Market in Watch-and-Wait Mode The Federal Open Market Committee (FOMC) of the U.S. Federal Reserve concluded its March 2025 meeting at mid-month and, as expected, maintained its fed funds target at the 4.25%-4.50% level. This marked a second straight meeting in which the Fed stood pat, after cutting rates three times for a cumulative 100 basis points (bps) in fall 2025. Argus believes this non-decision reflects the Fed's ongoing concerns with inflation as the central bank monitors the overall economy. The Fed had been generally sanguine about the economy in the past two years, but now appears to be acknowledging new strains in the outlook. The Fed's closely studied post-meeting statement added language that 'uncertainty around the economic outlook has increased.' It also deleted language stating that 'risks to achieving employment and inflation goals are roughly in balance.' The increasing caution from the Fed is being echoed by the stock market. While the general trend is down, strong selling days are being punctuated by sharp upward surges. The volatility in stocks is not so much in response to specific economic data or earnings releases, but instead to policy signals from Washington. We believe this uncertainty is likely to persist in the intermediate term -- at least until the final tariff structure is certified and enacted. A second adjustment period could follow as implemented tariffs impact consumer and business spending. After that, investors may settle into a new reality. The Markets in March With a single trading week remaining in March 2025, the S&P 500 was down 3.9% for the month. That follows a decline of 1.4% in February and a 2.7% gain in January on pre-inauguration optimism. The market declined through much of March as the president promised new tariffs, including some triple-digit-percentage threats in response to retaliatory tariffs from other nations. Stocks then rallied on 3/24/25 on rumors that he might pause tariffs scheduled for April 2. For the year to date as of 3/21/25, the S&P 500 was down 3.3% on a total-return basis (including dividends). The DJIA was down 0.9% year to date, while the Nasdaq Composite was off 7.8%. Among indices in our survey, only the Wilshire Large Cap Value was positive, with a 0.8% gain. Wilshire Large Cap Growth is off 7.1% year to date, another sign of traditional leadership being flipped on its head this year. The Russell 2000 is down 7.5% year-to-date. The conventional wisdom is that smaller-cap component companies in this index would be more likely to have a domestically focused revenue base. Despite that conventional wisdom, in recent years the Russell 2000 has tracked performance of the growth indices while showing little sensitivity to tariff effects. At the sector level, leadership has firmly rotated away from growth and to defensive, income-oriented, and cyclical sectors. The best sector year to date is Energy, up about 8%. This leadership is somewhat surprising, given that energy prices for most of the first quarter of 2025 have been below average prices for 2024. Oil prices have jumped higher on Washington's pledge to attribute any future Houthi attacks to Iranian influence. Energy earnings could also swing to positive against easy year-earlier comps as soon as the 1Q25 EPS season, although that transition is more likely in 2Q25 season. Healthcare is in second place year to date with a 7% gain, followed by 4% for Utilities. Healthcare is positioned for multiple quarters of EPS growth after posting negative earnings all across 2024. Utilities are benefiting from the decline in long-term rates, which is causing bond investors to seek income in higher-yielding stock sectors. The decline in rates in 2024 was driven by optimism on the pace of Fed rate cuts. In 2025, the decline in long rates is more attributable to safe-haven investing in Treasuries among Washington policy turmoil. A handful of sectors -- Financial, Real Estate, Materials, and Consumer Staples -- are all up about 2% year to date. Industrials are fractionally positive. Eight sectors are higher in 2025 amongst a down market. The three sectors in negative territory collectively represent about 50% of total market weight and are causing the overall decline in S&P 500 stocks. In descending order, Communication Services is off 3%, Information Technology is down 9%, and Consumer Discretionary is down 14%. Consumer Discretionary is being negatively impacted by still-high inflation, concerns about slowing employment gains and economic growth, and Washington's on-again and off-again approach to tariffs. There has been only a modest bump in new vehicle activity in advance of potential tariffs. That suggests many consumers are too tapped out to consider buying or leasing a new car even at pre-tariff prices. Investors who enjoyed the giddy two-year run-up in IT stocks on AI excitement keep waiting for the all-clear to get back into these names. As seen in calendar 4Q24 earnings, fundamentals among AI economy participants are sound. Forecasts for AI spending at the enterprise level are only going up. But these stocks have not yet found a bottom. Media stocks in the Communication Services sector are also looking for a bid. The sector rotation visible in the second half of 2024 intensified in the first quarter of 2025. At some point, investors will conclude that valuations are sufficiently attractive to wade back in. The market does not yet appear to be at that point. First-Quarter GDP Outlook The advance report of first-quarter 2025 GDP will be released late in April. At that point, March economic data will be generally available. Currently, GDP forecasts for 1Q25 are based on January and February data. The Atlanta Fed's GDPNow forecast currently indicates a decline of 1.8% for 1Q25 GDP. A negative GDP reading for 1Q25 would be the first since the first quarter of 2022. The GDPNow forecast was more deeply negative earlier in the quarter. When it became evident that President Trump meant what he said about tariffs, businesses raced to pre-order foreign goods at pre-tariff prices. As such, we look for a deeply imbalanced net export-import reading in 1Q25 GDP. Retail data also shows consumers are growing more cautious. Overall U.S. retail sales for February rose 0.2% month over month, following a (downwardly revised) 1.2% decline for January. Spending in February remained reasonably healthy, with 3.1% growth year over year. Argus continues to look for positive 1Q25 GDP growth, but we have grown more cautious as well. Recently, Director of Economic Research Chris Graja, CFA, lowered the Argus estimate for 2025 GDP growth to 2.0% from 2.3%. This includes GDP growth of 1.6% in 1Q25, as the nation adjusts to the new administration. In Chris's view, services spending will support GDP growth for the full year. He expects total personal consumption expenditures to rise 2.3% for the year, bolstered by 2.4% growth in services spending. Consumers can put off buying a new sofa or laptop. The services category, by contrast, includes hard-to-avoid expenses such as rent, utilities, healthcare, and insurance. The ISM services purchasing managers' index expanded for an eighth consecutive month in February 2025 and has indicated expansion for 54 of the past 57 months. Despite the threat of tariffs and signs of waning confidence among consumers and business owners, there are multiple positives supporting a continued favorable outlook. Unemployment remains low at 4.1% in the most-recent nonfarm payrolls report. Wage growth of about 4% annually is running ahead of all-items consumer inflation at less than 3%. Chris Graja also notes that pullbacks in consumer spending often occur in the winter months. Finally, Chris notes that other forecasting tools from the New York and Chicago Federal Reserve banks are not as negative on 1Q25 GDP as is the Atlanta Fed tool. Conclusion The March 2025 FOMC meeting included the release of the Fed's so-called 'dot plot,' which signals its intentions for interest-rate policy in the intermediate term. The newest dot plot signals two rate cuts in 2025 and two in 2026. FOMC voting members were not unanimous in their predictions. In a shift seen as 'hawkish,' four members voted for just one cut in 2025, while four voted for no cuts. The Fed also slowed the pace of quantitative tightening, reducing the amount of Treasury securities it will allow to run off each month from $25 billion to $5 billion. Quantitative tightening has removed $2.2 trillion from the Fed's balance sheet since mid-2022. The central bank dialed down its GDP growth forecast for 2025 to 1.7%, from the 2.1% issued in December 2024. The Fed nudged up its unemployment forecast to 4.4% at the end of 2025, from a 4.3% prediction three months ago. And The Fed now looks for core PCE inflation at the end of 2025 to be 2.8%, raised from a previous 2.5% forecast. These are slightly less favorable forecasts, consistent with slowing growth but not recession. Amid this uncertainty, investors may remain in a watch-and-wait mode while seeking more clarity on actual tariffs and any changes in tax policy in 2025 and beyond.

