Making Sense: June Market Update

Making Sense

Monthly Market Update

Recorded on June 25, 2025

Amy: Hi, I'm Amy Thomas, a strategist here at First Citizens Bank. Today is Wednesday, June 25, 2025, and I want to welcome you to our Market Update series. Brent Cillano and Phil Neuhart will take a deep dive into both 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 at the time of recording and should not be considered for anything other than educational purposes. This should not be considered as tax, legal or investment advice.

Brent: Thank you, Amy, and good afternoon, everyone. Hope all of you are well. Well, Phil, it's hard to believe 2025 is basically half over.

Phil: Unbelievable.

Brent: Unbelievable. And boy, what an interesting first half of the year it's been. We've had tariffs, trade, fiscal policy uncertainty, economic uncertainty, an almost 20% drawdown that we've almost fully recovered from, geopolitical volatility and tensions with Iran. So here's to hoping that the second half is a little bit less intense than that.

Phil: We can use some calm.

Brent: Exactly. So let's jump in, Amy, and get right into it. We're going to break down the conversation into two parts like we always do—give you a broad economic update on what's going on, and then we'll jump into the markets and cover everything from an equity market perspective, fixed-income valuations, et cetera.

So Amy, let's jump into the economic section, and let's start off with a broad economic landscape and mosaic here. What we're looking at is the first bar—is what broad economists had forecast coming into this year.

Second bar is "Where are they now?" as it relates to their expectations for fiscal 2025. And what you can see as you move left to right, starting with growth, expectations were 2.1% down at 1.4%. And if you think about, Phil, where we were at the end of last year, which was 2.8%, basically half the expected growth this year. And as you kind of run your eyes left to right, whether that's consumer spending, manufacturing output or growth in nonfarm payrolls. And by the way, we have a jobs report next Thursday.

Phil: Right.

Brent: Growth at the margin, the economy is slowing. Those last two bars—inflation expected 2.5% coming into this year, now economists are at 3.3% and unemployment 4.3% up to 4.4%. So broadly, again, at the margin, the economy in the US is slowing at the margin.

Phil: What's interesting, though, even with those slower economic numbers on the left side, still positive growth.

Brent: Absolutely.

Phil: And the other thing we have to point out with all of the estimates we're mentioning is uncertainty, which you already discussed is there's a wider band of outcomes here. If you're forecasting based on, say, trade wars that are changing really rapidly or tax legislation, which is moving through Congress, it's very hard to know where we are. Hopefully, we have more certainty by the end of the summer than we do today, and you could put a little bit more stock in forecast accuracy.

Brent: Absolutely. So let's move ahead, Amy. Let's take a look at growth, not just in the United States but globally. And what you can see here is that a slowing growth outlook is not just a US phenomenon.

Phil: Right.

Brent: It's a global phenomenon. And you can see where economists were coming into this year for the world about 3% now today sitting at about 2.7%. And as you run your eyes down both of those columns, you can see that analysts, by and large, for most areas of the world have reduced their expectations for growth.

And when you look at the comparisons of 2024 to where economists are today for their view on 2025, almost every area of the world is slowing year over the year with one exception, which is the Euro area, which is expected to pick up a 10th. But by and large, not just the US slowing, a broad global slowing.

The good news is when you kind of look at the left here and we take a look at quarter-over-quarter GDP growth, you can see how strong, Phil, growth was in 2023 and 2024. The good news is that broadly economists believe that 2025 will be sort of that trough as far as fiscal slowing in the United States. And when I look at forecast for economists for 2026 and 2027, it's a reacceleration in growth from the 1.4% expected this year to 1.6% in 2026 and 1.9% in 2027. So the good news is is that much of that slowdown is expected to be compartmentalized this year with the reacceleration, so fingers crossed if that happens.

Phil: And one thing we should point out is that first quarter you see negative GDP growth. That was really a distortion in which those who were anticipating tariffs pulled forward imports.

Brent: That's right.

