Weekly Market Update

Inflation or Growth – Which One Is It?

Market weighs inflation risks vs growth potential as falling treasury yields and muted cyclical vs defensive stock returns raise concerns about slowing business growth and economic stability amid mixed investor sentiment in early 2025.

March 10, 2025 5 min read

Chris Carpentier, CFA, FRM

Senior Investment Strategist

Maria Nikitanova

Investment Strategy and Research

Kyle Murray

Investment Strategy and Research

Zanub Raza

Fixed Income Portfolio Specialist

The new presidential term began seven weeks ago, triggering adizzying amounts of executive orders, and inciting tariffs, inflationary impulses, federal layoffs, and the mysterious exertions of the Department of Government Efficiency (DOGE)— highlighting only some of the outcomes of an otherwise incomplete list. A market’s efficiency is unmatched, even by DOGE’s ambitious standards, but the bond market appears unresolved. US 10-year Treasury yields surged higher in Q4 2024 because of economic optimism, with some citing inflation concerns. However, since mid-February, yields have dropped from nearly 4.8 to 4.1% due to lower growth concerns. Which one is it and has the equity market reflected these same moves?

The chart above shows the relative relationship between cyclical vs defensive equity sectors, along with 5-year real yields. The path of real yields often represents future economic growth expectations. Cyclical sectors tend to have a high sensitivity to the business cycle, having higher profits during times of growth, while the defensive sector has less sensitivity to the cycle. Looking at the cyclical vs defensive pair gives deeper clues of investor concerns below the surface. For instance, even as overall year-to-date S&P 500 returns¹ are only slightly negative, the cyclical vs defensive pair has seen a meaningful move lower since January, signaling deeper growth concerns. At the same time, we have seen real yields drop 60 bps over the past couple of months. Despite much of the recent narrative about higher inflation, especially relating to recent goods prices, markets are reacting most to the risk of slowing business growth in response to February’s flash PMI data.

US equities investors have taken notice, with the S&P 500 down 4.91% over the last two weeks. However, we just finished a healthy earnings season that gave the S&P 500 10% earnings growth in 2024, with slightly higher expectations of 12% earnings growth for 2025. We also expect real economic growth to remain over 2% in 2025. While it is easy to get caught up in the volatility, we do not believe it is time to panic. However, we acknowledge that the market today is more focused on downside risks. For more of our thoughts, please visit When Data and Headlines Don’t Quite Match Up: Where We Stand on Markets and the Economy.

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Footnotes

Disclosure

Marketing Communication

ssga.com

State Street Global Advisors Worldwide Entities

The information provided does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor's particular investment objectives, strategies, tax status or investment horizon. You should consult your tax and financial advisor.

The information contained in this communication is not a research recommendation or ‘investment research’ and is classified as a ‘Marketing Communication’ in accordance with the applicable regional regulation. This means that this marketing communication (a) has not been prepared in accordance with legal requirements designed to promote the independence of investment research (b) is not subject to any prohibition on dealing ahead of the dissemination of investment research.

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The views expressed in this material are the views of Christopher Carpentier, Maria Nikitanova, Kyle Murray, and Zanub Raza, through the period ended March 6, 2025 and are subject to change based on market and other conditions. This document contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.

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All information is from SSGA unless otherwise noted and has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.
Equity securities may fluctuate in value and can decline significantly in response to the activities of individual companies and general market and economic conditions.

Bonds generally present less short-term risk and volatility than stocks, but contain interest rate risk (as interest rates raise, bond prices usually fall); issuer default risk; issuer credit risk; liquidity risk; and inflation risk. These effects are usually pronounced for longer-term
securities. Any fixed income security sold or redeemed prior to maturity may be subject to a substantial gain or loss.

Currency Risk is a form of risk that arises from the change in price of one currency against another. Whenever investors or companies have assets or business operations across national borders, they face currency risk if their positions are not hedged.

Generally, among asset classes, stocks are more volatile than bonds or short-term instruments. Government bonds and corporate bonds generally have more moderate short-term price fluctuations than stocks, but provide lower potential long-term returns. U.S. Treasury Bills maintain a stable value if held to maturity, but returns are generally only slightly above the inflation rate.

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Exp. Date: 08/31/2025

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