The start of 2025 has been, well, let’s just say bumpy. What awaits us in the coming months and for the remainder of the year? Coming up, we have some thoughts. 

From Thrivent Asset Management, welcome to Advisor’s Market360™, a podcast for you, the driven financial advisor. 

Bumpy, jarring, jerky. Any of these adjectives could be used to describe the U.S. economy during the first quarter of 2025. Will the ride smooth out or will we continue down this rutted road? 

To help us get a feel for what might happen in the coming months, we have three Thrivent Asset Management experts: Steve Lowe, Chief Investment Strategist, David Spangler, Vice President, Model and Mixed Portfolios and Kent White, our Vice President, Fixed Income Mutual Funds. 

Let's get into it… 

The last few months have been a bit of a wild ride. But what have been the key issues troubling markets? We asked Lowe... 

(Lowe) Yeah, one of the key issues is just uncertainty. There's a lot of uncertainty over economic policy and especially trade policy. There's uncertainty over immigration and the impact on the labor market. Geopolitical volatility is very high with shifting relationships, especially in Europe. 

With the current levels of volatility, we want to hear from Spangler how this uncertainty is affecting his approach and positioning. 

(Spangler) Well, it's interesting because there's always something to worry about. That's the nature of the markets. But what we're really trying to understand is whether there's a material break in trend or a sea change in policy. What we're primarily interested in is not overreacting to the moment. What we want to be really conscious of is limiting larger drawdowns. So, the idea here is that when things become more volatile, when things are more uncertain and unclear, you may want to bring your risk in some. At the same time, though, you don't want to overreact to short term market reactions. Evaluate each of your positions as you would anyway, but evaluate them in the context of, has the thesis broken? 

We also want to hear about the implications of the high uncertainty when it comes to rates and credit. For that, we turned to White: 

(White) There's definitely been a lot of uncertainty in the markets, as Steve and David just laid out. We're seeing some of the same impacts in fixed income where the markets are having a difficult time pricing various outcomes on a day-to-day basis. Risk markets generally don't like uncertainty. And the Treasury market has historically benefited from a flight to safety bid. Which is exactly what we've been seeing over the past month. If this uncertain market persists, we'd probably lean towards remaining overweight Treasuries in our portfolios. And in the credit markets this uncertainty has definitely not been factored into spreads. And we've seen spreads widened in virtually every fixed income asset class. We have always leaned towards being a little bit more defensively positioned and up in quality, which is our position right now. And we also like to keep some powder dry in the event of, you know, further spread, widening. We usually do that through holding larger cash balances or greater exposure to U.S. treasuries. 

The U.S. economy entered 2025 in pretty solid shape. Many people were expecting that the soft landing that the U.S. Federal Reserve, or Fed, had been trying to engineer was actually being achieved. But now we're hearing increasing mentions of recession. So how did the uncertainty in policy changes impact the economy? And where does that put us in regard to a potential recession? Here’s Lowe: 

(Lowe) The U.S. economy was in good shape coming into the year. You know, domestic demand was very strong. The job market was solid, and spending was relatively healthy. And you have this trend of rising productivity and this massive investment into artificial intelligence. The key risk now I think is lower confidence for both businesses and consumers. It's hard to commit to a long-term investment if you don't know what the future is. You don't know the rules. But there's often this disconnect between confidence in what people actually do, what they say, and how they feel is different than how they actually spend. Hard data is actually holding up pretty well right now. That's measurable data versus kind of survey data, and that's what's weak right now. You know, tariffs definitely pose a significant risk. The problem with that is that with trying to change the way trade works is the sequencing, because there's usually growth negative first and the benefits are longer term. But you already seeing some companies, you know, decide to invest in the U.S. 

We asked Spangler if he could provide some bright spots in the economy? 