Phil: So net exports—imports minus exports, or exports minus imports—really drew down GDP. When you look at things like real final sales or personal consumption, they were still positive. So that first quarter being negative, we don't want to overreact to that, honestly.

So what about recession probabilities, as you look at the right side? Recession probability has risen, as you can see here. This is consensus from economists to 40%. Why is that? There's more uncertainty. But we are not anywhere near the levels we were in late 2022 through 2023, in which economists had a very well-above 50% chance of recession. We should note, we did not have a recession.

Brent: That's right.

Phil: So are economists may be being a little bit trigger shy now in terms of calling recession? Potentially. But we do tend to agree that recession is not imminent. And yes, there are more risks. The probability has risen of the bear case. But the base case still has expansion in our view. So let's talk about tariffs, something that we look forward to not—

Brent: Our favorite topic.

Phil: Yeah, we look forward to not covering every month. But as a reminder—why we're talking about it this month—is July 9th is the 90-day delay that we had in April 9th of reciprocal tariffs. That's the end of it is July 9th. Now there's going to be a lot of negotiations over the next couple of weeks. Could we see extensions? Of course, we could, but that's where we sit. So we felt here sitting in late June, it was our responsibility to at least cover tariffs quickly.

So where are we? What is enacted? We have the 10% universal tariff. We have a 25% tariff on autos and metals. A little bit on Canada and Mexico, but remember they're mostly exempt. And then China—this is the big swing factor—30% tariff, that's the dark blue. If you add where we were before at 145%, that's that gray bar there, the fourth bar, it just shows how important China is in terms of our average effective weighted tariff rate.

There are things pending. We have 25% on semiconductors and electronics pending and pharmaceuticals pending. But the proposed tariffs on this far right, you have that 90-day delay of China, which expires in August, and you have reciprocal 90-day delays on other countries—Vietnam comes to mind, for example, that expires in July. That's another really big swing factor.

So the truth is we are not out of the woods in terms of certainty here. What we often hear from business owners is they just want to know the rules of the road, right? If tariffs are here, then they're here. They will work around that. They will deal with it. But the uncertainty is what we need to move past.

Brent: Yeah, clarity allows corporations to make decisions that they need to make to be profitable and to drive their businesses forward. And it is interesting to see specifically in the news whether it was the Euro area saying, "Hey, let's discuss this." So I think between now and July 9th, you'll start to see a little bit more rhetoric and a little bit more banter back and forth as a posture to kind of hopefully come to a good negotiation.

Phil: Hopefully progress, right? So let's talk about the revenue side of tariffs. Remember, tariffs are just a custom duty, right? It's just a duty that is charged by the government on the importer. You could see here if you look at the trailing 12 months, we have gathered $140 billion, the US has, in custom duties.

Remember, that only includes a few months of higher duties. So if you annualize that number, we're running at about $250 billion in custom duties.

Brent: That's a big number.

Phil: So when you think about things like the deficit, which we'll talk about in a moment, it is a big number, but it also is a big number that someone is paying, right?

Brent: That's right.

Phil: And that might impact margins. That might find its way into inflation. We shall see, but still early days. But certainly custom duties are rising. I mentioned inflation. Let's talk about that. We've had recent inflation data, which has been well below expectations, particularly CPI.

Where are we running on inflation? As you could show here, we're showing both Consumer Price Index and core PCE—personal consumption expenditure deflator—which is the Fed's preferred measure. Both measures are running above 2%, which is the Fed's target, have of course come down from the extremes, but inflation remains positive and remains above the Fed's target. We have not seen dramatic moves that you might expect from tariffs.

The reason is is that all this data is lagged, and we probably would not see that for several months. Additionally, we've had a lot of delays. The truth is the effective tariff rate's at 11%, not 25%, so it won't feed through quite as much. But this is still something that the market is watching very closely. Inflation data is in some ways the most important data of the month that's not tied to the labor market.

Brent: Yeah, and as Chair Powell mentioned last week in his presser, right? You know, will tariffs be this price shock, or will it be more pervasive in the context of inflation? Time will certainly tell.

