Making Sense: April Market Update

Making Sense: Monthly Market Update

Recorded on April 30, 2025

Amy: Hello, everyone. I'm Amy Thomas, a strategist here at First Citizens Bank. Today is Wednesday, April 30th, 2025, and I'm joined by our Chief Investment Officer, Brent Ciliano, and Director of Market and Economic Research, Phil Neuhart. We want to welcome you to our Making Sense: Market Update series. Each month, our team brings you an in-depth analysis of what's happening in the markets and the economy.

Before we get started, just a couple of reminders. The information you're about to hear are the views and opinions of only the authors and should be considered for educational purposes only. This information should not be considered as tax, legal or investment advice. If you have a question about your financial plan, please reach out to your First Citizens partner. And Brent, with that, we're ready to go. So I'll turn it over to you.

Brent: Great. Well, thank you, Amy, and good afternoon, everyone. Hope you are well. Well, Phil, they say April showers bring May flowers, and I feel with all the tariff noise that we certainly need our umbrella.

Phil: Absolutely.

Brent: So we've got a lot to cover today, so why don't we jump in? We've added, like we did last month, an extra section called Pulse Check. We're going to give you a real-time update on trade policy, tariffs and all things financial market impact. We'll get into a broad economic update like we always do. We'll talk about US growth, the impact on inflation and interest rates, and certainly what's going on in the labor market and with the US consumer. And then we'll get into what's going on in broad equity markets, fixed income. We'll talk valuations. We're right in the middle of corporate earnings season, so we'll give everybody an update on that. So why don't we jump right in, Amy?

Phil: Yeah, let's jump into the pulse check. And first, let's start with what's on everybody's mind still is tariffs. We've been on the road a lot over the last couple of months, and certainly this is what is on our clients' minds. So we want to dig right in.

So what do we have enacted today? That is the first section of this chart. You can see of course the 10% universal tariffs. Other tariffs on things like autos and metals, but look at the China bar. That is by far the biggest. Why is that? The two largest economies in the world, there's a lot of trade between the two, obviously, one of our biggest trade partners in a very high 145% tariff. That, along with a little bit with Canada Mexico, puts the current effective tariff rate at roughly 20%.

Brent: Yeah.

Phil: Look at pending. That is semiconductor, electronics, sectoral tariffs, pharmaceuticals—potential tariffs there, again, it's pending. We don't know where we land. That would bring us to about 25.6%. And then the suspended reciprocal tariffs. This is that 90-day delay that we saw after Liberation Day. If those all were to come back on—which again, there's negotiations happening, that's not the base case—but if all of those were to come back on, you're pushing 30% tariffs.

As a reminder, as of end of last year, the tariff rate was about 2.5%. So to say that markets and businesses are digesting really a paradigm shift is an understatement.

We can't lose sight, as we flip ahead, to the budget issues here. Of course, there is tax legislation moving through Congress. What are we seeing on the spending side? We won't spend a lot of time here. We've talked about this a lot in the past, but you can see our spending. On the right side, you can see that budget deficit, which if you count the gray shaded or the pink shaded, is roughly $2 trillion estimated for 2025. If tariffs were to stay at their current levels, and if imports were to match the 2024 levels—both of those are massive assumptions and would not be the case.

Brent: And highly likely to change.

Phil: Highly likely to change. But if that was the case, you can see quite a bit around $700 billion in revenue. That takes a chunk out of the budget deficit. Of course, if it slows growth it would also potentially put downward pressure on things like individual income tax and payroll tax. But in an environment in which the administration and Congress are working on a tax bill, we can't lose sight of this additional revenue potentially helping with some of their goals.

Brent: Yeah. And all of this tariff discussion, this global trade dilemma that we find ourselves in, on the next slide, Amy, is driving a massive amount of uncertainty. On the left-hand side, we're looking at the US Economic Policy Uncertainty Index, which measures articles, news clippings as it relates to what's going on as far as uncertainty—tariffs, trade, certain things along those lines—and you can see we are at levels that we haven't seen since the pandemic. And if you go back even further, one of the higher levels that we've seen in history.

And most investors would say, "Hey, Brent, Phil, there's an awful lot of uncertainty. What might that mean from a forward expected return for equity markets? Doesn't higher degrees of uncertainty lead to lower equity returns?" And when you look at the chart on the right, it's actually the complete opposite. And you can see 1-month, 3-months, 6-months, and more importantly, 12-months post high levels of uncertainty, and what we're looking at, sort of that economic uncertainty index above 180. And you can see how far above that, Phil, we are. You actually see much more significant rates of return.

