Party Like It’s 1999
It is impossible to overemphasize how crazy the first half of this year was for the capital markets. Stocks, after a negative first quarter, started the second quarter by plummeting (a word we don’t like and rarely use, but fitting here) in the first week of April after massive tariffs were imposed on imported goods. The S&P 500 Index quickly dropped to near bear market territory, before a dizzying climb after the tariffs were paused. High volatility persisted for the remainder of the quarter, as shifting trade policies caused uncertainty among investors. Bonds also experienced significant fluctuations as fixed-income markets adjusted to the shifting economic landscape.
Looking at the numbers at the halfway point of 2025, both stocks and bonds have produced modest gains year to date. It is difficult to forecast what the second half of the year will look like with the uncertainty about tariffs. Most firms are like we are; one forecast with tariffs and one without. The Federal Reserve is projecting economic growth of 1.4% for 2025 and 1.4%-1.8% growth through 2027. These estimates have been lowered from previous outlooks. The Fed is also forecasting an inflation rate of 3.1% for this year, quite a bit higher than its target rate of 2%. As long as the Fed expects inflation to rise, it is difficult to imagine that it will lower interest rates. Some Fed members argue that data showing a slowing economy justifies lower rates. These are outnumbered by those who are hawkish on rates. GDP contracted in the first quarter but is expected to be positive during the second quarter.
The elephant in the room is the high valuation of the equity markets. Current stock prices relative to earnings are nearing those last seen during the dot com bubble in 1999. We all like rising stock prices, but there must be earnings to support those prices. Without sufficient earnings, market gains become untenable and are destined to fall. It is impossible to know at what point stocks are too top-heavy, but anytime we approach 1999 valuations, we should all be concerned. Prince, in his song 1999, sang, “Life is just a party, and parties weren’t meant to last.” We would advise that the same holds for highly valued stock markets.
Consumer confidence has dropped in six of the past seven months. We are just beginning to see a drop in spending, and this is an area that will be closely watched in the months ahead. Likewise, inflation and employment data are important to watch. The Fed is in a tough spot. If inflation rises while the economy slows, which is possible, any missteps will have outsized consequences.
The past five years have been challenging for American businesses, and they have been great at adapting and growing despite the difficult environment that included a global pandemic and high inflation. High valuations and uneven trade policy concern us in the short term, but we remain bullish in the long term.
Wabash Capital