The wireless business contributes nearly 70% of AT&T’s revenue. The firm is the third-largest US wireless carrier, connecting 72 million postpaid and 17 million prepaid phone customers. Fixed-line enterprise services, which account for about 15% of revenue, include internet access, private networking, security, voice, and wholesale network capacity. Residential fixed-line services, about 11% of revenue, primarily consist of broadband internet access, serving 14 million customers. AT&T also has a sizable presence in Mexico, with 23 million customers, but this business only accounts for 4% of revenue. The firm recently agreed to sell its 70% equity stake in satellite television provider DirecTV to its partner, private equity firm TPG.

Wireless services account for about 70% of Verizon Communications' total service revenue and nearly all of its operating income. The firm serves about 93 million postpaid and 21 million prepaid phone customers (following the acquisition of Tracfone) via its nationwide network, making it the largest US wireless carrier. Fixed-line telecom operations include local networks in the Northeast, which reach about 29 million homes and businesses and serve about 8 million broadband customers. Verizon also provides telecom services nationwide to enterprise customers, often using a mixture of its own and other carriers' networks.

The wireless business contributes nearly 70% of AT&T’s revenue. The firm is the third-largest US wireless carrier, connecting 72 million postpaid and 17 million prepaid phone customers. Fixed-line enterprise services, which account for about 16% of revenue, include internet access, private networking, security, voice, and wholesale network capacity. Residential fixed-line services, about 11% of revenue, primarily consist of broadband internet access, serving 14 million customers. AT&T also has a sizable presence in Mexico, with 23 million customers, but this business only accounts for 4% of revenue. The firm still holds a 70% equity stake in satellite television provider DirecTV but does not consolidate this business in its financial statements.