So again, the markets are not the economy, and the economy are not markets. And we're going to get into this a little bit more when we get into the market section about staying on course and sticking to your goals and objectives.

Phil: And even something we've been reminded in recent weeks, often high uncertainty leads to a market drawdown, but that generates opportunity. And you see that opportunity playing out 6 and 12 months down the road.

Brent: So another thing when we look at uncertainty, it's really corporations and what CEOs are saying. And like I was talking about, we're in the midst of corporate earnings season. We're getting a lot of analyst calls where we're getting information related to pulled back forward guidance. CEOs, broadly, with what's going on are used to dealing in a world of uncertainty. But I think needing to understand the rules of the game and understanding the path forward is what we really need. And it's certainly driving CEO confidence down. And you can see on this chart here in the April reading, we saw the most significant drop in CEO confidence that we've seen in quite a while, at least since this reading started.

So again, breeding uncertainty—when corporate CEOs are less certain about the path forward—they're not going to invest or build plants. They're not going to be including or buying inventories. It really paralyzes corporations as it relates to their forward plans.

Phil: We're definitely seeing a wait-and-see approach. And we're hearing this on the road from our business clients as well, not just in this survey data.

Brent: And when we pull forward beyond, on the next slide, Amy, when we think about the underlying market impact. And we're showing here on the table, we're looking at—first of all, I want to start sort of year to date. Despite the almost 19% peak-to-trough drawdown, Phil, that we had from February 19th to April 8th, which is just a pretty significant contraction—year to date, I'm going to update this on the fly through last night, we're down a little bit over 5% for US equities. But on the other side, the international equities are still up basically double digits. So in a globally diversified portfolio, balance between US and international equities, we're doing much better now than where we were at the peak of that drawdown.

On the fixed-income side of things, a very bifurcated world. Taxable bonds doing what they do in portfolios, which is providing a shock absorber or a balance in the portfolio, up about 3%, where municipal bonds have sort of taken a hit as it relates to what might the trickle-down effects be as it relates to potential layoffs or issues with local and regional budgets. We're seeing some dislocation in municipals, but by and large not nearly as bad today as where we saw back in the beginning part of April.

Phil: Absolutely. We've seen a recovery, but it has been a bumpy ride. Since April 2nd, eight daily changes of at least plus or minus 2%. If you go back in history, that matches periods like the pandemic, after the Great Financial Crisis, after the tech bubble—so highly volatile. Major moves in the 10-year Treasury yield. This, of course, preceded the 90-day delay. We saw Treasuries spike and that was a real market focus and something the administration paid attention to. We have seen the highest one-day US municipal bond transaction volume on record since about 1995.

Brent: It's incredible.

Phil: So we mentioned muni's underperformance. Some of that is technical as well. We're seeing a lot of transaction volume. And then, of course, we have seen dollar weakness—which, by the way, when you think about trade can help us on the export side of things. It can also help corporate earnings as multinationals bring earnings back. But again, that is assuming all else equal.

So let's dig into the economy for a bit. Showing here, on this first slide, we're showing world economic growth. Where we were for 2025—estimate as of December of last year—world at 3%. That's fallen to 2.6%. US, 2.1%. That's fallen to 1.4%, so on and so forth. We are seeing—when you see trade locked up globally, that's going to lower growth—so we are seeing growth expectations fall. To that point, this morning, as of this recording, we received first quarter GDP. GDP fell 0.3%. But we do want to spend some time on the details there.

Something that we had talked about—we talked about on the road quite a bit—is that net exports, right? We had imports pulled forward because companies are smart, right?

Brent: Right, getting ahead of it.

Phil: People are paying attention. They're getting ahead of tariffs and potential trade conflict. Pulled forward, that was a massive amount of imports. So your net export subtraction from GDP is huge. It was 4.8% detraction. So think about that 0.3% fall, but 4.8% of that was net exports. If you look at real growth—and the thing is a couple of years ago, we had the same story, we were saying the same thing—we'd rather look underneath the hood and see what activity is, not what net exports or imports or inventories, for example, are driving.

Personal consumption, real personal consumption, grew 1.8% in the first quarter, and real final sales to private to domestic buyers was 2.3% growth, so growth underneath the hood. Now, the caveat to all of this and a lot of economic data we've received of late is—this is lagged. This is the first quarter. Here we are, we're almost in May. So we shall see where we go. But the headlines that you're going to see around GDP, I think, are a little bit deceptive because they are distorted by companies pulling forward imports, seeing tariffs on the way.