So as we move ahead to the next slide, let's talk about monetary policy. And the Fed—as I just said, the Fed met last week—held the fed funds rate steady at 4.25% to 4.5%. In the press conference, Chair Powell said the things that we sort of expected him to say, Phil, right? Certainly, the labor market, maximum employment, the economy is broadly in good shape. He did acknowledge some slowing, some very, very small slowing at the margin. He did talk about tariffs and the potential impact, but by and large held prices steady.

And you can see where we are today is the market is currently pricing in about 2.4 cuts between now and the end of 2025. So basically getting from about 4.4% down to about 3.7% to update this on the fly here. Looking all the way out to the end of 2026, pricing in almost exactly 5 cuts, which would take that number a little bit below 3.2%.

But, again, we've seen so much variability in fed fund futures and expectations as it relates to what the Fed is going to do. Again, we would probably still take a little bit of the under there as it relates to the 2.4 cuts this year. Time will certainly tell.

Phil: Yeah, bias lower on the fed funds rate, but clearly, the Fed with inflation above 2% in a labor market, which you'll talk about in a second, that's okay. We are not in a Fed that's in a rush to cut rapidly.

Brent: Yeah, and as I mentioned in the opening, right? Next Thursday, July 3rd, they pulled forward the jobs data. We get another print, expectations for about 116,000 jobs, which again is above that 100,000 job level to keep the unemployment rate from moving higher.

And as you can see on this graph, if you look at the last 3 months' 3-month moving average, we've seen that 3-month moving average move higher. So despite variability in the labor market, the labor market overall remains strong, and we're not really seeing any material erosion at the margin. It's something that we're certainly going to be watching.

As we move ahead to this next slide here, and we think about people receiving jobless benefits. It's hard to see here, but if you look at the far right, the number of people receiving unemployment insurance benefits is at the highest level, Phil, since November of 2021.

Really hard to see on that graph, especially when you look at the broader history. Still well below that sort of long-term average. But again, something that you and I have always said that we're watching is jobless claims and continuing claims to look for signs that the labor market might show signs of erosion. Starting to move higher, not at a point where we feel that something is going to materially happen, but something that we're certainly watching.

Phil: Right. Usually, if the labor market starts to deteriorate, you see it here first. This is weekly data, higher frequency, so we definitely are keeping an eye on that.

So what about the consumer? The consumer is keeping their jobs, and generally what they're still doing is spending, right? Here, we're showing personal consumption expenditures. This is percent change year on year. You'll notice services spending still exceeds goods spending.

The goods spending, we have seen an improvement. Some of that might be a little bit of a pull forward around headline risk related to tariffs. There was a lot of fear on electronics, for example. So we might have seen some pull forward in terms of goods spending, but the truth is—as long as Americans have jobs, they tend to spend.

Brent: That's right.

Phil: Now that does not mean, as we turn ahead here, that does not mean that all Americans are prospering, right?

Brent: That's right.

Phil: We know that there's a real split in terms of consumption of high-income, middle-income and low-income spenders. And what we are noticing, especially when inflation rose dramatically in 2022 and in the years following, that's a tax on all of us, right? But obviously, if you live paycheck to paycheck, it hurts more. And what we saw was a dramatic increase in the use of credit cards, right?

If you're living paycheck to paycheck and inflation hits you, what do you do? You access your credit card. Well, unfortunately, what that eventually yields is higher delinquency. So here we're showing 90-plus-day delinquent—credit card and auto loans both have risen.

So we don't want to look at personal consumption in aggregate and say all is fine. The truth is there are some cracks underneath the hood. This is something we are watching. We've shown it before, and we will continue to watch delinquency rates as we move forward.

So let's talk about the fiscal situation in the US. Obviously, there is an important tax bill moving through Congress. It is currently with the Senate. Where are we in terms of debt to GDP within the US? These are congressional budget office forecasts, so don't shoot the messenger.

Brent: It's bipartisan.

Phil: This is bipartisan congressional budget forecast. So where were we in 2014? Debt to GDP was about 73%. 2024, let's call it a 100% debt to GDP. This, by the way to be clear, is debt held by the public.

