The equal-weighted S&P 500 was roughly flat as the market returns broadened out, supporting the case for portfolio diversification. Additionally, European equities registered their best showing in decades, posting double digit returns. Emerging markets stocks also beat the US with single-digit positive returns. American exceptionalism has been challenged for the first time in decades.

Chart 1

Source: Charles Schwab, Bloomberg

Q1 2025 SECTOR BEST AND WORST

As seen in table 1. Energy had strong performance and was led by integrated super majors creating operating efficiencies despite lower crude prices. The Health Care sector rebounded after being one of the worst sectors in 2024, while Consumer Staples provided a defensive safe haven during the market drawdown.

Table 1

Conversely, Consumer Discretionary was dragged down by Tesla and Amazon, plus retailers affected by a slowdown in consumer spending. The Information Technology sector was mostly impacted by semiconductors and hardware companies subject to tariff risk. Finally, the Communication Services sector was dragged down by large index constituents, Meta and Google, despite positive returns in the telecommunications Big 3: AT&T, Verizon, and T-Mobile.

The Big “If” from Tariffs

The economic backdrop in the first quarter was foreshadowed by a large decline in consumer spending in January, as discretionary purchases exhibited a slowdown. Tariff threats and government layoffs sparked uncertainty for both consumers and businesses. The “what if” scenarios began to grow in frequency as investors considered the range of potential economic impacts. Along those lines, the federal reserve published Economic Policy Uncertainty (EPU) Index spiked close to pandemic-period levels, as seen in Chart 2. The EPU index ended 2024 at a level of 109.44, ultimately ending the 1^st quarter at 428.5, almost a 400% increase.

Chart 2

What does this index measure? The EPU reflects the frequency of articles from 10 leading US news outlets and tracks key mentions related to the economy, uncertainty, legislation, and regulation among other items. In the end, the index attempts to capture sentiment from these datapoints. The resulting uncertainty also can take a toll on an economic outlook. The rising potential of slowing growth and sticky inflation has led to growing fears of stagflation, last seen in the late 1970s. Ultimately this backdrop creates a challenging environment for the Federal Reserve to navigate.

Tariffs to be imposed by the US were still very uncertain in early 2025, with 10% as the likely consensus outcome. On Liberation Day, however, the numbers came in at 22%, the highest tariffs in 100 years and even higher than the Smoot Hawley Act of 1930 as seen in Chart 3. Politically, this has been bad for the incumbent party. After the 1930 Smoot Haley Act, both Smoot and Hawley were defeated in 1932. The Tariff Act of 1890, authored by McKinley, cost Republicans 83 seats in the House in 1890 and control of the House, Senate, and Presidency in 1892.

Chart 3

More recently, the Republicans lost 40 seats in the House of Representatives in 2018 after Trump’s first foray into tariffs. Republicans are now scrambling to propose legislation to provide oversight to the executive branch’s tariff power.

Dividend Growth Scorecard

According to Howard Silverblatt, Senior Index Analyst at S&P Dow Jones Indices, in 1Q 2025, the cumulative dollar value of U.S. common stock dividends per share posted a 7.3% increase for the trailing twelve months¹. As seen in Table 2, on a year-to-date basis, 8 GICS sectors have seen a dividend increase in 2024. For the year, thirteen of our thirty-seven holdings (35%) announced dividend increases of 9.6% on average.

Table 2

Looking historically at the last few years, as seen in Table 3, it’s been encouraging to see the consistent pace of the 1^st quarter dividend increases. In addition, in all years, the Brentview Dividend Growth strategy began each calendar year with a nice growth rate, helping the strategy achieve its goal of faster than market dividend growth. While there is much more to come in 2025, our strategy’s dividend growth rates remain on track to exceed the S&P 500’s 2025 forecast, which was recently revised down from 8% towards 6-7% dividend growth.

Table 3

MARKET OUTLOOK & PORTFOLIO POSTIONING

Over the last few years, earnings growth has been the market’s savior, but that too may be slowing. Estimates for earnings in 2025 are currently at 11.5%, revised down from 15% at the end of September 2024. These numbers will obviously be revised downward if a recession entails. Tariffs may also reduce GDP growth rates by one percent, while the odds of a mild recession are increasing. The wealth effect from the stock market has supported spending from the top 10% of consumers, representing more than a third of GDP. Right now, soft data like consumer confidence could result in deteriorating hard numbers.

The stock market’s rich valuation has come down from a PE of 21.2x near the end of 2024, to early April’s multiple of 18.9x, which is still on the historical upper range. Ultimately, the stock market will need declining interest rates to support this current multiple.

What are we doing during these volatile times? We reduced our portfolio risk at the end of 2024 and early 2025 by reducing our technology exposure and adding to companies with stable growth and attractive valuations. We also increased our exposure across the financials, industrials, and utilities sectors. Given the most recent market sell-off, we continue to review our current holdings for potential opportunities to add, especially if valuations reach oversold levels. As of the close of this 1^st quarter, our dividend growth strategy reached a nineteen-year track record. Over those years we have seen both favorable and challenging markets. Through it all, one item remains true, volatility can bring opportunity. As we move forward, we will evaluate new opportunities that may result from the turmoil in the consumer discretionary, financial, or transportation industries.

Sources

This commentary reflects the views of Brentview Investment Management and is subject to change as market and other conditions warrant. No forecasts are guaranteed. This commentary is provided for informational purposes only and is not an endorsement of any security, sector, or index. The commentary should not be seen as a solicitation or offer to buy or sell any securities. The advisor (Brentview Investment Management, LLC), and their employees and clients, may hold or trade the securities mentioned in this commentary. Diversification does not guarantee a profit or eliminate the risk of a loss. PAST PERFORMANCE IS NOT A GUARANTEE OF FUTURE RESULTS.

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