(Branstad) Hi, everyone. Thank you for joining us today for Thriving Asset Management's capital markets perspective on the second quarter of 2025. I'm Jeff Branstad, portfolio manager for Thrivent’s Managed Portfolio suite. I'm joined today with David Spangler, head of mixed assets and market strategy, Kent White, head of fixed income. And Steve Lowe, our chief investment strategist. 

Q1 was a bit of a wild ride. So let's jump right into the key issues troubling the markets. Steve, what would you say are the key concerns and drivers?

(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. The end result of all this is consumer confidence is down. And, business confidence is down.

(Branstad) David, how does this level of uncertainty change your 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. Evaluate each of your positions as you would anyway, but evaluate them in the context of, has the thesis broken?

(Branstad) So Kent. How about fixed income? What are the implications of the high uncertainty for rates and credit?

(White) 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.

(Branstad) The U.S. economy entered 2025 in pretty solid shape. A lot of people were expecting that the soft landing that the Fed had been working toward engineering was actually achieved. But now we're hearing more and more increasing mentions of recession. So how did the uncertainty in policy changes impact the economy? And, where does that put us in regards to a potential recession? 

(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.

(Branstad) David, what are your thoughts on that? Do you see a recession coming, a slowdown? What kind of things are concerning you?

(Spangler) I could imagine a slowdown, but I don't necessarily, at the moment see a recession. You know, 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're 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. I mean, they're at levels now that are more associated with recession. So very low levels on “now is a good time to expand” or “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 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. They're not going to invest. They may even want to go into sort of a conservation mode, reduce expenses. And that means, potentially layoffs. At the moment, though, we don't necessarily see that.

(White) With regard to the recession, I agree, I think what 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, you know, does it begin to impact their margins, and 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? So, there's a lot of things that we've got to pay a lot of attention to here.

(Branstad) Steve, how's the consumer holding up?

(Lowe) Yeah, well overall. There’s still this bifurcation because the lower and middle tier have more headwinds. And that kind of shows up a little bit in consumer confidence which has fallen. So, the key concern for a lot of consumers right now is still high level of prices. Tariffs could exacerbate that concern because they will push up prices, at least for a while. There's more concern over jobs, even though the job market is relatively healthy, and concern about finances right now. You know, another, key point for consumers is that housing affordability still remains relatively poor. You know, rates have fallen. That helps. But they’re still relatively high. And you are seeing rising delinquencies in credit cards, mortgages, autos and it’s across income tiers. Now, you’re starting seeing upper income people have higher delinquencies. It's a low level. The upper tier has been spending, they've been driving a lot of, you know, service spending and other spending. So, a concern there is that markets have boosted wealth. And that's one thing fueling this is if we get a significant downturn, how does that impact? Because the upper tier is very important for the overall economy. They spend a lot.

(Branstad) One of the key concerns around the tariffs has been the potential for higher inflation. And we're also hearing a lot of mentions of stagflation where we're talking slower growth yet still higher prices. What are your expectations on that?

(Lowe) Yeah, I do think we get a stagflationary impulse. 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.

(Branstad) Kent, I'd like to hear your views on this too.

(White) 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) One of the things I think that I would add to this is that there is sort of the, the counterargument, if you will, which 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 to the tax bill coming up near the end of the year, in addition to deregulation. And I think the deregulation is under appreciated. That can really unlock a lot of economic value within the economy. That could be a strong counterbalance to the tariffs. Another thing, too, is that even if there are tariffs and are 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, and 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. And 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. 

(Branstad) The Fed is in a really tough spot here because they're trying to balance fighting inflation while also supporting a potentially softening economy. So, what do you think, Kent, that they're actually going to do?

(White) There are competing risks around the Fed's dual mandate right now. Upside risks to inflation, downside risks to the economy. Faced with the possibility of some stagflation, I think the Fed will likely remain on hold for the next few meetings. And at the same time, the Fed also recently announced downside risk to economic growth and would probably not be too slow to act if weakness showed up in the labor markets or the broader economy. 