Brent: That's right.

Phil: Some measures you'll see over 100% because it includes other—

Brent: Yeah, there's about 7 trillion—

Phil: Yeah, but this is debt held by the public. So previous baseline, there is no law enacted, right? In other words, the 2017 tax cuts roll off, et cetera. Previous baseline debt to GDP would be a 117.1% GDP, so still an increase. With the previous baseline but with this current tax bill, that moves up to 123.8% based on congressional budget office estimates. But if you add tariff revenue, which we just mentioned is a big number, that basically goes flat to 117.1%.

Brent: Yes.

Phil: So a few things to point out here. Look, these are estimates. This is moving through the Senate. These numbers are going to change because the bill is going to change, and not to mention they’re estimates. We don't know what economic growth is going to be. And by we, I mean, the CBO doesn't know what economic growth is going to be. But what it does show is that what's unlikely is that we see an improvement in debt to GDP in the US.

Brent: Yes.

Phil: We still have an aging population.

Brent: Yeah.

Phil: We still—Medicare, Social Security—these are still very expensive programs. And with the aging population, it is a burden. But underneath the hood, it does matter. It also shows that maybe tariffs are becoming something that we're going to get hooked on, right?

Brent: Yeah.

Phil: That as a revenue source—

Brent: That's a material offset.

Phil: It's going to be an increasingly important material offset. But the idea that debt to GDP is going to be solved easily in this nation is probably unlikely.

Brent: And I want to make it clear. This is not just a US thing, right? There's many sovereign nations around the world that are struggling with the same type of thing. And I think this is such an important topic, Phil, that you and I are going to bring this forward in subsequent webinars to talk about not only the trajectory of federal debt and some of these estimates but also fiscal policy—the impact of interest expense because from a mathematical perspective, even if interest rates were to fall, the aggregate level of debt held still increases the amount of total dollar interest expense. So there's a lot of things that I think that our listeners would want to know. So we're going to bring this forward in future conversations.

Phil: Yeah, it remains really a challenge. And the only other thing I'll add, I should have mentioned is these 2034, this is also 10 years out.

Brent: Yeah, so anything can happen.

Phil: A lot of things can happen. But these are the estimates as they currently sit.

Brent: So let's shift gears, Phil, and let's talk about the markets. And let's jump right in. Let's kind of—I talked about the volatility and that sort of drawdown and V-shape recovery that we saw in the first half—let's kind of put that under the microscope here.

So the first column is looking at broad-equity and fixed-income benchmarks from the US market high back on February 19th through the US trough on April 8th. And you can see US equities drew down 19.3%. Actually, intraday, it drew down over 21%, but we finished the day. So as you kind of run your eye down the list, it wasn't just a US equity drawdown. You can see international developed markets and emerging markets also felt some pain.

But fast forward to where we are today, basically from February 19th through June 23rd, you can see US equities have all but recovered. And if I were to actually fast forward that to the actions through the 24th, we're effectively almost flat from February 19th to today.

The interesting thing is international markets fell but have recovered, and you can see them in positive territory. When I go to that last column and look across the board, almost all US equity markets year to date are positive. And the good news is, you know, US taxable fixed income positive. Municipal bonds after a little bit of tumultuousness in the first half are basically effectively flat.

So as quickly as the markets went down over that, you know, a little bit less than 2-month period, we've all but completely recovered from an equity market perspective.

Phil: And it's a reminder of the importance of diversification portfolios.

Brent: Yes, absolutely.

Phil: Look at international developed, look at emerging market, look at fixed income. All three are outperforming US stocks, which is not something that you could have said for a number of years, but it just reminds us that there's other asset classes than just US equities.

Brent: Absolutely. So if we get a little bit more under the microscope with US equities. So this is the S&P 500 from January of 2022 all the way through to today. And you can see from the bear market low on October 12th of 2022, we are up cumulatively more than 75%.

