Post-April 2, investors, consumers and corporate capital allocators are weighing a range of policy outcomes, from a shorter-term negotiation process to full long-term economic reshoring scenario.
  • Headlines will likely overwhelm fundamentals driving equity price movements until policy clarity emerges. Analysts have not materially adjusted earnings growth forecasts at the time of this publication, but we anticipate companies will likely withhold, temper or offer wide-ranging guidance when reporting first quarter results, unofficially beginning the week of April 8. Meanwhile, trade negotiations’ impact on domestic growth and inflation remains uncertain, clouding the Fed’s policy response.
  • First quarter results and company commentary will also impact sentiment into midyear. According to Factset, analysts forecast first quarter year-over-year earnings and revenue growth of 4.2% and 7.0%, respectively, modestly below fourth quarter results. It is likely that many companies that provide components into the manufacturing process or products into the retail distribution channel will post strong results this quarter, since manufacturers and retailers have stocked up on key components and products in front of tariff deadlines. This demand pull-forward environment may suggest that the next couple of quarters could be more challenging.
  • We favor a balanced approach combining growth-oriented technology and defensive, income-oriented sectors. The world is changing at an unprecedented pace, and speed, scale and efficiencies do not occur without technology. This presents a favorable backdrop for AI-related buildout beneficiaries. Meanwhile, defensive/income-oriented sectors with favorable risk profiles should continue to respond favorably in a slow-growth environment, helping mitigate periods of economic and political uncertainty.

International equity markets

Quick take: Trade policy outcomes will be key to unlocking foreign equity opportunities, with attractive valuations, major policy support and a value-oriented index composition representing positive catalysts for developed markets. While materialized trade risks temper emerging markets’ near-term prospects, the combination of solid earnings growth and cheap valuations underscore the region’s return potential.

  • Weak economic data and subdued asset price performance in 2024 set the stage for a first quarter rebound in developed market equities. Economic growth appeared to be in recovery mode pre-tariff announcements, with Germany announcing a landmark 500 billion euros stimulus package while bond yields reflect further central bank rate cuts in Europe and the U.K., supporting borrowers. Near-term, uncertain tariff policy outcomes discussed above as well as the ongoing Russia-Ukraine conflict continue to weigh on investor sentiment. Inexpensive valuations compared to other equity categories, strong current income with a 3.0% dividend yield and 1.4% share buyback yield, along with a higher allocation toward value-oriented companies provide a return buffer if investor sentiment remains overly cautious relative to the more growth-oriented U.S. market.
  • Corporate fundamentals remain mixed across foreign markets. Before the tariff announcements, mid-single-digit revenue growth expectations paired with reasonable profit margins translated to modestly positive 2025 growth expectations in foreign developed markets. Forecasts remain in flux, pending tariff implementation breadth (country as well as sector specific) and depth (final rate imposed, if any). Meanwhile, strong free cash flow growth in Japan remains a bright spot, in contrast to poor cash flow growth in core European markets like France and Germany. Subdued valuations already reflect a degree of mixed fundamental data and trade policy uncertainty, which could mute downside risks and provide upside potential if economic outcomes improve.
  • Cheaper valuations and improving investor sentiment toward China benefit emerging market stocks, but materialized tariff risks temper the region’s growth prospects. Improving sentiment toward Chinese stocks, which comprise nearly one-third of the emerging market equity index, bolstered emerging market returns in the first quarter. While China’s policymakers unveiled a series of measures to stimulate domestic consumption, China’s tougher response to the Trump Administration’s “Liberation Day” reciprocal tariff announcement muddies emerging equities’ near-term prospects. Oil-importing countries should benefit from cheaper energy costs, but at the expense of oil exporters. Despite expectations for moderating economic growth, low-double-digit profit margins supported pre-tariff expectations of robust earnings growth in 2025, though analysts’ estimates will remain fluid amid escalating U.S.-China announcements.