(Lowe) Yeah. And the market's read of the Fed chair Jerome Powell was generally pretty dovish. The overall message, though, was kind of one of uncertainty. And Powell kept using that word over and over again. So, I think in the near term, you know, for a couple of months, they just sit on their hands and, you know, watch what happens.

(Branstad) They're dealing with the same uncertainty that the markets are, and they don't want to react before they have some better feelings of where things are going. 

(Lowe) Exactly.

(Branstad) Rates they've fallen. While many people were expecting them to be stickier. Kent, what's your outlook for the rest of the year?

(White) So, a lot of the move higher in rates earlier this year was due to the initial economic growth optimism that came along with the new administration. And in addition to a slower path back to the Fed's target inflation rate getting priced in. So, we had higher rates to begin the year. Since then we've had this uncertainty, shock, we've all been talking about. The Fed's been talking about. And 10-year Treasury yields are about 50 basis points lower, or half a percent lower than their peak in January. Near term, I think we may see a potential back up in rates once there's a little bit more visibility into the new administration's policies. But beyond that, I think growth concerns are likely to return to the market. And this combined with the Treasury Secretary's goal of pushing down yields, should drive yields, and rates lower by year end. We're still also in what the Fed thinks is at a restrictive policy rate. So, I think they're biased to, to bring that down over time and maybe not next 6 to 9 months. But over time, I think, you know, they still want it. It's pretty restrictive. So they do want it lower.

(Branstad) How about the Treasury curve?

(White) With regard to the curve, we still like being in steeper trades. That is favoring the front end of the curve over longer data maturities. And this is because a persistently higher inflation environment and a fiscal trajectory that is likely to get worse before it gets better, should keep upward pressure on 10-year and longer Treasury yields. And in the event the economy does weaken a little bit more than we currently expect, front end yields should outperform as the Fed restarts its cutting cycle. So we like that front end, five years and trying to stay a little bit underweight the back end where there's just a lot of volatility day to day.

(Branstad) We haven't talked much about the global economy. Expectations have risen in Europe at least. And, many are kind of calling the end of the so-called U.S. exceptionalism. David, what are your expectations on that?

(Spangler) We're looking for a change in the overall long-term trend or structural break or 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.  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. They work many less hours overall than 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. And so, while fiscal spending increases within Germany or Europe overall can be somewhat helpful, and certainly the European markets have outperformed the U.S. markets more recently, but that may be a little bit more because of our Mag Seven, coming down in price quite a bit and a little bit less of, of European equities substantially outperforming. This idea that overall U.S. exceptionalism, if you will, has come to an end is premature.

(Branstad) With international markets now outperforming U.S., through the first quarter, any change in your outlook? Doesn’t sound like too much of a change.

(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, so we're about neutralish, a little underweight in EM, most of the underweight, as I just mentioned, is in developed countries.

(Branstad) Steve, there's been a pretty huge shift in the geopolitical landscape. What are your thoughts on that?

(Lowe) Yeah, that is pretty amazing because in the space of about two months, you've totally reordered possibly the world order that has largely held since World War II. But if you look at the historical record, it's pretty clear that geopolitics don't impact markets over time. There's been a few exceptions, like the Arab-Israeli war in the 70s where there was a oil embargo. But other than that, markets move on.

(Branstad) David, U.S. equities have seen some challenges over the first quarter. What are your expectations going forward?

(Spangler) To me, outside of an exogenous shock, or going into a recession, I don't see that we would expect a significant drawdown. I would expect companies to continue to reduce their expectations and to have some negative language around the uncertainty within the economy. Temporarily, that could be a provide a little bit more of a choppy waters for the markets. But I think it lowers the bar and it allows for on the back end for companies to be able to come in with a little more of a surprise. We'll have choppiness. I think there's some limit to the upside generally. But I'm not expecting any significant drawdowns outside of shocks to the market or a larger growth, scare or recession.

(Branstad) Last year, David, the Meg Seven and other large-cap tech names really powered the market. But they've had more challenges so far this year. Do you see that lasting? Do you think there's new leadership? Do you think it will shift back to Meg Seven leading the way? 