And the interesting thing here is that we are still in a bull market run. The drawdown that we had—while it was almost 20%—it didn't meet sort of that pervasiveness. You usually need a persistent period of time, which is usually defined of 2 months or more, and we didn't really hit that. So in our opinion, we believe that we're still in an upward bull market trend, and you can see we're effectively flat on the S&P 500 and likely to make higher highs when we kind of get into our forecast.

So let's talk a little bit about some of the geopolitics and what's gone on. And that's certainly had effect on commodities. And specifically here we're looking at two commodities specifically. Well, we're looking at oil on the left and the US dollar index on the right.

And what I want you to look at—if you look at the chart on the left and look at oil, you can see that broad—if you were to draw a line, there has been a downward trajectory from the summer of last year through today. But despite the tumultuousness with Iran and the potential for disruption in oil and them potentially closing the Strait of Hormuz where certainly a lot of Iranian oil and LNG—liquid natural gas—goes through, we would expect volatility in oil prices.

But the interesting thing is over the last couple of days, we've seen oil fall almost 14% in 2 days, which is just unexpected and, again, what you would expect from a volatile asset class like oil. But again, hard to predict what's going on. You would think it would be the complete opposite, that if you had that type of geopolitical conflict that it might spike oil prices up. Saw a little bit of that, but it's come back down.

On the right-hand side, when we look at the US dollar index, from the beginning of this year to now, we've seen the US dollar fall a little bit more than 10%. If I were to expand this out, though, and look, jeez, over the last, I don't know, 10 years, 15 years, the US dollar is still remarkably high relative to developed and emerging currency baskets.

We've seen a little bit of a fallback here, which is good as it relates to exporters and the translation of foreign returns back to US dollars. But again, we expect to see both volatility in commodities and in the dollar from here.

Phil: Yeah, weaker dollar tends to help corporate earnings.

Brent: Yeah.

Phil: It does give a tailwind there. So let's talk about valuation for a moment. We say valuation, here we're showing price-to-forward earnings. This is the price you're willing to pay for a dollar of earnings. So when this is high, that means the stock market's more expensive, relative. When it's low, the market is cheaper.

A couple of things to point out. First, and we've said this before, but we'll say it again—the market rarely trades at the average, right? So when you hear folks say the market's expensive versus history or cheap versus history, well that's almost always the case.

Brent: Yeah.

Phil: It can stay expensive or cheap for quite a long time. It really is about fundamentals under the hood. That said, we have had—we are lower in terms of valuation than we were at the peaks of this cycle, but certainly still an expensive market when you look overall. Let's talk about some of the fundamentals that are driving that.

So on the left side, this is gross margin by market cap. So if you look at mega cap, which here is defined as the largest 50 companies, very high gross margin. That is normal. As you can see, there's a spread between mega cap and the other 450 companies in the S&P 500.

But you can see recently—and mega cap has dramatically outperformed in recent years—

Brent: Yes, it has.

Phil: You can see that tick up in mega-cap margin and not really that same tick up in the other 450.

Brent: Yeah.

Phil: So when you step back, you say, "Well, maybe, there is some justification for mega cap's outperformance." These companies have really great margin. But you say, "Well, are there other good companies?" Well, there absolutely are. If you look at the largest 3,000 US equities on the right side here, what percentage of them have gross margin over 60%? It's the highest.

Brent: That's incredible.

Phil: It's the highest in 26 years. So there may be a reason the stock market's more expensive. It may be that there's just more profitable companies.

Brent: That's right.

Phil: So we don't want to just look at valuation and say, "Well, the market's expensive versus history. That means it has to go down."

Brent: Yeah.

Phil: The truth is it's about fundamentals. Now if this starts to deteriorate, our view does change. So you say, "Well, does valuation or does margin matter?" On the left side here, we're showing a valuation measure called enterprise value to forecasted sales. Think of it like price to earnings, where higher here means more expensive, cheaper, lower. If you group this by gross margin decile, right, into tenths, right?

Brent: Yeah.

Phil: Higher gross margin is more expensive than low gross margin. This makes logical sense that you'd pay more for a company that has higher margins, but the data shows that as well. So again, when you think back to the previous slide, there's more companies making more money. You would expect the market to be more expensive.