So what does this all mean for the Fed? We'll talk about their dual mandate inflation and employment in a moment, but Fed expectations have moved quite a bit and continue to shift pretty dramatically. Right now, if you believe futures, which I'm not sure you should, right?

Brent: Highly volatile series.

Phil: Highly volatile series. But the expectation is that the Fed would cut by another 100 basis points, or four quarter-point cuts, between now and the end of the year. Remember, they've already cut by about 100 basis points, as you can see here. Right now, the May 7th meeting is not viewed as a live meeting, a small percent chance. There's always a chance, but a small chance. More likely, if you believe futures, first cut in June or July—if they are cutting. What the Fed has been very open about is that they are going to be data dependent. Now, the data is stale.

Brent: Yes.

Phil: But if you're looking backwards, you have inflation, as we'll talk about in a moment, above the Fed's target. And you have a labor market that's been pretty decent. We do get fresh labor market data this Friday, which, of course, will be important.

Brent: And to that point, the hard data that we got this morning, to your point, core PCE came in at 3.5%. So again, creating a very, very difficult conversation for Jay Powell and the Fed to think about where they need to go from a policy perspective. We do believe that we'll eventually get anywhere between one to three cuts this year, but certainly it'll be path dependent. And again, the back half of this year, again, when we go from sort of stale, hard data to—and certainly looking at the soft data showing signs of economic deterioration—it's going to really put the Fed in a bind and we're going to have to wait and see what happens.

So let's move forward and let's talk a little bit, Phil, about inflation. What we're looking at here, dark blue line is the year-over-year CPI index. The light blue dotted line is the 3-month annualized rate, which you can see is certainly a bit more of a volatile series, but tends to portend where the direction of CPI goes overall. And then that gold line that we've talked about many times is that Fed's 2% target. And I think what you can see, and again, stale data, we're talking about March data where you have headline CPI at about 2.4%. The annualized rate you can see has come down to about 2.6%. But we've been in a very volatile range for inflation from 2023 all the way through now.

And again, much of this hard data is quite stale. And when we think about what Jay Powell has said as far as his view as to what inflation might look like if tariffs were to stay at the level that they are. If we were to get to a point where they would have an impact on the economy, we would expect this to go higher than that.

And when we flip to the next slide and we actually look at that soft data and look at the survey information, what are we looking at here? The light blue line is household expectations for inflation over the next 12 months. The gold line is inflation expectations, household survey over the next 5 years. And look at the uptick in both of those lines. I mean, the lighter blue line is approaching almost 7%. Gold line in excess of 4%. Interestingly, bounded by markets' expectations for 5-year inflation, which that break-even rate—which is sort of that markets-implied break-even rate—over that next 5 years has been relatively tame. Down at about 2.3%.

So there's sort of this dichotomy between where households expect inflation to ultimately go if tariffs were to stay in place versus what the market expectations are calling for. And again, as Jay Powell said, longer-term inflation expectations, while above the Fed's target, are thoughtfully anchored, at least for now.

Phil: That's right. So that's one side of the Fed's dual mandate. Let's talk about the labor market, the other side. Here we're showing monthly payroll growth, 3-month moving average. You can see we've stayed above that break-even job growth rate. We do get fresh April data this Friday for payrolls. That is an important report because the survey period is after Liberation Day. The truth is we may not know impacts of some of these things until the May, June, July, August data. But it is something that's going to be watched unbelievably closely this Friday because it's really our first data point that's not March.

Brent: That's right.

Phil: And March data just feels very, very stale. So turning ahead, speaking of data that may be a little stale, but something we want to show because we're going to be watching this closely. This is from the JOLTS report—job openings and labor turnover. So the job openings rate, if you remember, we had this incredibly tight labor market in 2021 into 2022. We had a very high job openings rate. That has moderated, but kind of has settled in at the level we currently see.

When you look at quits rate, right, the number of people quitting—that number tends to fall sharply in a weak labor market because who's going to quit their job if there's no job waiting for them—and the layoffs rate, which in a weak job market you would expect to rise, neither of those have moved. Now, the caveat is this is March data. So we are waiting, but we wanted to show this because it's something, a chart I think we're going to be showing for months to come, really, as we keep an eye on things.

There have been a few layoff announcements here and there, but the truth is we aren't seeing them en masse. What we really are seeing, and you mentioned this relative to CEO confidence, is everyone's just taking a wait-and-see approach. So what does that mean for hiring? I think that that's the big debate. But from a layoff perspective, we are not seeing it dramatically yet. So what about the actual consumer spending?

