Comments over the weekend by President Trump that he would not “rule out a recession” has sparked further market declines today. At the time of this note, the S&P 500 was trading 2.5% lower and the technology oriented NASDAQ had declined by nearly 4%.
The overall market drawdown is not yet extreme, as we noted last Monday. After some up and down trading sessions last week, the S&P 500 is now off 8.6% from its all-time high, while the NASDAQ is off 13.5%. For context, the S&P 500 typically experiences a “correction” – defined as a market decline of 10% or more – at least once per calendar year.
As of this moment, the S&P 500’s valuation remains at a forward PE multiple of approximately 20.3x. While 2025 has thus far been marked by renewed volatility, this is still near the highest level on record; the metric has only risen above 20.0x in the tech bubble, the post-Covid bubble, and now. A return to a more normal 16.9x multiple would require either a further 17% market decline or a 20% increase in earnings, holding all else equal.
President Trump and his cabinet’s acknowledgement that the US economy could be in store for some pain as he implements his policy aims is a new development. Historically, the President has been very sensitive to the stock market. We believe he viewed its performance as a referendum on the job he was doing; thus, he appeared to restrain certain policies when markets reacted too negatively to his proposals.
This weekend, however, he relayed in an interview on FOX that, “…what I have to do is build a strong country. You can’t really watch the stock market. If you look at China, they have a 100-year perspective,” as reported in the Wall Street Journal.
What does this mean? Effectively, the risks of a material economic disruption are now substantially higher. While the economy is on stable footing at the moment, the odds of a recession have risen significantly. The erratic nature of the tariff announcements thus far has eroded confidence among business owners. Higher uncertainty translates to less investment, future hiring, and reduced spending as businesses anticipate an economic slowdown – ultimately a self-fulfilling prophecy.
We do not have perfect clarity on the future and thus it is possible that President Trump’s policies are implemented effectively or that he ultimately pulls back on his plans. However, it is clear that the range of outcomes for the market is now substantially wider – both positively and negatively.
Generally speaking, we have been conservatively positioned (relative to our clients’ standard risk target) for the better part of the past year because of valuations. While investors have exhibited a “buy the dip” mentality for several years, we are now increasingly concerned about the risk of an economic slowdown to accompany today’s high valuations. We believe investors should seek even greater bargains before jumping back into this market. Going forward, we will be favoring liquidity and lower volatility assets as we seek to capitalize on potential further market dislocation.
Sincerely,
Andrew Hart Ryan Davis, CFA, CAIA
Chief Executive Officer Chief Investment Officer
ahart@nextcapitalmgmt.com rdavis@nextcapitalmgmt.com
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