And then when you think about portfolio construction, here we're thinking more about the Magnificent Seven, really the top 10 on the right side. This is price-to-forward earnings for the most expensive, or for the largest companies, top 10, and for the other 490. The top 10, yes, they are expensive versus, say, their 15-, 20-year history—off the highs, I would point out—but the other 490 are not.

So there's a lot of good companies, and you can't really say that the whole market is expensive versus its own history. The largest names are expensive versus their own history, which makes some sense. And we think about that in portfolio construction.

Brent: And you get concerned when there's sort of this bifurcated differential in valuation, but also in in profitability. You can see that there's profitability in both the mega as well as the residual 490s.

Phil: Exactly.

Brent: So to that point, let's talk about corporate earnings. And again, as we come to wrap up this second quarter in the next couple of days, all eyes are sort of forecast on what second quarter earnings are likely to be. Full year, you can see we're estimating at 9%. As we start to look at early expectations under the hood for second quarter earnings, analysts as of June 19th are expecting about 3.8% year-over-year earnings growth for the second quarter.

What is really interesting is that 10 out of 11 sectors are expected to have year-over-year earnings growth, which would be the highest count since the third quarter of 2022. So continuing along your theme—across the board, more sectors and more companies are being profitable than what we've seen in previous cycles, which again supports the valuation story there.

And as we kind of move forward—and look there's still a lot of volatility going on—but right now, expectations for full year 2026 is looking at estimated earnings growth of 13.7%. That's been a certainly a variable number that's come up a little bit over the last several weeks, but an incredibly healthy number. Certainly, a long time to go that could change that number. But relative to the long-term average of 7.6%, this year as well as next year is above average.

And when you look at the chart on the right and I look at the next 12 months' operating margin—not current, but projected next 12 months—you can see that little bit of the hockey stick up. Estimated next 12 month operating margins for S&P 500 companies sitting at 17.7%. It's moving higher, not lower.

Phil: That's right.

Brent: Which, again, is a great thing to see.

Phil: Yeah, you had this little tick down with some tariff fear, but with tariff delays that's starting to come back up. Margins have not deteriorated at a scary level.

Brent: Yeah.

Phil: What may be the most important chart we think about relative to the stock market is this chart, though.

Brent: Yeah. Fundamentals have to be there.

Phil: You pay for margins. You pay for margins. So what about IPOs? Something we haven't talked about in a little bit is are we seeing an increase in IPOs? This is looking last 12 months, so kind of smooth. And we're focused on IPOs over $100 million. You can see the explosion of IPOs in the time immediately after the pandemic, major deterioration. We've seen some recovery, but still very low compared to even pre-pandemic times.

But we've had a couple IPOs this year, and certainly something we are hearing is a little bit of optimism that maybe the IPO window—

Brent: Maybe loosen up a little bit?

Phil: Loosen up a little bit. Are we going back to extremes? Probably not in the near term, but there might be a little bit of optimism, at least on the margin, that the IPO window is opening up.

Brent: Yeah, and rates are going to matter.

Phil: Yes.

Brent: The trajectory of economic growth, if economists are right and 2026 and 2027 might be better from a growth perspectivem, if we can get the rate story and the growth story to work itself out, we might see better IPO volume from here.

Phil: That's right. So let's talk about our price target just very quickly. As a reminder, our previous next 12-month price target was 6,300. We're adjusting it to 6,400 here.

I'm using the word adjustment intentionally. I would not call it a reset. We set 6,300 before April 2nd, before the events of the tariffs. And we did not adjust it because we just felt that negotiation was the path and that we would see some adjustments to tariff rates.

What I would point out on the base case is—think about a 12-month-forward price target. You are looking at the next 12-month earnings, but really the 12 months after that.

Brent: That's right.

Phil: Thirteen to 24 is what matters. So in the base case, we've seen some down revisions to our earnings. So we are not adjusting NTM—next 12-month earnings—and we're assuming about 8.5% earnings growth after that, which by the way, is below our consensus now.