Brent: Yeah. And I think, look, the fulcrum, broadly, in the labor market and for consumers and for spending is—do I have a job, right? And we'll have to see, right, if corporate earnings and profitability can hang in there, consumers will continue to be employed, and we won't see, hopefully, knock on wood, an uptick in layoffs.

But when we look at consumer expenditures—and obviously reminding everybody that consumption is more than 68% of US real GDP, so it is the primary driver of growth in our economy—dark blue dotted line here is spending on services, which is more than two-thirds of all aggregate spending. Gold line is spending on goods. And we've shown this slide for many months. Again, we can see a slight moderation in both numbers—both spending on services and goods. Good news is that spending on services is still above that 20-year average, which is good to see. But we are moderating lower. And as you said, this is March data. It's stale. We're going to have to really wait and see what the impact is as tariffs come through into increased prices, what that does to inflation. And you would likely see a drop in spending if, in fact, we saw that tariff impact come through into prices that would affect consumers. Will they be able to change their spending habits and shift consumption to different things as far as affordability? Only time will tell.

So let's talk a little bit more, Phil, about households and the consumer. On the left-hand side, what we are starting to see is delinquency rates rise. Gold line is auto loan delinquencies. Dark blue line is credit card loan delinquencies. And again, this is, again, stale data to some degree because you're looking at data that is February, March-ish as far as its impact.

But we already started to see strains in household finances as it relates to their ability to pay back. And on the right-hand side, when you look at the survey, as far as being able to come up with a $2,000 unexpected expense for a given household, you can see how that's moderated lower to one of the lower levels that we've seen in more than a decade.

There's been other surveys, whether it's University of Michigan or likewise, but by and large, households had already started to feel the strain before the impact of higher prices from tariffs have hit. So we're going to have to really monitor the impact of households and their ability to spend if higher prices come through.

Phil: Yeah, what we're seeing here is the impact of inflation. Inflation is a tax on all Americans, but if you live paycheck to paycheck, what do you do? You access your credit card first, right, if the bills have moved up too high because of inflation. And that of course drives things like credit card delinquency. This is why inflation is so destructive. This chart really captures it all.

So let's talk about the market. We touched on some of this a moment ago, but let's dig in a bit. So if you look at the S&P 500, Brent mentioned our peak-to-trough drawdown this year was 19% from February 19th. Right now, we're down about 10% from the February 19th height. So we've had quite a little recovery.

Just a reminder, you've heard us say this before, but last year, during a contentious election year, the market was pretty smooth. Our max drawdown was around 8.5%. We are now seeing a return of some volatility in markets, which you would expect given all the headline risk. Impressively, since that low in October 2022, to date the market is still up 61% in total return terms. So it's not as if we haven't come a long way, as we have. But certainly this year we have seen a material drawdown.

What does that mean for valuation in the market? Here we're showing price-to-forward earnings for the S&P 500. Again, this is the dollar you're willing to pay—the price you're willing to pay for a dollar of earnings. Easy for me to say. When PE, as you'll hear it referred to, when next 12-month PE is high, the market’s more expensive. When it's low, it's cheaper. Obviously, the market has become somewhat cheaper. But at the same time, we have seen earnings revisions turn lower. So that's the denominator here. So in times of change, in terms of perspective of earnings, you can see some volatility around the PE ratio and some noise. But nonetheless, we've come becheaper, but certainly not a cheap market.

Why is that? As we turn ahead, it still remains a lot of the biggest companies. So here we've shown this before, but really remains important in our view. This is the capital-weighted, price-to-forward earnings, market-cap weighted. The top 10 names—so think Magnificent Seven and a few others—they are expensive versus, say, their 20-year history. When you look at numbers 11 to 500, you know, not all that expensive. This remains the story in our mind that there's still a lot of good companies out there. And if you look at gross margins, a massive percentage of US companies still have very good gross margins. So it's not just that we only have 10 good companies in America. We have a lot of good companies. Now, why have we maybe seen some underperformance in small cap, et cetera? It's because far more exposed to things like tariffs.

Brent: Yeah, economically sensitive.

Phil: Much more economically sensitive.

Brent: Well, and I think the one thing like it's easy to see, like look at the magnitude of the difference and come down as far as the multiple for the top 10 versus the 490, right? You know, there's a lot more room to come down as far as the underlying pricing. And from a cap-weighted perspective, obviously that drawdown. And I think one thing, and I do listen to you a lot, Phil, when we think about what you said as it relates to forward multiples, we rarely trade at the average.

Phil: That's right.

