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I recently interviewed a panel of our senior investment professionals to discuss the implications of President Trump’s first 100 days in office, the impact of tariffs, and the resulting market volatility. They provided insights into the resilience of the U.S. economy, the challenges and opportunities in the tech sector, and the broader economic and market trends.
The panelists included: Jennifer Johnston, Director of Research, Municipal Bonds, Franklin Templeton Fixed Income; Jeff Schulze, CFA, Head of Economic and Market Strategy, ClearBridge Investments; and Jonathan Curtis, Chief Investment Officer, Portfolio Manager, Franklin Equity Group.
This summary will delve into the key topics they analyzed.
In our panelists’ view, the U.S. economy continues to be resilient. Despite recent challenges, the labor market remains healthy. The drop in initial jobless claims to 215,000 on April 17, 2025, is an historically low figure given the size of the labor force. This indicates that a significant portion of the workforce remains employed, and labor income, a crucial factor in consumption, remains strong.
Additionally, while consumer confidence has declined, actual consumer spending has been broad-based and robust. This suggests to us that U.S. consumers are in a good position to continue their consumption patterns.
A combination of factors led to a recent, simultaneous decline in U.S. stock valuations, fixed-income rates, and the U.S. dollar. Forced liquidations and a reversal of foreign investment in U.S. assets have put pressure on Treasury yields and the U.S. dollar. This de-risking follows years of overaccumulation of U.S. assets.
We also believe the U.S. dollar has been overvalued for the past three to five years and we’ve expected some adjustment to it for quite a while. Additionally, the market had been reacting to the possibility of President Trump removing Federal Reserve (Fed) Chair Jerome Powell, which Trump later said was not his intention. Fed independence is viewed as crucial for U.S. capital markets, and any threat to it could be highly disruptive.
If the U.S. economy experiences stagflation, we believe value stocks would look favorable, as they have tended to perform well in higher-inflation and lower-growth environments. Historically, sectors like energy, materials and health care have also done well during stagflationary periods. Investing in commodities, precious metals (especially gold) and commodity-producing countries can provide additional diversification.
In our opinion, the Trump administration has a high tolerance for equity market pain and is focused on resetting the economy, which includes bringing manufacturing back to the United States. It extended the tariff adoption by 90 days and is not providing many signals on negotiations.
While the administration is less concerned about equity markets, it is closely monitoring the 10-year Treasury yield. This is because rates above 5% would make financing the government as well as capital investments in manufacturing more difficult. It’s also worth remembering the forthcoming positive aspects for the United States economy of Trump’s agenda, such as deregulation and corporate tax cuts, especially incentives for capital investments.
We expect the S&P 500 Index is likely to be range-bound between recent lows and around 5,400 in the short term, with a potential recession being the key risk factor. Historical data show that market declines during recessions can be modest, and the current selloff has already reached those levels. Thus, we believe the market has priced in much of the negativity, which may present opportunities for long-term investors.
The Trump administration’s latest cuts to health care research funding are more severe than the initial reductions and could negatively impact the health care sector. We are concerned about who could step in to fill the gap, as venture capitalists are less likely to fund such speculative, early-stage research. Large endowments and foundations like the Gates Foundation might help, but the amounts needed are substantial.
Despite the challenges, the sector remains defensive, with people continuing to need medical care and innovations – like genomics, biotech, and artificial intelligence (AI) – reducing health care costs and improving productivity. In our analysis, this resilience and ongoing innovation presents potential opportunities for equity investors to find mispriced companies that can navigate the current uncertainty.
At the start of the year, there was high optimism in the tech sector. However, the introduction of tariffs (and subsequent pauses) have led to declining business sentiment and uncertainty in cost structures, especially for companies with supply chains in Asia. Ongoing legal cases against tech giants like Google have also contributed further to the uncertain environment.
Despite these challenges, we believe a couple of growth themes remail largely intact. There is still significant investment in AI from major companies such as Google and Amazon. We believe the Magnificent Seven (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla) remain strong in fundamentals and innovation. Additionally, there is continued demand for AI applications from firms. In our analysis, the productivity gains from AI will likely be profound, and the United States is the leader in this area.
Leading up to the U.S. presidential election, there was a noticeable slowdown in municipal revenue growth. However, the municipal bond market has benefited significantly from the post-Covid stimulus and inflation, which have driven up sales and income taxes. These taxes are primary revenue sources for state and local governments, including transit districts, and have helped strengthen the credit spectrum for municipal bonds.
Despite some sectors struggling more than others, the overall credit position for municipals looks strong, and the slower growth assumptions in fiscal year 2025 budgets are being outpaced. This robust positioning, combined with management policies that have been honed during challenging times, suggests to us that the market is well-prepared to weather a potential rise in inflation or a recession. Even with increased supply in the municipal market and some volatility, sectors across the board are ready to issue and build capital, though higher rates could slow this activity.
One sector of note is the education sector. The higher education market is divided, with strong institutions like Harvard and Stanford on one end and struggling small regional liberal arts schools on the other. Many private colleges have closed or merged over the past two years, an unprecedented trend. While concerns over funding for research grants at top institutions exist, we believe these schools are well-positioned to absorb such losses.
There has been some discussion of municipal bonds’ potential loss of their tax exemption, which could have far-reaching implications, including higher borrowing costs. However, the tax exemption for municipal bonds is crucial for funding infrastructure at a lower cost, and there is strong support in Congress to maintain it. While certain sectors like higher education, private-activity bonds and health care could be targeted, we think the overall municipal bond market is unlikely to lose its tax-exempt status.
We think there is more value in staying neutral on duration while adding value through credit risk, often by investing in longer maturities and lower-rated bonds. There are also opportunities to capitalize on retail investors’ panic during volatility, with opportunities across the yield curve, especially in high-grade bonds that have become cheaper.
Despite ongoing uncertainty and volatility in the equity and bond markets, we believe the current environment presents significant opportunities. The tech sector, particularly in AI, remains a strong area of growth, with U.S. companies leading the way in innovation. We believe focusing on company fundamentals is crucial, as this approach can help navigate challenges and seek to take advantage of what we consider market mispricings.
Stephen Dover, CFA, is Franklin Templeton’s Chief Market Strategist and Head of the Franklin Templeton Investment Institute. Originally published in Stephen Dover’s LinkedIn Newsletter. Follow Stephen Dover on LinkedIn where he posts his thoughts and comments as well as his Global Market Perspectives newsletter.
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