Wealth Insights

Stocks Commentary

Stocks: Tough Trend, But Seasonality, Sentiment, And Elevated Volatility Are Reasons For Optimism

April 2025

U.S. equity indices closed out March and wrapped up the first quarter of the year in negative territory as continued uncertainty surrounding tariffs and investors drastically lowering their expectations for investment in artificial intelligence (AI) initiatives weighed on sentiment and risk appetite. The largest U.S. stocks, with few exceptions, were a major drag on the S&P 500, evidenced by the Bloomberg Magnificent 7 index falling 10% in March and posting a nearly 16% year-to-date decline, with that weakness spilling over into April. With the April 2^nd announcement on tariffs in the rearview, market participants will now fix their gaze on quarterly earnings season.

Earnings season kicks off in mid-April, and despite what has been a more universally downbeat economic outlook in the wake of the April 2 announcement on tariffs, analysts and market prognosticators have so far only modestly revised their forecasts for corporate profits lower, but that could change as S&P 500 companies post results. Full-year 2025 S&P 500 earnings estimates have gradually moved lower in recent months, but the consensus estimate is for approximately $269 in earnings this year, down from $273 on 12/31/24. A broad swath of companies guiding future earnings lower or removing forward guidance altogether when they post results in the next couple of months should lead to sizable downward revisions to earnings estimates and help reset expectations and valuations. The market’s response to revisions is worth watching as stabilization in the face of negative earnings news would be encouraging. Despite what is expected to be a dire earnings season with few silver linings, there are reasons stocks could find their footing in the near-term.

From a seasonality perspective, the calendar has historically turned more favorable for stocks in April. The S&P 500 has turned out a gain 64% of the time during the month dating back to 1928, with December the only month with a better ‘batting average,’ and the index has generated an average monthly return of 1.3% over that time horizon, trailing only July’s 1.7% return. Given the challenging economic and policy backdrop currently in place, the calendar might not help stocks much this time around, but it’s worth watching as a potential offset to the negativity dominating headlines at present. On the sentiment front, equity investors remain justifiably skittish and negative with the first AAII Sentiment Survey in April showing 62% of respondents bearish on stocks over the next six months, well above the historical average of 31%. This is an extreme reading and highlights how it might not take much good, or perhaps just ‘less bad’ news on the trade/tariff front to improve sentiment and drive inflows into stocks.

Lastly, after the tariff announcement on April 2, stock prices have fallen sharply and the CBOE Volatility Index, or VIX, has moved higher in an equally unsettling manner due to a rapid rise in demand for hedges against additional market downside. Historically, VIX spikes such as this have preceded outsized advances for the S&P 500 in the 12-months to follow. Should the Trump administration pivot and focus on pro-growth policies, specifically, deregulation and tax reform, VIX should come down almost as quickly as it went up, with stock prices responding positively as a result. Secondarily, if our trading partners come to the negotiating table and the Trump administration makes some deals and takes some wins, headwinds facing equities in recent months could subside. Simplistically, the absence of negative headlines on the trade/tariff front might be enough to bring investors back into risk assets in the coming month(s), albeit in a more half-hearted or measured way.

Higher Shareholder Yield Suggests International Has Staying Power. International developed market stocks returned 7% in the first three months of the year, outperforming the S&P 500 by over 11% on a total return basis, marking the best quarter since 1986 relative to U.S, large-cap stocks. That advance makes up for the double-digit underperformance out of the MSCI EAFE index in the fourth quarter as the U.S. exceptionalism trade took hold, and apparently set the expectations bar far too low for international companies. Low expectations and cheaper valuations abroad have combined to act like a coiled spring this year, but unforeseen structural changes, specifically, a fiscal policy pivot out of Germany, also played a vital role. Germany’s increased willingness to issue debt to spend on defense and infrastructure in the coming years is potentially a watershed event, and if other EU countries take the opportunity to ease fiscal restraints to boost their economies, that could trigger capital flows out of the U.S. and into the Eurozone.

Narrowing economic growth differentials between the U.S. and developed markets abroad, along with the increasing appeal of higher dividend yielding stocks, suggest last quarter could be more than an oversold bounce for stocks tied to developed markets abroad. Along with some expected improvement in the fundamental backdrop abroad due to easier monetary and fiscal policies, valuations have room to run as stocks in Europe and Japan still trade far cheaper with the MSCI EAFE trading at 15X trailing 12-months earnings versus the S&P 500 at 20.6X. Unsurprisingly, dividend yield easily favors developed market stocks abroad, and after accounting for share buybacks the overall yield advantage over the S&P 500 grows, with the MSCI EAFE shareholder yield at 4.7% while the S&P 500 is closer to 3.2%. From our perspective, the stability of cash flows international equities provide still holds appeal and considering the elevated volatility surrounding tariffs and a more uncertain growth environment, we like maintaining some exposure to cheaper, more shareholder friendly companies tied to developed markets abroad.