Brent: So you're going to see an awful lot of variability, and I think it's really going to depend on the path of corporate earnings and profitability. Like we always say, fundamentals, we believe, drive markets more than sort of the speculative nature of that. To that, on the next slide, let's talk about corporate earnings and profitability, and let's talk about where we are.

We're in the midst of earnings season. Roughly about 40% of companies have reported. About 75 percent-ish of them are exceeding expectations as far as earnings surprise—below the 1-year and 5-year average, above the 10-year—so basically in line. Where are we so far? We've seen a lot of variability, Phil, in what we believe corporate earnings and profitability is going to be for this year. What 3 or 4 months ago, that was a 14%, 15% number for 2025. We're now at about 10%—9.7%. We've seen an interesting juxtaposition. Q1 has gone up from about seven-ish percent to about 10% earnings.

Phil: Because companies are beating, right?

Brent: Exactly. So when you think about the linear sequencing that if we have about a 10% estimated earnings growth in Q1 but 9.7% for the full year, that basically means the back half quarters—two, three, four—are likely to be a little bit less good, if that's the right way of positioning it.

Phil: And we've seen companies withdraw guidance because they are just uncertain. They are not sure of the rules of the road. It's very hard to have accurate guidance when you don't know what tariff rates will be as we look at the back half of the year. Something we've shown a lot is the right side. We want to show this again is estimated next 12-month operating margins. That has ticked down a bit. Something we focus on a lot is we talk a lot about earnings growth, right? But the truth is, my belief is the equity market moves more on margin expansion, right? And seeing margins tick down, why is that? Because we're seeing downward revisions. Doesn't mean this ends up being correct, but there is a view that we might have hit peak margins. And that's certainly something that we have to watch as market participants.

Brent: Well, if you're a company, what is one of the largest inputs to your P&L statement? It's people. It's the cost, right? So if you're a CEO or a CFO and earnings do come under pressure, what might you be forced to do, which could be layoffs, right, but time will tell. But by and large, again, 2026 estimates are likely to come down, 13.8% and falling. But I still want everyone to understand, relative to the long-term average of 7.6%, these are still very, very solid earnings.

And by and large, it's good if we are getting into any type of a broader economic downturn—and time will tell—corporate earnings and profitability was in, likely, the best shape that it's been in quite a while. So I would rather that going into a storm being in better shape than being in worse shape coming into a potential economic downturn.

One of the things that, you know, Phil, you and I get asked about all the time is, "Okay, great. You talked about fundamentals. You talked about where corporate earnings and profitability might go. I'm a little concerned about the broader environment. Maybe I want to raise some cash. Maybe I want to sit on the sidelines and wait this out."

We constantly say, Phil, that market timing is a very, very dangerous game. So what are we looking at here? We're looking at the period of roughly the last 30 years from 1995 through the end of 2024. If I put $10,000 hypothetically, into the S&P 500—first bar there—that $10,000, Phil, grew from $10,000 to $131,347. 13x over 30-ish years. That's incredible. When you start looking to the right, if you missed only 5 of the best days out of those 30 years—and again, there's roughly, you know, 250-ish trading days in a year, so you're talking about 7,500-ish trading days—so if you only miss 5 of that, roughly 7,500, you had almost 40% less. God forbid you missed 10 of those roughly 7,500 trading days. You had less than half.

And so you might be asking yourself, well, what is the probability of that actually happening? Well, look at the callout box on the right. About 48% percent of the S&P 500's best days occurred during a bear market. Another 28% occurred during the first 2 months of a bull market when no one knew it was a bull market. So a full 76% of the S&P 500's best days occurred when you'd likely never want to be an equity market investor.

So please, please, please—don't let all of this headline noise scare you out of your financial plan, scare you out of your asset allocation. Sticking with the plan and making sure that you have that right asset allocation, is what's going to accrete to long-term wealth over time.

So interestingly enough, part of that volatility occurred on April 9th, where we had the 3rd best day since 1950. We had a 9.5% day. Just incredible. That was tied for 9th best ever in the entire stock market since 1928. So again, if you would have missed that one day, and the days before were significantly negative, you would have had a much worse drawdown than what we showed earlier.

Phil: 9.5%, that's a good year of return.

Brent: That's a good year of return. So again, as far as portending what that might mean for equity markets going forward, what you can see here is that in the days from plus-5 days all the way through 125 days—so think a week to about effectively 6 months—what you can see in the shaded areas as you go back through time is continued downside, a little bit of economic and market volatility that sort of drove uncertainty and equity markets vacillating.