(Spangler) I could imagine a slowdown, but I don't necessarily, at the moment, see a recession. There is obviously a lot more uncertainty, and there's uncertainty within consumers and within businesses. Businesses came into the year very optimistic, very optimistic that we were going to have lower taxes, lower regulation, that we were going to have a shift in policy that would be much more business friendly. Now, with a lot more uncertainty within policy, you're seeing that business sentiment has fallen very, very low. They're at levels now that are more associated with recession. So very low levels on now is a good time to expand or we're expecting higher sales over the next six months. Now, at the same time, though, results are looking okay. Businesses are showing higher sales. Unemployment is reasonable. It’s steady. At the moment, If businesses are saying one thing and maybe doing something different. The risk is, of course, if it continues, it can definitely begin to bleed into the hard data. Businesses can definitely begin to be concerned enough that they're not going to expand or not going to invest. They may even want to go into a conservation mode, reduce expenses, and that means potentially layoffs. Then we do have the risk of slowdowns or into recession. 

We’ve heard a lot of talk about consumer sentiment and how it may be a leading indicator of the economy’s health. We want to get White’s opinion on consumer sentiment and its reliability as an indicator. 

(White) I think that's going to be key to watch, too. It's just these soft survey data, the confidence numbers that came up recently, too. Does that begin to bleed into the hard data? That's going to be a very important thing for all of us to watch. With regard to the recession, I agree. I think while we're likely to see a negative GDP print for the first quarter, I think we're very unlikely to enter an actual economic recession at this point. Slower growth, but no recession. I think another thing we're really going to have to watch, though, is this potential trade policy impact. How does that impact businesses and corporations? Does it begin to impact their margins? If so, does that lead into layoffs, you know, dialing down their business cap-ex plans, and does that feed down into lower consumer spending? There's a lot of things that we've got to pay a lot of attention to here. But at the moment, I don't foresee a recession, just with the growth ahead of us. 

One of the key concerns around the tariffs imposed by President Donald Trump is their potential for causing higher inflation. There are also concerns about “stagflation” which is characterized by slow growth and a high unemployment rate accompanied by inflation. We want to hear what Lowe had to say about those two possibilities. 

(Lowe) Yeah, I do think we get a stagflationary impulse. It's not going to be anywhere near what it was, you know, in the 1970s with, you know, high inflation and high unemployment. But if you look at, estimates on tariffs, generally they're around the 1% hit to GDP economic growth and about a 1% bump in inflation. I'm more concerned, actually, about growth than inflation. Particularly as you know, higher prices can dampen consumption and investment also. And confidence can impact growth too. 

White has this to add about stagflation concerns: 

(White) Yeah, I think we'll very likely be looking at a period of modest stagflation. Risks are probably skewed to somewhat weaker growth and inflation at a minimum remains at current levels or ticks up a bit from here, especially if the administration's new tariffs are implemented fully. 

Spangler has a slightly different take on stagflation and describes how the economy could improve. 

(Spangler) One of the things I think that I would add to this is that there is the counterargument, if you will, is that the theme very much now, the story in the markets has been more of a slower growth stagflation, maybe a little slower growth, higher inflation. However, what we could see is some resolution to tariffs, and at the same time, too, resolution to the tax bill coming up near the end of the year, in addition to deregulation. I think deregulation is underappreciated. That can really unlock a lot of economic value within the economy. There can be a strong counterbalance to the tariffs. Another thing, too, is that even if there are tariffs and there probably are going to continue to be tariffs, is that that will affect maybe smaller and mid-cap companies, but the vast majority of the market is, of course, large-cap. Large-cap companies over the last number of years have accumulated substantial cash balances. They have a lot of cash that they can use to offset some of the tariff pricing. The United States, of course, has less of a tariff risk than many other parts of the world. So, it may not all be negative in the type of scenario that we're looking at here, even with more tariffs. We could actually see growth benefits from deregulation as well. 

So far, we have been focused on the U.S. economy. We want to broaden our discussion to include the global economy. With expectations rising in Europe, some are predicting the end of so-called U.S. exceptionalism. Here’s what Spangler has to say about that. 