Bond markets

Quick take: Meaningful bond income offers critical portfolio diversification benefits during times of market volatility. Core exposures to high-quality bonds with supplemental allocations to riskier high yield debt and esoteric bond types like non-agency mortgages and reinsurance (where appropriate) support return opportunities.

  • Bond yields reflect expectations for the Fed to resume interest rate cuts in the second quarter. Solid labor market conditions prompted the Fed to pause cuts in the first quarter to focus on slowing inflation. Recognizing the 4.25%-4.50% policy rate is still somewhat restrictive, the Fed noted hesitancy to cut rates too soon and risk further inflation despite recent market stress, particularly given recent tariff announcements and the potential for higher prices. Expectations for 2025 remain volatile, currently calling for three to four 0.25% rate cuts despite recent Fed officials’ comments reflecting a patient approach.
  • Treasury yields fairly compensate for Fed policy expectations, inflation ambiguity and growing Treasury bond supply. Recent administration efforts to reduce government spending did little to cut the federal deficit thus far, which remains around 7% of gross domestic product (GDP). Treasury issuance may increase in coming quarters, should Congress lift the debt ceiling, but the Fed announced plans to stabilize its Treasury holdings to smooth bond market functioning.
  • Corporate and municipal bond prices fell relative to Treasuries and now offer more incremental yield than historical averages. Issuer credit fundamentals have been on solid footing, but growing investor concern that tariffs will drag on economic growth and corporate profitability sent corporate and municipal bond prices lower. The extra yields on investment-grade corporate and municipal bonds over Treasuries, which compensate for their incremental risk, quickly adjusted from below to above normal. Municipal bond yields now offer significantly more yield relative to Treasuries (after adjusting for tax benefits) compared to historical norms, presenting opportunities for highly taxed investors.
  • Less traditional bond categories present extra yield, albeit with incremental volatility. Residential mortgages not backed by the government offer yields near 7%. Sound credit fundamentals, structural credit protection from mortgage delinquencies and borrower incentives to pay low-cost fixed rate mortgages support the category. Similarly, highly rated collateralized loan obligations have minimal credit risk due to strong structural protection from losses in underlying bank loan pools but, like other esoteric bond categories, can experience added volatility in periods of uncertainty. Insurance-linked securities (reinsurance) can introduce a unique return stream to portfolios with income tied to insurance premiums and insured losses in natural catastrophes. Recent insurance premium increases support over 10% yields on reinsurance, providing ample cushion against historical insurance claim losses, which average near 2% annually.

Real assets markets

Quick take: Inflation uncertainty highlights real assets’ importance for diversified portfolios, although the category remains susceptible to ongoing volatility amid tariff uncertainty. Solid income distributions and steady rent growth trends provide a positive baseline outlook for publicly traded real estate.

  • The largest publicly traded real estate categories have sound fundamentals. Effective rent growth remained positive across most property types, fueling net operating income growth of around 3% year-over-year for broad exposures to real estate investment trusts (REITs). Occupancy rates near 93% for the past several years also bolster REIT fundamentals. Specifically, retail property occupancy rates improved to 97%. Solid retail fundamentals are encouraging for broader real estate opportunities, since retail is one of the largest categories in REITs and it can be sensitive to underlying economic conditions.
  • REITs compete with Treasuries as a source of income in investor portfolios while rent increases provide some protection from sustained inflation. REIT cap rates, the net operating income generated on a property compared to its price, are above their long-term average across property types. However, comparing REIT income to Treasury yields suggests REIT valuations remain somewhat elevated. REIT prices rose as Treasury yields fell in the first quarter. While REITs may stand to benefit if yields continue to decline, they also remain susceptible to deteriorating investor sentiment and economic growth concerns. Lower Treasury yields improve the attractiveness of income opportunities in REITs and reduce financing costs for property owners.
  • Commodity performance is split between categories most sensitive to growth, like energy commodities, and safe havens like precious metals. Investor demand pushed gold prices to an all-time high in the first quarter, with further gains early in the second quarter amid a shifting geopolitical landscape. Foreign central banks continued to add gold in reserves, providing a steady source of demand. Energy commodities like oil hinge on global economic activity fueling demand. The Organization of the Petroleum Exporting Countries (OPEC) increased oil production in April that, combined with speculation for recent economic growth concerns, propelled prices lower over a brief period. While commodities have served as an important inflation hedge over time, they also remain susceptible to growth expectations and deteriorating economic activity.