But what I want you to really focus on is that far right column, which is 1 year forward from some of these best-day gainers. You can see more often than not, if you're a patient investor, 1 year forward you ended up with positive returns—post that great 1-day gain—than negative returns. So again, it's time in the markets, Phil, not timing markets that matters.

Phil: Right. And to that point, let's talk about our price target. This is the same as it was last time we presented—6,300 on the base case. That's up, depending on the day, through the 29th up about 14%. Of course, given the volatility of the market, this number can move pretty dramatically in terms of the percent change. Our bear case, 4,600. Our bull case, 6,900.

To be clear, a couple of things. First, this is a 12-month price target. So when we say 6,300, that is looking a year out. We do think we see volatility in the intervening period, just as Brent just mentioned, unlikely that we have a smooth ride in our view. Also, there's a reason we have the bear case and the bull case. And the truth is, with uncertainty, just as companies are withdrawing guidance, the likelihood of the bear case has increased relative to the bull case, right? The base case, still our base case, but there's no question that there's risks to the downside if this were to get really ugly. It doesn't mean the bull case can't play out. It certainly can, but we want to highlight the fact that there's a reason we always show bear, base and bull. There is a legitimate reason.

So let's talk about fixed income for a few minutes here. One, we already mentioned that we saw a lot of volatility in the 10-year Treasury, really since February. You can see that in the gold bar here. Municipal bonds, as we mentioned, have underperformed this year. Look at the spread.

Brent: It's incredible.

Phil: This is yield. Yield tracked very closely into February. And really, since tariff chatter heated up, you have seen munis underperform pretty dramatically, and yields go up. By the way, and we'll talk about this in a moment, that can be an opportunity for investors. But nonetheless, we have seen a real divergence between muni bonds and Treasuries. There's technical reasons for this. There's also concerns around federal funding coming to municipalities. There's a lot going on there. But nonetheless, munis, their yield has actually become more attractive relative to the 10-year Treasury.

Brent: And if we take this, on the next slide, Amy, to corporate credit, gold line, high-yield spreads over Treasuries, dark blue, line investment-grade spreads over Treasuries. And again, spread is nothing more than the extra yield over and above a default, risk-free asset like the 10-year Treasury.

So what you can see here is when you look at the chart all the way on the right. Obviously, both have moved up along with that equity market volatility that we saw so far. But again, moved up, but compare that to the left. I mean, nowhere near the levels of where we saw back in the pandemic or, God forbid, the Great Financial Crisis. Not even really near the levels that we saw back in 2022 when we saw that significant bond market sell-off.

And specifically in investment-grade bonds, while spreads have widened out, we're still only about 169, 170 basis points over Treasuries. So again, not really seeing that pain come through into credit markets yet. Time will certainly tell if corporate earnings and profitability were to erode, we were to have tariffs and we get by July 9th and something bad happens. We can't come to an agreement with China or any other trading partner for that matter. You could see these spreads start to widen out. But for right now, spreads are relatively sanguine relative to their histories.

So Phil was just talking about yields across various fixed-income asset classes. And if you run your eye down that list, you can see yields are certainly way higher than what they were back in, let's say, 2020 when the 10-year Treasury was at 52 basis points. You now are getting paid to own fixed income. And if you look at something like the US aggregate bond index or broad taxable bond proxy at 4.6%, very attractive yield.

Municipal bonds, as you just mentioned, at 4.14% here, right? Taxed-equivalent yield if you're in the 37% tax bracket is 6.5%. That's a pretty good return. As we mentioned back in our 2025 outlook, again, back then, things have certainly changed from an equity risk premium perspective in forward expected returns and equities. That was the expected return over the next 10 years for US large-cap stocks was 6.5%. Now that's where we are now with tax equivalent yields for municipal bonds.

Now, likely the expected return for equities has gone up as equity returns have gone down, which is just a mathematical thing. But again, balance in portfolios today, we think, matters a lot. And you can have a much smoother ride in portfolios by having balance versus where we were over the previous decade, where having more exposure to stocks versus bond mattered immensely to your returns.

So, Amy, I see that we have a lot of questions in the queue. Why don't we jump into the Q&A?

Amy: Yeah, Brent, Phil, thank you both for taking a deep dive into markets and the economy. A couple of my takeaways were a lot of market swings, but also some potential opportunities along the way. If you're a person who's interested in staying on top of all the information we have available, I'd encourage you to use the QR code to sign up for our email chain so that we can get you this information as quickly as possible.

Let's jump into questions. Brent, lots of questions around everybody's favorite topic—tariffs these days. With the dollar weakening and volatile interest rates, what does that mean for foreign-held debt, such as with China?

