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Monthly Economic and Investment Outlook

May 2025 Economic and Investment Outlook

United States

stock market bull statue
  • 1Q 2025 GDP was slightly negative at -0.3% but this was largely due to a surge in imports. Imports were an enormous drag on GDP subtracting 5 ppt, the most since the pandemic.

US Contribution to real GDP 
  

  • Imports are not expected to be as sizable of a drag on GDP in the future as tariffs on China are acting as an embargo. We may see some front-loading of imports from other countries before the 90-day pause expires.
  • Ignoring the surge in inventories and imports, GDP was encouraging. Real final sales to private domestic purchasers, the engine of the economy posted a solid gain. Real consumer spending increased while business investment in equipment added another 1.1 ppt.
  • Extension of the tax cuts is moving along, deregulation continues, the deficit is still growing and lower energy prices are helping cool inflation and cushion growth.
  • The April employment report was strong enough to allow the Fed to continue to remain on the sidelines as it monitors the impacts of tariffs on inflation and inflation expectations.
  • Nonfarm payrolls increased 177,000 in April. Federal jobs declined only modestly but we expect this to increase in the months ahead. Healthcare employment saw large gains.


    US Nonfarm payroll employment
    Sources: Oxford Economics/Haver Analytics
     

  • The unemployment rate was unchanged at 4.2% but some of the details of the household unemployment report were concerning including a rise in the share of unemployed who have permanently been laid off and an increase in the duration of unemployment.
  • If tariffs are a short-term tool to negotiate “big, beautiful deals” then companies should hold on to workers as long as possible even if demand slips for a few summer months.
  • The 90-day pause on tariffs expires on July 9th (if no extension).

Global

  • Activity across major Developed Markets has slowed in recent months.

    DM Current Activity Indicators
    Sources: Goldman Sachs Investment Research
          

  • The administration is negotiating with individual countries to reduce the supplemental tariffs levied on them on top of the ten percent universal tariff rate.
  • The trade deal the US just announced with the UK is likely to be the first of many deals with our trade partners. New trade deals will be “frameworks” that may even allow the 90-day pause to be pushed back until the details can be filled in.
  • President Trump has talked about lowering tariff rates back down to 60 percent. China has exempted 25 percent of US imports from tariffs and is now looking at its fentanyl policy to alleviate the first set of tariffs Trump imposed.
  • Sentiment in the Eurozone has bounced back after ‘Liberation Day’ likely fueled by hopes for a number of trade deals including with the incoming German government and easier monetary policy.
  • Japan’s economic growth is likely to moderate, as tariffs lead to a slowdown in trade and a decline in domestic profits, although accommodative financial conditions are likely to prevail.
  • At the moment European and Asian energy importers are reaping the double windfall of falling oil prices and the weak US dollar.
  • Emerging markets are experiencing stronger currencies which is exacerbating tariff-related growth headwinds.
  • For the first time in history the US now pays more income to foreigners that it earns on its foreign assets. If this trend continues, the US will transfer more and more to the rest of the world, which at the same time requiring ever-larger capital inflows to finance its growing current account deficit.

    Foreigners US Assets     
    Sources: StoneX/Bloomberg

  • One way to reduce this trend is to lower interest rates but this can only be done if inflation cools and the Fed feels comfortable cutting interest rates.

         

Fixed Income

  • The Fed Funds futures market is currently pricing four rate cuts with the first expected in July. We expect 2-3 interest rate cuts.
  • Chairman Powell has said that with respect to the tradeoff between growth and inflation, “we would consider how far the economy is from each goal, and the potentially different time horizons over which those respective gaps would be anticipated to close.”
  • The unemployment rate is right on the Fed’s target of 4.2 percent. By contrast headline and core PCE inflation remain above the Fed’s target of 2.0 percent with near-term risks (tariffs) skewing them to the upside.