Alternative investments

Quick take: Hedge funds are positioned well for the current market volatility, and managers are working through this environment seeking opportunities.

  • Hedge fund managers increased their short positions in the first quarter of the year, reducing their net exposure and adjusting their portfolios’ sensitivity to broad market price movements. Instead of actively hedging for broad market declines, managers are approaching volatility this year by more actively selling-short individual stocks.
  • Economic and geopolitical risks form a constructive background of market volatility and significant stock price movement. This environment lends itself to a wide range of performance among securities, creating opportunities for hedge funds to generate strong returns with low correlation to underlying indices. Equity market neutral is a strategy that performed well last year and can offer greater stability amid geopolitical and economic uncertainty.
  • Hedge fund managers trade their portfolios frequently, pursuing investments to both buy long or sell short. When evaluating the spectrum of investment approaches spanning passive to active, hedge funds are at the edge of active management. We are intrigued by managers seeking to exploit market turmoil and inefficiencies. Event-driven strategies are also gaining renewed interest from investors anticipating a strong post-election merger and acquisition cycle.

Private markets

Quick take: Investor optimism in private market deal activity and technology company public listings was quickly met with tariff announcements and federal spending cut uncertainty. Looking ahead, the competing forces of pro-growth regulatory and tax policies with tariffs and federal spending cuts will delay some of the deals in the pipeline until more clarity emerges.

  • Conditions remain favorable for greater deal activity in 2025. Deal starts increased in January and February compared to 2024, but the time spent performing diligence also increased to account for uncertainty before closing deals. We still foresee strong deal activity this year, particularly in the second half, but anticipate a bumpy ride in the near term. Evidencing elevated market volatility and uncertainly, both Klarna and StubHub postponed their highly anticipated initial public offerings (IPOs).
  • Private debt managers raised record amounts of capital with significant interest from wealthy investors. The lending shift from banks to non-bank private debt asset managers accelerated over the past five years. Direct lending, a type of private debt solution, attracted a record $91 billion in 2024 from investors. With more capital available in this segment of the market, competition is heating up. Until buyout deal activity picks up, investment opportunities for these private debt funds remain limited, further intensifying competition that reduces credit spreads, or the additional yields investors receive for taking repayment risk.
  • Large pools of capital raised by private debt funds make us wary. Lower future returns could result if fund managers loosen credit underwriting standards to deploy the large pools of raised capital, especially if the economy hits a soft patch and the companies are unable to service the debt. For this reason, we continue to focus on opportunities in the middle-market segment where competition is much less intense and traditional lenders such as smaller banks are less active. Borrowers in this segment value the speed, flexibility and certainty of execution provided by the private debt managers.
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This commentary was prepared April 2025 and represents the opinion of U.S. Bank. The views are subject to change at any time based on market or other conditions and are not intended to be a forecast of future events or guarantee of future results and are not intended to provide specific advice or to be construed as an offering of securities or recommendation to invest. Not for use as a primary basis of investment decisions. Not to be construed to meet the needs of any particular investor. Not a representation or solicitation or an offer to sell/buy any security. Investors should consult with their investment professional for advice concerning their particular situation. The factual information provided has been obtained from sources believed to be reliable but is not guaranteed as to accuracy or completeness. Any organizations mentioned in this commentary are not affiliated or associated with U.S. Bank in any way.

U.S. Bank and its representatives do not provide tax or legal advice. Your tax and financial situation is unique. You should consult your tax and/or legal advisor for advice and information concerning your particular situation. Diversification and asset allocation do not guarantee returns or protect against losses. Based on our strategic approach to creating diversified portfolios, guidelines are in place concerning the construction of portfolios and how investments should be allocated to specific asset classes based on client goals, objectives and tolerance for risk. Not all recommended asset classes will be suitable for every portfolio.