Brent: Yeah, there's a lot of chatter, and rightfully so that with everything going on with global trade and tariff discussions—and hopefully negotiations—that foreign buyers of our $36 trillion of debt will start to disappear and go down. We, just to be clear, we have not yet seen signs of that. We have not seen dumping of Treasuries by foreign buyers. We've not really seen a significant deceleration in overall aggregate foreign purchases and ownership.

Certainly we've had some auctions that were okay, not exceptional, but by and large we really haven't seen that. As it relates to the volatility in the dollar, it's a double-edged sword, right? We've seen the US dollar fall about 10% from January 13th to now, which, if you're an exporter—if you're a US exporter—that benefits you.

Phil: Yes.

Brent: If you're an importer of goods, it makes it even more expensive, right? Because your dollar, the dollars that you're using to purchase those imports, are 10% cheaper or weaker than they were before January 13th of this year. So again, the variability in the US dollar, the variability in overall rates, is absolutely something that we're watching. I think a lot of that is driven by the headline noise. I do believe that will ultimately settle down. We have seen variability in the US trade-weighted dollar start to settle down a little bit. We had more extreme moves earlier on in the year. But it's starting to settle down. We're just going to have to wait, Amy, for a lot of the economic data to come through, and certainly critically watching that July 9th date to see what type of negotiations we can get done between now and then.

Amy: Phil, I'm sure you hear a lot from small business owners when you're on the road. One of the questions we received is how should small business owners be thinking about liquidity and short-term reserves?

Phil: Yeah, so and this is the part of the answer that is annoying, but it's just true. It really depends on the business, right? I mean, there are absolutely small businesses that tariffs can benefit, right? And then there's many, of course, they don't. And then there's other small businesses that are very service related. And really, as long as the US consumer remains on track, they're okay.

For those, I'll read this question as for small businesses that are impacted negatively potentially, right, in terms of more expensive imports. Look, what we have seen is kind of a conservative reaction, right? A wait-and-see approach, we've already said that, but a pause. The head of our rail division described it as a pushing away from the desk, right? In other words, I want to know what the rules of the game are. Whether I like tariffs or I don't like tariffs, to run my business I need to know what the rules of the road are.

So what we're seeing is a wait-and-see approach and a bit of a conservative mindset when you talk about reserves, et cetera. That doesn't mean business isn't going to get done. It is. It just has been a bit conservative. I don't think—I think that's rational, right? If I was running a small business and I did not have the power of large tech corporations that are coming to Washington and trying to get exclusions, et cetera, I'm saying, okay, this is a time to batten down the hatches a bit. And that's okay. The truth is these are negotiations. If they are, if they bear positive fruit, that can be a good thing for some of these small businesses. But right now, we are in that time of uncertainty.

Brent: Yeah, I think one of the things that you and I are certainly watching is sort of the liquidity and capital ratios of small- to medium-sized businesses. Because if you're Apple and your goods show up at the port, you can fork over the money to pay it, even though you don't really want to but you might need to. They have the capital, ratios and capacity to actually do that. If you're a small- to medium-sized business, you have to pay that tariff the second you take possession of those goods at the port.

If you're a small- to medium-sized business and you don't have the liquidity or capital ratios to be able to afford that, you're going to see a lot of, you know, cargo ships sitting off the coast because people are just pushing away from buying those goods or taking them in because, again, to what you said thoughtfully, Phil, is sort of a wait and see. I'm not going to buy them right now because maybe by July 9th something will be cheaper, and then I'll wait because there's no give backs when I buy those goods.

Phil: And to be clear, this isn't just perception. This is reality. We are seeing cargo ship volumes drop precipitously, dramatically. And that's because folks—they're going to wait.

Brent: Yeah, why wouldn't you?

Phil: They're going to wait rather than paying the tariff. So we are seeing that in the data. It is happening on the ground—or in this case on the water.

Brent: Yeah.

Amy: And there's a lot of broad concerns around the impact of tariffs on inflation. One question that was submitted is what's the life cycle of a trade war, and are we on the way to stagflation?

Phil: Yeah, so the life cycle of a trade war, that is the question everyone is asking. And the truth is, no trade war is created equal because if this is a negotiation, that's the nature of negotiation, right? How long? There are no rules saying that negotiation takes X amount of time and lands in Y place. Think of anyone who's ever bought a home. Depending on the housing market, you know, homes can be on the market for a long time.

So that's where we stand. So the answer is, there is no playbook. You go back to Smoot-Hawley. That was quite drawn out.

Brent: A decade.

Phil: In the 1930s, which was not a wonderful decade, certainly, for the US. There is no playbook.

