As we move through 2025, financial markets are experiencing notable shifts, reflecting both broader economic factors and investor sentiment. These recent trends have been highlighted by the year-to-date under performance of the domestic stock market relative to other asset classes. Meanwhile, consumer sentiment, a crucial driver of economic activity, has also shifted as people’s perceptions of the economy influence spending, investment, and overall market behavior.

The Current Market Landscape

Markets in 2025 have proven volatile, with the S&P 500 down 4.6% year to date (as of May 7, 2025). Beginning February 20, 2025, markets began their downward ascent on news of setbacks in negotiating peace talks in the Ukraine/Russian War, and the first round of tariffs on auto imports. Volatility peaked with the April 2^nd “Liberation Day” tariff announcement which set markets into free fall.^[1] The April 9, 2025 “pause” of those tariffs has helped to soothe investors nerves, but the premise of higher priced goods in an already inflationary environment is top of mind for the market and its consumers.  Presently, investors appear to be rotating capital away from stocks that previously saw substantial gains, favoring other opportunities with perceived safety in mind. Such movements signal a reassessment of risk and return, with market participants balancing their portfolios in response to evolving economic conditions.

Consumer Sentiment and Its Impact

Despite relative economic stability, namely low unemployment and GDP growth, consumer sentiment presents a more complex picture. Recent surveys indicate heightened unease about the economy across various income levels. Concerns about inflation, tariffs, interest rates, and job security continue to weigh on consumer confidence, which in turn affects spending patterns. A decline in consumer confidence can have ripple effects throughout the economy. When individuals feel uncertain about their financial future, they tend to cut back on discretionary spending, delay major purchases, and save more. This behavior impacts businesses, particularly those reliant on consumer-driven demand, such as the retail, travel, and entertainment industries.

Key Factors Influencing Sentiment

1. Inflation and Cost of Living: Although inflation has moderated from its peaks, persistent price pressures in housing, food, and services continue to strain household budgets. Consumers are highly sensitive to rising costs, and any unexpected price increases can dampen confidence.
2. Tariffs: Recent tariffs have significantly influenced consumer sentiment in the United States. In March 2025, the consumer sentiment index experienced a sharp decline, dropping to 57.0, the lowest in two years. This downturn is largely attributed to escalating concerns over tariffs and their potential economic repercussions.^[2]

The introduction of tariffs has heightened fears of increased consumer prices. Importers transfer the additional costs that tariffs add to consumers, leading to expectations of rising inflation. This anticipation of higher prices contributes to a more cautious consumer outlook.

3. Interest Rates and Borrowing Costs: The Federal Reserve’s monetary policy remains a focal point for both investors and consumers. Higher interest rates make borrowing more expensive, impacting everything from mortgages to credit card debt. This influences consumer purchasing decisions, especially for big-ticket items.
4. Job Market Conditions: Employment stability is a crucial determinant of consumer confidence. While the labor market has remained relatively strong, concerns about potential layoffs or slowing job growth can create anxiety among workers, leading to reduced spending.
5. Stock Market Performance: Wealthier consumers often tie their spending behavior to stock market performance. When markets are performing well, they feel more financially secure and are likely to spend more. Conversely, market downturns can prompt a more cautious approach.

What’s Next?

Looking ahead, markets will continue to be shaped by economic data, corporate earnings, and central bank policies. Unexpected shocks—such as geopolitical instability or a financial sector disruption—would accelerate concerns and lead to added market volatility. Those who can adapt to changing market conditions and consumer behavior trends without making seismic portfolio changes will be best positioned to navigate uncertainties and capitalize on new opportunities. As advisors, staying attuned to current events and talking about them with our clients helps to promote sound decision-making. With how nuanced and fluid these dynamics are, I encourage you to reach out to our team and find the answers to the questions that keep you up at night.

^[1] 5 things to know for Feb. 19: Ukraine war talks, Delta plane crash, Immigration, Tariffs, Measles outbreak | CNN (Link)

^[2] University of Michigan: Consumer Sentiment (UMCSENT) | FRED | St. Louis Fed (Link)

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