     
    Inflation still exceeds target
    Sources: Renaissance Macro Research/Macrobond
           

  • Although the labor market appears resilient, conditions can change quickly. As the economy heads into an expected slowdown, the labor market’s momentum is no stronger than it was in the lead-up to past downturns.
  • Markets are expecting the price increase from tariffs to be temporary and both 1 year and 5-year inflation expectations have moved down from their peaks.

    •  
    USD Infl Swap
    Sources: Piper Sandler, Bloomberg
           

Tactical Fixed Income Allocation

  • Neutral duration to the fixed income strategy’s respective benchmark as the Fed remains on an easing path. At the same time, U.S. fiscal deficits and debt concern us. At the margin international debt is becoming relatively more attractive and central banks may look to diversify their holdings in the future.
  • Slight overweight to short-term investment grade corporates versus the respective benchmark to capture additional income with minimal incremental risk.
  • Allocation to short-term Treasury Inflation Protected Securities (TIPS) due to risk of sticky inflation (in short-term) exacerbated by inflationary policies.

Equity Market

  • April was a tale of two markets. U.S. market turmoil continued in the first half as markets where whipsawed by tariff-related trade concerns. Notably the later half of the month was characterized by a series of market rallies, driven by easing geopolitical tensions amid mixed corporate earnings results.

      
Number S&P 500
Sources: Strategas Research Calculations, Bloomberg
          

  • Investors are still struggling to calibrate Trump’s tariff initiative, but the majority seem to be banking on an imminent ‘off ramp’ rather than the start of a regime change.
  • We see downside risk to earnings forecasts. In previous US recessions, the range of the fall for US earnings has been wide. Nominal GDP seems to matter more than real GDP growth.
  • In a slowdown the combination of high financial leverage with high operating leverage in a cyclical sector is to be avoided. Low EPS volatility is the factor that traditionally has performed the best.
  • Although S&P multiples have de-rated over the last few months, there is still downside to both multiples and earnings from the worsening growth/inflation mix despite the 18% rally in 18 days.



SP 500 Bear Market Rallies
Sources: Strategas Research Calculations, Bloomberg

Tactical Equity Allocation

  • Overweight to U.S. Large Cap stocks with an emphasis on equities with quality, strong cash flow characteristics and lower volatility. A focus on companies that are more insulated from tariff shocks and have strong pricing power.
  • Neutral International Developed stocks with no exposure to Emerging Markets. We remain concerned about reciprocal tariff policy as it impacts Emerging Markets.
  • Exposure to gold to serve as a hedge, in a geopolitically tense global environment, and supported by strong central bank buying.
Notices & Disclosures

Products and services offered through F.N.B. Wealth Management are not FDIC insured; and are not insured by any Federal Government Agency, are not deposits or obligations of or guaranteed by First National Bank of Pennsylvania or its affiliates and may go down in value.

This report reflects the current opinions of the authors. It contains forward-looking statements which are based on assumptions and are speculative in nature, and actual outcomes may materially differ from our expectations. Opinions, forward-looking statements, and assumptions are subject to change without notice, and various factors including changes in market conditions, applicable laws, or other events may render the content no longer reflective of our positions. Information in this report is based upon sources believed, but not guaranteed, to be accurate and reliable. Investing involves risk and past performance is no guarantee of future results, and there can be no assurance that any investment, strategy, allocation, or product referenced in this report will be profitable, equal any historical performance, or be suitable for your portfolio or individual situation. The S&P 500 Index, generally considered representative of the large-cap U.S. equity market, is an unmanaged, value-weighted index of 500 common stocks. Indices are not available for direct investment, and index performance does not reflect the expenses or management fees associated with investing in securities.

Allocations in this report reflect FNBWM’s current positioning for the referenced strategies and are provided for informational purposes only. The report does not constitute an offer, solicitation, or recommendation to buy or sell any security or take any particular action, nor does it include personalized investment advice or account for the financial situation or specific needs of any individual. You are encouraged consult with your investment professional regarding its applicability to your individual situation.

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