Past performance is no guarantee of future results. All performance data, while deemed obtained from reliable sources, are not guaranteed for accuracy. Indexes shown are unmanaged and are not available for investment. The S&P 500 Index is an unmanaged, capitalization-weighted index of 500 widely traded stocks that are considered to represent the performance of the stock market in general. The Volatility Index (VIX) is the annualized implied volatility of a hypothetical S&P 500 stock option with 30 days to expiration. The Bloomberg U.S. Aggregate Bond Index is a broad-based benchmark that measures the investment-grade, U.S. dollar-denominated, fixed-rate taxable bond market, including Treasuries, government-related and corporate securities, mortgage-backed securities, asset-backed securities and commercial mortgage-backed securities. The Bloomberg U.S. Corporate Bond Index measures the investment grade, fixed-rate, taxable corporate bond market and includes U.S. dollar denominated securities publicly issued by U.S. and non-U.S. industrial, utility and financial issuers. The Bloomberg U.S. Corporate High Yield Bond Index measures the U.S. dollar denominated, high yield, fixed-rate corporate bond market. The Bloomberg U.S. Municipal Bond Index is a broad-based benchmark that measures the investment grade, U.S. dollar denominated, fixed tax-exempt bond market. The index includes state and local general obligation, revenue, insured and pre-refunded bonds. The Bloomberg High Yield Municipal Bond Index is an unmanaged index consisting of non-investment grade, unrated or below Ba1 bonds. Equity securities are subject to stock market fluctuations that occur in response to economic and business developments. International investing involves special risks, including foreign taxation, currency risks, risks associated with possible difference in financial standards and other risks associated with future political and economic developments. Investing in emerging markets may involve greater risks than investing in more developed countries. In addition, concentration of investments in a single region may result in greater volatility. Investing in fixed income securities is subject to various risks, including changes in interest rates, credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications, and other factors. Investments in debt securities typically decrease in value when interest rates rise. The risk is usually greater for longer-term debt securities. Investments in lower-rated and non-rated securities present a greater risk of loss to principal and interest than higher-rated securities. Investments in high yield bonds offer the potential for high current income and attractive total return but involve certain risks. Changes in economic conditions or other circumstances may adversely affect a bond issuer’s ability to make principal and interest payments. The municipal bond market is volatile and can be significantly affected by adverse tax, legislative or political changes and the financial condition of the issuers of municipal securities. Interest rate increases can cause the price of a bond to decrease. Income on municipal bonds is free from federal taxes but may be subject to the federal alternative minimum tax (AMT), state and local taxes. There are special risks associated with investments in real assets such as commodities and real estate securities. For commodities, risks may include market price fluctuations, regulatory changes, interest rate changes, credit risk, economic changes and the impact of adverse political or financial factors. Investments in real estate securities can be subject to fluctuations in the value of the underlying properties, the effect of economic conditions on real estate values, changes in interest rates and risks related to renting properties (such as rental defaults). Hedge funds are speculative and involve a high degree of risk. An investment in a hedge fund involves a substantially more complicated set of risk factors than traditional investments in stocks or bonds, including the risks of using derivatives, leverage and short sales, which can magnify potential losses or gains. Restrictions exist on the ability to redeem or transfer interests in a fund. Private capital investment funds are speculative and involve a higher degree of risk. These investments usually involve a substantially more complicated set of investment strategies than traditional investments in stocks or bonds, including the risks of using derivatives, leverage, and short sales, which can magnify potential losses or gains. Always refer to a Fund’s most current offering documents for a more thorough discussion of risks and other specific characteristics associated with investing in private capital and impact investment funds. Reinsurance allocations made to insurance-linked securities (ILS) are financial instruments whose performance is determined by insurance loss events primarily driven by weather-related and other natural catastrophes (such as hurricanes and earthquakes). These events are typically low-frequency but high-severity occurrences. Private equity investments provide investors and funds the potential to invest directly into private companies or participate in buyouts of public companies that result in a delisting of the public equity. Investors considering an investment in private equity must be fully aware that these investments are illiquid by nature, typically represent a long-term binding commitment and are not readily marketable. The valuation procedures for these holdings are often subjective in nature. Private debt investments may be either direct or indirect and are subject to significant risks, including the possibility of default, limited liquidity and the infrequent availability of independent credit ratings for private companies.