Brent: Yeah, we just said 13.7%.

Phil: Yeah, below our consensus, and with a little bit of multiple contraction. The multiple—when I say multiple, think PE, price to earnings—that is the most volatile component. That can move a lot, but that gets us to 6,400. The only other thing I'll point out is we have a bear case and a bull case depending how you feel about the world. We do have more downside to our bear case and upside to our bull case. Why is that?

There is a lot of good news priced into the stock market. So I describe us as optimistic, but not max bullish. We do think the market can move higher. That does not mean we don't have some volatility, particularly this summer with some of the things we're contending with—some uncertainty we're contending with. But over the next 12 months, we do think the market can move higher.

Brent: Yeah. So let's shift a little bit away from equities and let's talk about fixed income. First of all, first column here, we're looking at yield to worse, which is basically yield to maturity adjusted for some of the optionality in bonds. But you can see where we are today relative to where we were at the start of the year, still across all these various fixed-income sectors, still very attractive starting points, right? So taxable bonds down a little bit from the start of the year, but again, when yields go down, prices go up, right? So that's actually a good thing from a total return perspective, still attractive at 4.6%.

I would argue municipal bonds, which has gone the other way, you know, yield to worse has actually gone up, right? So as far as expected return on a tax-equivalent basis, if you're in the 35% tax bracket, that's about a 6.1% to 6.2% tax-equivalent yield. And the duration of that benchmark is between 6 to 8 years. So that is a good total return profile.

So having balance in one's portfolio, at least today, you're getting compensated for that relative to where we were some quarters ago and some years ago.

Phil: Absolutely.

Brent: So let's talk about treasury markets. Dark blue line is where the yield curve was at the beginning of this year. And you can see upward sloping, a little bit more of a straight line inside of that short end to belly. And we're sort of talking about that 3- to 10-year part of the curve. The gold line is where we are today. And you can see that sort of big droop inside of that 2 years out to 10 years where we've seen yields fall, which mean prices rise.

But by and large, we've seen a good bit of rates volatility along the way. What I think is very interesting is the 20-year and out. The 20-year and 30-year has actually basically been either flat or gone up a little bit. That feels like a referendum on fiscal policy.

I think there's certainly going to be continued volatility in sort of the 10-year-and-out space. Time will certainly tell, where we go there. I think the slide that you covered as it relates to our federal debt and fiscal policy is going to play a pretty big role in where that part of the yield curve moves. But by and large, if it follows in line with where Fed monetary policy is likely to go, we think some of that shorter part of the curve might come in a little bit more.

Phil: But further out, who knows? Right?

Brent: Yeah, we don't know.

Phil: There's risk. There's term premium. We certainly might not see dramatic moves further out in the curve even if the Fed is cutting. What about corporate spreads? So we say spreads here—what is this? This is corporate bonds. The premium you have to pay for the, well, a lender has to pay to you to buy their bond over Treasuries.

Brent: Right.

Phil: So when you see spreads rise—for example, the pandemic era—that means more risk, right? So this is a great measure for underlying risk in the marketplace, something we watch closely. We're watching both high-yield, which are lower-grade, and investment-grade fixed income here.

You'll see the spike earlier this year. This was during the 19% drawdown. Usually, if stocks are selling off, spreads are widening because there's more risk in the marketplace. But that's come back down, right? Particularly in the investment-grade space, yields remain quite tight. So we are not seeing pricing in the fixed-income market that we would characterize as high risk or viewing cataclysm as around the corner, which is great to see.

Brent: Yeah.

Phil: One final point here—geopolitical events. This has been a real historic last couple of weeks, and there's a lot happening geopolitically this year. A question we often get is, you know, "How do you invest around that?" Well, the truth is we don't swing portfolios based on headlines.

Brent: That's right.

Phil: We have a quantitative approach, and something that we've shown before and we want to show again is if you look at geopolitical events all the way back to the 1930s in these first two data columns here and you say, "Well, what's the time to bottom in the S&P 500, and what's the time to recover that level?" It's 16 trading days down, 16 trading days to recover.

