Ouch!  Markets fell as tariff uncertainty took over fundamentals – at least temporarily.  And, with the number and magnitude of changes, how accurate are fundamentals?  And, what even are fundamentals?  Do they still matter?

Investors hate uncertainty.  Although many expected tariffs to be declared and implemented, the market seemed to be caught off guard as the tariffs were announced to be larger and more widespread than originally anticipated.  

Yes! Fundamentals still matter!  Regardless of the crisis du jour, fundamentals provide clarity – especially during uncertain times.  The bedrock of fundamental investing is corporate earnings and the multiple one pays for those earnings.  The question becomes, what will happen to corporate earnings if / when tariffs are implemented?  

As of today’s latest FactSet report, one-year anticipated corporate earnings have come down over the first quarter – from $274.12 as of 12/31/24 to $269.67 as of 3/31/25.  At today’s close, the current multiple stands at 18.82 times earnings.  This is lower than the five-year average of 19.9, and still higher than the ten-year average of 18.3.  Perhaps earnings expectations could go lower…time will tell.  

Back of the envelope math… What if tariff policies change to be less onerous?  What is earnings actually increase?  What if earnings do not grow in 2025 and remained the same as 2024 at $243.02?  That puts today’s market at 20.88.  Not cheap, but not as high as the market was priced only six weeks ago.  Or, what if the market traded down to the 10-year average multiple?  This would take the S&P 500 down to 4934.96 – some 2.74% lower than today’s close, based on the current earnings expectations.  Of course, if both the multiple and eps decrease, more pain would be in store…  

Therefore, it all comes down to time horizon.  When things are uncertain, and the market doesn’t seem to be trading on tried-and-true fundamentals, sometimes it helps to consider one’s time horizon.  By asking oneself, is the market likely to be trading higher in two months, two years, five years, twelve years?  Taking one’s time horizon into consideration often helps soften the initial blow.  If one’s time horizon is long enough, this too will likely look like a mere blip in a long-term string of increasing returns.  Although, admittedly, short-term the “mere blip” is still painful.

Although it seems there are few places to hide, we are fortunate to find that asset allocation, diversification, and manager selection appear to be working.  Portfolios incorporating these aspects seem to be holding up better than the general market.  Not swimming upstream, but not taking losses to the same extent.  Thankfully, textbook modern portfolio theory seems to be working in real life applications.

Earnings season is soon to be upon us.  As corporations begin to release their Q1 data, and offer guidance to the extent they do, hopefully additional clarity will wipe away some of the murkiness.  Likewise, in the coming days, weeks, and months, imagine we will have a better understanding of the impact of tariffs and with time can plan ahead.

Market pullbacks, corrections, and especially bear markets are NOT fun.  However, they tend to be the price paid to achieve equity performance over time.  Should you be interested in discussing specifics regarding your portfolio, risk tolerance, cashflow, time horizon, or anything else important to you, we welcome the opportunity.  In the interim, please know we value the confidence you place in us and appreciate the opportunity to work with the life savings of our trusted clients. Thank you for the opportunity!