(Spangler) Well, from an expectation standpoint, I think that might be a little exaggerated. The reason I say that is that overall, structurally, there hasn't been substantial changes to what has been the trend over a long period of time. We're looking for a change in the overall long-term trend, or a structural break or a sea change. It could be the case that Europe is going to be more fiscally responsive, that they're going to have more fiscal spending both on a consumer side and also within the military. Germany certainly has raised their spending more recently, but that's going to take a lot of time. You know, the spending may be coming into their economy in, in 2026 or 27, over a 10-year period, at least that's how long it may take for that spending to come into the economy. While at the same time, they remain still in a demographic challenge relative to the United States. Productivity is still far lower than it is in the United States. And within innovation, still the United States is the leader within the world. So more than 50% of global venture capital spending comes to the United States. It's about 20% in Europe. So I think that this idea that overall U.S. exceptionalism, if you will, has come to an end, is premature. 

Recently, European markets have outperformed U.S. markets. Lowe has some insights on why that has come to pass. 

(Lowe) If you look at the rally so far in Europe, it's been entirely through valuation. Higher multiple earnings haven't changed, so they're expecting this change. Europe is very dependent on trade, and tariffs would hurt significantly. And yet the markets are rallying as if this is going to benefit them. And also, they're doing a lot of fiscal spending. Outside of Germany, there aren't a lot of countries in Europe that can raise their debt substantially. It's been an issue before for Italy and other countries. So, we'll see how that works out. 

With international markets outperforming U.S. through the first quarter, we asked Spangler if that will affect his outlook on international stocks. We also want to know how he is weighing developed markets versus emerging markets, or EM. 

(Spangler) So far, we have not made any changes in terms of our overall allocations. We remain about 3 or 4% underweight international. It's mostly in developed relative to EM. We're about neutral-ish to a little underweight in EM. Most of the underweight, as I just mentioned, is in developed countries. Again, we're looking to see if there's a long-term change in trend, which we don't necessarily see at this point. If there is, then we would need to reevaluate that underweight overall. 

Last year, the Magnificent Seven, or Mag Seven — Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta and Tesla — and other large-cap tech names powered the market. But so far this year, they've had challenges. We want Spangler’s opinion on whether these stocks will continue their earlier trajectory.

(Spangler) Of course, in a shorter term, that's hard to tell. But yes, there was significant concentration within the markets. An abnormal amount of market returns were coming from a very small number of stocks, be it five or seven of the largest multi-trillion dollar companies in the world. And that is a situation that can't persist indefinitely. So, some retracement, some retrenchment would be expected, and we've seen that. Some of the Mag Seven are down substantially. Tesla is an example, is down nearly 50% from its highs. I would expect some continued broadening out, but I think to me, the broadening out is more generally within growth to value, as we have seen so far this year. I think that if we are going to experience some economic slowing, if we do expect some rise in prices, generally speaking, that is not a good environment for mid-caps and small-caps overall. So small-caps margins are far more challenged. If the economy isn't growing, then that's going to be a challenge to sales within small-caps. The large-caps, they're global companies. They have tremendous cash flows, profit margins and overall, they're able to weather the storm if we do have a little bit more economic weakness overall. 

Valuations entered the year rather rich, but there was a mini correction in the first quarter of this year. We asked Lowe how they are looking now… 

(Lowe) Yeah, the valuation was well above median. It's reset lower. Particularly with tech selling off. And if you look at the NASDAQ 100 that's reset much more. I do think that the reset in valuations is good. It takes some of the froth out and allows markets to reassess and recover in advance again.But at the end of the day, it's all going to be dependent on earnings growth. And historically earnings growth drives markets over longer time frames not valuation. Valuation explains very little over one year period. I think it's about 10%, but a lot over a long-term period. Valuation matters more on a 10-year horizon. 

We also want to get Lowe’s thoughts on earnings growth. 

(Lowe) Yeah, generally good. There's some rising uncertainty. If you look at earnings or revisions, they've been more negative than positive, so they're pricing a little bit less growth. At one point, earnings expectations for this year were about 14%, and now that's closer to 11%. And companies with international exposure might face headwinds from retaliatory tariffs. And earnings expectations for industrials also have been cut partly on trade uncertainty. It's good overall. I think downgrade in earnings expectations can be good. It can reset expectations, and the market can move on, especially with more reasonable growth expectations. 

