While tariff tensions between the U.S. and other nations have recently escalated, the impact on earnings and the consumer still appear to be milder than expected.

Uncertainty around tariffs is a key headwind that will create volatility, but today’s markets appear to be taking more of a wait-and-see approach compared to President Trump's first term in office. For example, a recent reciprocal tariff review, rather than immediate enactment, reflects a less aggressive stance toward protectionism.

Companies potentially exposed to tariffs are now proactively taking steps, including front-loading orders and/or diversifying supply chains to mitigate risks. While specific companies may face headwinds from foreign tariff retaliation or restrictions, broader market capex expectations have moved higher.

This adaptability suggests that broader market sentiment may remain positive, particularly over further tax cuts and deregulation despite lingering concerns over tariffs.

Goods and Food Inflation

Inflation also remains a key issue facing markets, with the most recent data showing both headline and core inflation running above expectations. Energy prices are rising again after a period of deflation, while transportation services, which are up 8% year over year, continue to remain a significant contributor to inflation.

Goods and food inflation are also trending higher again after being deflationary for most of last year. These factors, among others, suggest that inflationary pressures could persist, making the Fed less likely to cut interest rates in the near future.

The "higher-for-longer" rate environment is likely to continue, which could keep borrowing costs elevated, dampen consumer spending and impact sectors already dealing with demand uncertainty like housing. Recent uncertainty around tariffs and immigration restrictions leading to higher inflation expectations and government spending cuts saw consumer confidence decline in February.

January's weaker-than-expected retail sales—partly attributed to weather disruptions and the California wildfires—has raised concerns about consumer strength. January’s retail sales data historically sees one of the weakest month-over-month prints because of a pullback in consumer spending after the holiday season.

Varied Investment Opportunities

Despite the monthly decline, overall household wealth remains robust, and real wage growth continues. This suggests that consumer spending may be temporarily subdued but not necessarily on a sustained decline. Investors will be watching upcoming data closely to gauge whether this was simply a post-holiday pullback or the start of a larger trend.

Looking forward, the AI theme remains a key growth driver for the large-cap equity indices, but with slower earnings growth expected and high valuations in the largest tech companies, investors should consider diversifying their portfolios. Other value-oriented sectors and smaller market cap companies are likely to experience earnings acceleration in 2025, offering new investment opportunities for returns beyond the Magnificent Seven stocks.

Read more on EFT Markets Monitor.