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Investment products and services are:
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The information provided represents the opinion of U.S. Bank and is not intended to be a forecast of future events or guarantee of future results. It is not intended to provide specific investment advice and should not be construed as an offering of securities or recommendation to invest. Not for use as a primary basis of investment decisions. Not to be construed to meet the needs of any particular investor. Not a representation or solicitation or an offer to sell/buy any security. Investors should consult with their investment professional for advice concerning their particular situation.

U.S. Bank and its representatives do not provide tax or legal advice. Your tax and financial situation is unique. You should consult your tax and/or legal advisor for advice and information concerning your particular situation.

Diversification and asset allocation do not guarantee returns or protect against losses.

Based on our strategic approach to creating diversified portfolios, guidelines are in place concerning the construction of portfolios and how investments should be allocated to specific asset classes based on client goals, objectives and tolerance for risk. Not all recommended asset classes will be suitable for every portfolio.

Past performance is no guarantee of future results. All performance data, while obtained from sources deemed to be reliable, are not guaranteed for accuracy.

Equity securities are subject to stock market fluctuations that occur in response to economic and business developments.

International investing involves special risks, including foreign taxation, currency risks, risks associated with possible differences in financial standards and other risks associated with future political and economic developments. 

Investing in emerging markets may involve greater risks than investing in more developed countries. In addition, concentration of investments in a single region may result in greater volatility.

Investments in fixed income securities are subject to various risks, including changes in interest rates, credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications and other factors. Investment in fixed income securities typically decrease in value when interest rates rise. This risk is usually greater for longer-term securities. Investments in lower-rated and non-rated securities present a greater risk of loss to principal and interest than higher-rated securities.

Investments in high yield bonds offer the potential for high current income and attractive total return, but involve certain risks. Changes in economic conditions or other circumstances may adversely affect a bond issuer’s ability to make principal and interest payments.

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The municipal bond market is volatile and can be significantly affected by adverse tax, legislative or political changes and the financial condition of the issues of municipal securities. Interest rate increases can cause the price of a bond to decrease. Income on municipal bonds is free from federal taxes, but may be subject to the federal alternative minimum tax (AMT), state and local taxes.

There are special risks associated with investments in real assets such as commodities and real estate securities. For commodities, risks may include market price fluctuations, regulatory changes, interest rate changes, credit risk, economic changes and the impact of adverse political or financial factors. Investments in real estate securities can be subject to fluctuations in the value of the underlying properties, the effect of economic conditions on real estate values, changes in interest rates and risks related to renting properties (such as rental defaults).

Hedge funds are speculative and involve a high degree of risk. An investment in a hedge fund involves a substantially more complicated set of risk factors than traditional investments in stocks or bonds, including the risks of using derivatives, leverage and short sales, which can magnify potential losses or gains. Restrictions exist on the ability to redeem or transfer interests in a fund.  A hedge fund’s offering memorandum and related materials contain important information about investing in the fund, including the investment strategies, fees, expenses, and levels of risk involved in the fund’s investment strategies.  Potential investors are encouraged to review a fund’s offering memorandum and related materials with tax and legal advisors before investing in a hedge fund.

Private equity investments provide investors and funds the potential to invest directly into private companies or participate in buyouts of public companies that result in a delisting of the public equity. Investors considering an investment in private equity must be fully aware that these investments are illiquid by nature, typically represent a long-term binding commitment and are not readily marketable. The valuation procedures for these holdings are often subjective in nature.

Private debt investments may be either direct or indirect and are subject to significant risks, including the possibility of default, limited liquidity, and the infrequent availability of independent credit ratings for private companies.