What might it mean for stagflation? I'll give you the bear case first. So the bear case—and those who mention stagflation—is that economic growth slows to flat or negative type numbers, globally, particularly in the US, right? Why is that? Because the key word of capitalism is capital, right? Capital has to flow to generate growth. If capital is locked up and we are seeing essentially trade embargoes, et cetera, that, of course, lowers growth. That's the stag part.

The inflation part is, okay, tariffs are paid for with margins. They're paid for potentially negotiations with your trade partner across the border, but some percentage also finds its way to the consumer, right? That's the inflation part.

That's the bear case. That's the stagflationary case. We remain hopeful that is not where we end up because trade deals get done and we see a loosening of some of these concerns. But that's how you get there. And look, there is a percent chance that's where we end up. To be clear, first quarter negative-GDP growth, that is not a stagflationary number in our view.

When you see personal consumption growing, when you see real final sales growing—what we saw was a distortion from imports being pulled forward, right? And again, we saw this a few years ago, and we were saying the same thing, which is, when net exports and inventories are distorting GDP data, we say, "Well, what's the underlying activity?"

So we do not think we're in stagflationary environment today, but it is in the opportunity set if the bear case plays out, not the base case.

Brent: So can I hit the bull case? Because one of the things that I wanted to mention is, let's just talk about the linear sequencing of events that are to occur, right? You still have the debt ceiling that's coming up in August. Treasury Secretary Bessent said that it's more likely like June or July. They have to get through that. They also then have to think about extending the Tax Cuts and Jobs Act, where if we don't get that done and start having those conversations in earnest, in the summertime, it's unlikely with recesses and getting things done and the concessions and pay-fors that we won't be able to do it.

So the optimistic side is that we are able to have thoughtful negotiations between now and July because we need to move on, and we need to think about some of the other things as it relates to what the administration wants to focus on. And we're hopeful and optimistic, as you said, that we will be able to get through that. But again, time will tell. It's a very delicate situation.

Amy: And Brent, just to end things on a high note, what opportunities are you seeing in all of this market volatility?

Brent: Yeah, obviously none of us want to see financial assets go down in value, right? But if one has an intermediate- to long-term view, equities and financial assets that go down in price mean that forward expected returns go up, not down. That's math. That's not Brent's opinion. At the end of the day, when we think about the dislocation, and Phil covered it nicely, when we had a drawdown of 19%. We've shown this in other charts before—that's kind of the average drawdown and median drawdown since 1950. So again, an opportunity if you have cash on the sidelines and you are a long-term investor, might be an interesting entry point for equities for the long-term investor.

As we talked about with fixed income, right, as we've seen volatility—whether that's municipals, whether that's taxable bonds—your starting yield to worst is a very, very good indicator of future expected returns over that duration horizon. So if in the aggregate bond index we have a yield to worse today of about 4.6% with a duration of about 6.3%, more often than not that's congruent to the total return, annualized total return, that you would expect over that duration horizon.

So again, balance between portfolios, Amy, is very thoughtful. Both fixed income and equities, we believe, provide good opportunities. But all of it, Amy, goes back to, what are you investing for in the first place? Investing without a financial plan, whether you're a high-net-worth investor or a corporation or an institution, endowment, foundation—you need to have goals and objectives. You need to make sure that your portfolio allocation reconciles to that goals and objectives that you've set out. If you cannot sleep at night with how your portfolio is vacillating, you need to talk to us because maybe you don't have the right allocation.

But again, having a long-term mindset, having a financial plan and thinking about your goals and objectives and your asset allocation and working with us, we think, is the way forward.

Amy: Brent, Phil, thank you both for all the information and for answering all those questions. If you'd like to submit a question, please visit FirstCitizens.com/Wealth. And just a reminder to everyone, thank you for trusting us to bring you this information. We will see you again next month.

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Authors

Brent Ciliano CFA | SVP, Chief Investment Officer

Capital Management Group | First Citizens Bank

8510 Colonnade Center Drive | Raleigh, NC 27615

Brent.Ciliano@FirstCitizens.com | 919-716-2650

Phillip Neuhart | SVP, Director of Market & Economic Research

Capital Management Group | First Citizens Bank

8510 Colonnade Center Drive | Raleigh, NC 27615

Phillip.Neuhart@FirstCitizens.com | 919-716-2403

Blake Taylor | VP, Market & Economic Research Analyst

Capital Management Group | First Citizens Bank

8510 Colonnade Center Drive | Raleigh, NC 27615

Blake.Taylor@FirstCitizens.com | 919-716-7964

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