In recent months, the fixed income message was to get your yield now. We asked White if that is still good advice. 

(White) All our yields are still at attractive levels. The investment-grade corporate bond index is currently yielding over five and a quarter percent—off the peak—but still materially higher than they've been over most of the last 15 years. This yield, combined with the total return opportunity, should the economy weaken, materially from here, and other risk markets sell off, it's still pretty compelling, in my view. Yield is also the biggest predictor of returns in fixed income, and high-yield corporates right now are currently yielding near seven and a half percent, which also looks pretty attractive, especially in a slow growth environment, non-recessionary. I feel like fixed income is still a great place to be. Might see some volatility, but overall, the yield is very attractive. 

We also want to get White’s outlook on credit markets and corporate bonds… 

(White) Corporate bonds have cheapened a little bit this year, but that was off a very historically rich level. So recent growth and trade policy uncertainty are priced in better than they had been at this point, but credit spreads are still trading at levels that we don't find particularly attractive yet. These trade and growth uncertainty, those risks are not going away anytime soon. We believe that risk is still skewed to wider spreads over the course of the remainder of the year. However, offsetting that is balance sheets in both investment grade and high yield remain pretty strong and should provide a decent cushion if we only had a soft patch in the economy. 

Next, we want to hear how each of our experts are positioning assets. We will start with Lowe: 

(Lowe) Overall, we’re relatively close to home. I would say an overall risk in mixed assets. So it's a bit overweight equities and underweight fixed income. And should we get opportunities to add at lower prices, I think we would take advantage of that.  

Next, we will drill down on equities. Here’s Spangler: 

(Spangler) As Steve mentioned, we're overweight equity. We're overweight by about 1.5%, and then another 1% or so in private equity. So 2.5% overall. Generally speaking, that's about our long-term strategic overweight, when the economy is reasonably good or better. And we have capacity to add. So, if we did see a pullback within the equity markets, we would add equity, and we've discussed it several times already this year, and we're going to keep our eye on that. Within the domestic versus international, we're underweight international. So, one of the key things that we want to continue to look at there is whether we want to not necessarily go to neutral, but whether we would have a little less of an underweight to international. I think within large-, mid-and small-caps on the domestic side, we're fairly comfortable with where we are. We're overweight large-caps, we're overweight mid-caps, but we're underweight small-caps. So generally speaking, we haven't made any larger shifts so far to this year. We're watching closely to see whether there are more, intermediate, longer term structural shifts that would cause us to want to reposition. But at the current time, we're more, generally staying with our positioning that we had at the end of last year. 

And finally, we will let White describe his positioning on the fixed income side: 

(White) On the fixed income side, we're still positioned a little bit cautiously, a little bit defensively positioned. And a lot of that just comes down to valuations where we don't feel like we're getting paid enough for the risks that could be out there. So, some examples of that is we're a little bit more overweight treasuries than we normally are in our portfolios. We've also gone from some of the more traditional credit like corporate credit into securitized, where we've gotten good yields and things like mortgage-backed securities. So, they're higher quality but still getting a good yield. And we're just being a little bit more up in quality in general across our portfolios, where up higher in the rating spectrum in our corporate bonds. So those are just a few of the things that we're doing just still remaining a little bit, up in quality, defensively positioned. And should things begin to weaken, or valuations become more attractive, we've got dry powder to move back into the more traditional corporate credit.

(Music)

That wraps up our capital markets perspective for Q2. Once again, we would like to thank Steve Lowe, David Spangler and Kent White for their insights. What did you think of this episode? Email us at podcast@thriventfunds.com with your feedback or questions for our experts. Want more episodes of Advisors Market360™ and other market and investing insights? Visit us at thriventfunds.com, where you can learn how we can partner with you, the driven financial advisor. Bye for now. 

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All information and representations herein are as of 3/25/2025 unless otherwise noted. 

Past performance is not necessarily indicative of future results. 

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