Brent: Not 16 months, not 16 quarters. Sixteen trading days.

Phil: That's essentially 3 weeks. And the last couple weeks remind us that the stock market can even move up in times of concern. So geopolitical events, they matter. They matter for the world. Sometimes the market sees through them, right? If you look 12 months from the bottom, the market tends to be up—the far right column on both median and average.

Brent: Well, Amy, I can see that we've got a lot of questions in the queue. So why don't we shift over to the Q&A?

Amy: Well, thank you guys for all of that information and taking a deep dive into markets and the economy. If this is something that's helpful to you, just a reminder that we have several publications throughout the month from weekly videos to written content. You can find all of that on our FirstCitizens.com Market Outlook page. So be sure to check that out. You can also hit the subscribe button to get all of that information sent directly to your inbox.

So jumping into the questions, Brent, Phil, a lot of uncertainty. Things we're hearing from clients and you reiterated today is a lot of people are just in that wait-and-see mode, pushing away from the table. What's going to bring people back to the table?

Phil: Yeah, look, I think time is a variable here. I get the sense that the initial reaction was, "Wait, we have to just see how this turns out." And I think depending how goods-based a business is or import-based, that remains the case, but for a lot of service companies, et cetera, I think we kind of move past that initial shock.

Brent: Yes.

Phil: And business is starting to get done, at least on the margin. We mentioned a couple IPOs, the potential for more M&A. I'm not saying that there aren't companies waiting. There are. But we do need more certainty for those who are goods-related. And I think that hopefully this summer is key to that, right? If you are in a business that is very dependent on imports, you just need to know the rules of the road. That helps you determine your CapEx plans, your hiring plans, et cetera. So I do think for those companies, this summer is important. And hopefully by the time we get to Labor Day, we know more than we know today.

Amy: And we're wrapping up the first half of the year here coming in on some key dates. Brent, what are your thoughts around where things have been from a volatility standpoint? We've kind of come full circle on the equity side of things. What are your thoughts there?

Brent: Yeah, so let's hit a couple of those key dates, right? As Phil mentioned, you know, July 9th is going to be a key date as it relates to tariff and broad trade policy. But we can't forget we have the debt-ceiling debate that's likely to hit in August, which will have an impact on fixed-income markets and also equity markets. So there's going to be a lot of tumultuousness potentially around that.

And, you know, additionally, extending the Tax Cuts and Jobs Act, as you said, it's still sitting with the Senate. I think there's got to be a lot of negotiations still to go, a lot of pay-fors, specifically around SALT tax deduction and where that actually ends up. We've sort of been all over the place—from $10,000 potentially up to $60,000 or $80,000 back down to $40,000.

So there's going to be a lot of negotiation around that, which will create fiscal policy, economic uncertainty, market volatility across the board. Having said that, as Phil said really nicely, we focus on fundamentals. The underlying fundamentals of equity markets are strong and potentially getting stronger.

So it supports the equity market recovery and rally that we see. And certainly, as Phil mentioned, you know, our forecast 12 months forward—not to the end of the year, but 12 months forward—is for 6,400. So we think that there's more upside to go in US equity markets. But we also can't forget what I showed in that slide as it relates to international markets both developed and developing.

International markets have outperformed US markets handedly by double digits this year. The good news is that we actually came into this year from a portfolio perspective being for the first time in 5 years overweight international markets by a small margin where we've been materially underweight. So we've reaped the benefits of that in our portfolios. And we expect that both developed markets and emerging markets over the shorter- to intermediate-term will continue to do well.

Amy: And I think the biggest question that is on all of our minds as we approach the July 4th weekend, are you guys going to the mountains or the beach?

Phil: Mountains for me. Mountains for me.

Brent: Beach for me.

Amy: Yeah, nice. Well, I'll stay in Raleigh, and we'll have the whole state covered. Well, thank you guys as always for answering questions and getting all this information out to our viewers. Thank you for trusting us to bring you this information. That's something that we never take for granted, and we will be back with you 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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