Wellington Management
March 17, 2025
Tracing our history to 1928, Wellington Management is one of the largest independent investment management firms in the world. We serve as a trusted adviser for institutions in more than 60 countries.

The US equity rotation: Where have all the good vibes gone?

After riding into 2025 on a wave of election euphoria following Donald Trump’s win, the US stock market has struggled to find its footing so far this year. US yields have fallen, the US dollar has weakened, and there have been signs of a shift in market leadership. It’s a good time to review what’s changed and what it might mean for investors.

In my view, three things have changed since the election:

US politics  — We are seeing a different President Trump in his second term. The general assumption at the beginning of the year was that he would talk big but act in a more measured way. Tariffs, federal employee firings, and DOGE cost cutting all point to Trump’s confidence that he has a mandate to take a more radical approach now, while more market-friendly policies, such as deregulation and tax cuts, may come later.

The US economy  — There are early indications the economy is softening. Consumer sentiment has taken a hit on the employment and inflationary fronts, hinting at a less favorable growth/inflation backdrop. First-quarter forecasts for real GDP growth are being revised from positive to negative and the US 10-year Treasury is now below 4.25%. Hard data on employment, housing, and inflation will be important to track, to determine the significance of the January decline in retail sales data — the largest such slip in nearly two years.

Artificial intelligence  — The megacap tech companies are still exceptional, but there has been more differentiation in their performance recently. Since DeepSeek disrupted the market in January, these companies have faced a growing number of questions about their $50 billion-plus in annual capital expenditures. If competitors can perform the same functions comparably and more cheaply, will that capex generate a sufficient return on investment?

One thing that hasn’t changed is the Federal Reserve’s reaction function. Sticky inflation turned the narrative early in the year to a more hawkish Fed with rate cuts this year almost completely priced out of the market. Today, about three cuts are priced in — a response to weaker sentiment and consumer spending. If inflation declines toward the Fed’s target of 2%, I expect policymakers to meet the market’s expectation of more cuts. Also, US equities are still expensive relative to other regions, at 22 times 12-month forward earnings.

How has the stock market responded?

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