Investing in an uncertain environment

The S&P 500 Index continues to oscillate around all-time highs, climbing +70% since the end of the last bear market in October 2022. Overall, the current bull market appears to be alive and well, and there may even be more room for it to continue in 2025.

That said, stock volatility has increased over the last two months, and a few key market developments have started to unsettle investors. Below we look at three potential drivers of market volatility in the near term and share how investors can navigate a more uncertain landscape.

1. AI spending scrutiny

Big Tech earnings for the previous quarter were solid, but artificial intelligence (AI) spending plans have investors more cautious. Profit growth for the Magnificent Seven (Tesla, Meta Platforms, Microsoft, Apple, Amazon, Alphabet and NVIDIA) in the final quarter of 2024 generally came in as expected and, in several cases, surpassed analyst estimates. However, China's DeepSeek artificial intelligence model, which allegedly was created for far less money to train/build than American AI, has recently sent shock waves across Big Tech. This has caused mixed reactions to Big Tech profit results/outlooks during the latest earnings season. As a result, investors are starting to call into question the tens of billions in dollars Big Tech is currently spending to develop AI in the U.S. each quarter.

Although markets have somewhat discounted DeepSeek developments, and companies like Meta Platforms and Alphabet have reiterated the need to spend aggressively on AI to compete, investors have begun to more closely scrutinize the near-term profit outlook, given high expectations, elevated valuations and massive spending on AI. That said, we believe a reset in expectations, and possibly more volatility across Big Tech this year, is healthy longer term and likely warranted, given how far this select group of stocks has run since the end of 2022.

Bottom line: We believe the AI secular trend remains intact, profit growth for Big Tech should remain strong in 2025 and some volatility should be expected in these stocks, though it shouldn't detract from their longer-term opportunities to profit from the early stages of AI expansion.

2. Tariff uncertainty

Tariffs — are they on or off? Unfortunately, it's a question investors may be grappling with for some time, adding an element of uncertainty in the market that makes forecasting growth, profits and global trade dynamics very difficult to predict.

For now, we believe investors and the market continue to view the president’s use of tariffs predominantly as a tool to achieve policy objectives (e.g., border security/drug trafficking and better trade deals). And while market volatility has risen since December, stocks have weathered temporary downdrafts reasonably well due to investors' ability to look past the tariff uncertainty and focus on still-solid U.S. growth trends, which remain supportive of asset prices, in our view.

That said, we believe the overall market could see steeper declines if the proposed tariffs are enacted in full and if they are levied over a prolonged period. Markets assume today that even if U.S. tariffs and retaliatory responses from other countries were put in place, they would be in place for just weeks or months until U.S. demands are met.

Yet, tariff actions that escalate due to deteriorating global relationships, become entrenched, create dislocations in supply chains, reduce global efficiencies, increase cost/inflation pressures or stall growth/corporate profitability are factors not fully priced into the overall market today. If such an environment were to develop, we would expect to see more severe selling pressure across consumer, industrial, material and technology companies, for example. For a period, this would likely pressure the overall stock market as well, and sap investor sentiment.

Bottom line: Broad tariff implementations could dampen economic growth and put upward pressure on inflation, which would likely be a market negative and could contribute to added volatility. However, it’s our view that any near-term tariffs imposed are likely to be temporary, rather than a longstanding shift in U.S. trade policy.

3. Elevated interest rates

Will higher interest rates and/or delayed Federal Reserve policy rate cuts start taking a bigger bite out of U.S. growth? Admittedly, the stock market seems to be doing just fine, with a 10-year U.S. Treasury yield hovering around 4.5%, and investors predominantly expecting the next Fed rate cut not to happen until the June or July meeting.

Further, U.S. economic growth forecasts and S&P 500 earnings estimates for 2025 remain solid. And as such, the elevated rate environment has currently taken a back seat to Big Tech and tariff concerns. But with core inflation hovering well above the Fed's +2.0% target, U.S. unemployment sitting at just 4.0% in January and growing investor concerns about the trajectory for U.S. government spending/debt levels, it stands to reason that rates could be stuck in a higher-for-longer environment this year.

Though this is an under-the-surface issue at the moment, a higher rate environment could eventually start stressing smaller companies looking to refinance debt, further slow consumer/business borrowing and make future corporate profits look less attractive when discounted back to the present (which often uses risk-free rates like the 10-year U.S. Treasury yield).

Bottom line: Rising government bond yields and less room for Fed cuts this year added to the stock volatility seen in December and early January. For now, investors appear to be looking past this risk from a day-to-day perspective as yields and Fed expectations have settled into their current state. Nevertheless, macroeconomic developments that send rates higher (e.g., tariffs, sticky inflation, stronger growth, increased fiscal deficits), or further delay Fed easing, could quickly see stock volatility rise.        

So, what's an investor to do?

It’s normal for investors to feel anxiety when faced with unknowns in the economic and market landscape. Here’s how you can navigate this uncertain environment:

• Avoid reacting to the news cycle. Stand still and let tariff, Big Tech and interest rate developments play out over the near term. Investors should expect headlines to stay fluid on these subjects and, in some cases, undetermined. Making investment decisions on still-unknown outcomes increases the risk of being wrong or offside if developments shift in the opposite direction.
• Follow your regularly scheduled investment strategy. If your portfolio has the proper asset allocation based on your risks and goals, then we believe you are well positioned to navigate this period of uncertainty.
• Leave your investment decisions to the professionals. If you use mutual funds or active managers in your portfolio, let them make the investment decisions about how to navigate individual stocks, bonds, sectors and industries when it comes to these developments.
• Consider securities that can benefit from the current environment. If you own individual stocks, bonds, ETFs or other securities in your portfolio, ensure you are comfortable owning these securities in varied market environments. Consider industries and companies that could benefit from the new presidential administration, as well as companies focused on shareholder yield, which tend to be higher quality companies that can navigate several types of environments. Income-producing stocks and/or strategies are another way to stay invested, but in a way that may produce less volatility over the intermediate term.
• Connect with your Ameriprise financial advisor. If you’re concerned about the current investing landscape, reach out to your Ameriprise financial advisor. They can provide personalized insights about how evolving market conditions could potentially impact your portfolio.