(Spangler) Well, 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 5 or 7, of the largest multi trillion dollar companies in the world. Overall, yeah 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. Also too, within the S&P 500, but not necessarily into mid-caps and small-caps. 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. The large-caps, they’re global companies, they have tremendous cash flows, profit margins and overall are able to weather the storm. I would think that we would continue to have some preference to growth and to large-caps in the intermediate and longer term. You know, when growth slows, then you look to the companies that are proven growers, and you're going to find that in large-caps and in growth. But I think in the in a shorter term, maybe in the first part of this year, we could see some continued rotation out of growth and into value, but not in my mind down to mid- and small-cap as much.

(Lowe) And I think looking ahead I think the market's focus on AI will be broader. So it's not so much you know the NVIDIAs of the world.

(Branstad) Steve, valuations entered the year rather rich with the kind of mini correction that we saw in Q1. How are they 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 to take some of the froth out and allows markets to kind of 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. 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.

(Branstad) So what's your outlook for earnings growth then, Steve?

(Lowe) Generally good. I mean there's some rising uncertainty. If you look at earnings revisions they've been more negative than positive. So, they're pricing a little bit less growth. You know at one point earnings expectations for this year were about 14%. And now that's closer to 11%. And, you know, companies with international exposure might face, you know, headwinds from retaliatory tariffs. And earnings expectations for industrials also have been cut partly on trade uncertainty. So, 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. 

(Branstad) Kent, broader fixed income credit markets. Like corporate bonds. They've cheapened a bit, but they still look kind of rich. What's your outlook there?

(White) Corporate bonds have cheapened a little bit this year, but that was off of 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. And these trade and growth uncertainty, those risks are not going away anytime soon. So, 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 they only hit a soft patch in the economy.

(Branstad) What are you thinking about yields right now? 

(White) Oh, yields are still at attractive levels. The investment grade corporate bond index is currently yielding over 5.25% off the peak, but still materially higher than they've been over most of the last 15 years. And 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. And yield is also the biggest predictor of returns and fixed income. And high yield corporates right now are currently yielding near 7.5%, which also looks pretty attractive, especially in a kind of a like a slow growth environment, non-recession era. And so, fixed income is still a great place to be. Might see some volatility, but overall the yield is very attractive.

(Lowe) And you've seen that from buyers. And there's continual demand for particularly corporate credit in general. And that helps keep spreads down.

(Branstad) What do you guys think are some of the key items that investors should be focused on? Kent, why don't you go first?

(White) The growth backdrop really needs to hold up. So, we'll be really focused on that. Continue to watch the labor markets and consumer spending for any signs of weakness. And again, just watching companies for any signs of margin pressures that could lead to changes in their behavior, like layoffs, cuts to cap-ex spending, all of this would be negative for growth. So, it just comes back to what's the growth backdrop going to look like the remaining part of the year?

(Branstad) Steve?

(Lowe) I'm focused a lot on just policy uncertainty right now and whether there'll be more stability and particularly watching whether low confidence bleeds into actual lower spending. And that's the key because, you know, consumers don't always behave the way they feel. If they have money they still spend. And then always, always the Fed and how they're going to react.

(Spangler) And I think that, to Steve's point, in terms of watching the consumer spending, it's watching the business spending. So, if the very, very low near recession, recessionary levels of confidence in the business side now starts bleeding into the hard data, one of the things we really want to look at is private fixed investment. And so what that is, is whether companies are continuing to try to invest into growing their businesses. If they don't, then that is going to restrain growth, but also too, could then also result in job concerns as well with layoffs.

(Branstad) Let’s go through our mixed asset positioning. Steve, could you tell us how broadly we’re positioned?

(Lowe) Overall, we’re relatively close to home. I would say an overall risk in mixed asset. 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.

(Branstad) David, what about, equity positioning? What are kind of the key overweights and underweights for you?

(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'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.

(Branstad) Kent, how about 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 and 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.

(Branstad) Well, thank you all again today for sharing your insights. And thank you everyone for joining us today. We hope to see you next time. Goodbye.