The current stock market is selling off on tariff concerns while corporate America continues to grow its profits. This year the stock market selloff is like 2022 when investors’ fears of pending policies have prompted a selling spree reminiscent of 2022. 

Let’s take a closer look at what was going on in 2022 to see what we can learn about the direction of today’s market environment.  You may recall that 2022 started off on a poor note as institutional investors concerned about rising interest rates began selling stocks.  They were hedging against the pending announcements by the Federal Reserve of an aggressive rate hike campaign to fight near double-digit inflation.  Inflation and cost of goods had soared in 2021 primarily due to the tsunami of trillions of government subsidies flowing into the economy.  Too much money chasing after too few goods gives retailers the opportunity to sell at almost any price.  Everything from donuts to autos had substantially increased to meet the explosive demand by cash-rich businesses and consumers. 

By December 2021, the US national inflation rate as represented by the Consumer Price Index (CPI) had jumped 500% from January’s 2021 rate of 1.4% to December’s 2021 rate of 7.0%.  The rapid momentum of rising prices continued until their peak reached in June 2022 of 9.1%. 

The Federal Reserve was keenly concerned about the future of America and the repeat of the 1970s era of runaway inflation and stagnant economic growth.  Jerome Powell, Federal Reserve Chairman, in his March 16, 2022 speech (a 4-page transcript), succinctly outlined the economic issues concerning the Federal Open Market Committee (FOMC) and their strategy.  During his speech, he stated:

• “At the Federal Reserve, we are strongly committed to achieving the monetary policy goals that Congress has given us: maximum employment and price stability. Today, in support of these goals, the FOMC raised its policy interest rate by ¼ percentage point. The economy is very strong, and against the backdrop of an extremely tight labor market and high inflation, the Committee anticipates that ongoing increases in the target range for the federal funds rate will be appropriate. In addition, we expect to begin reducing the size of our balance sheet at a coming meeting.”

He also addressed Wall Street concerns by stating,

• “Making appropriate monetary policy in this environment requires a recognition that the economy often evolves in unexpected ways. We will need to be nimble in responding to incoming data and the evolving outlook. And we will strive to avoid adding uncertainty to what is already an extraordinarily challenging and uncertain moment. We are attentive to the risks of potential further upward pressure on inflation and inflation expectations. The Committee is determined to take the measures necessary to restore price stability. The American economy is very strong and well positioned to handle tighter monetary policy”

Ironically, with the clear outline from the Federal Reserve on how and why they need to raise Federal funds rates, institutional investors had already begun selling stocks in January 2022.  Their analysts did not agree with the Federal Reserve and sold their stocks to hedge against fears of a recession, a concern also relentlessly touted by the major media. 

From January 2022 to March 15, 2022, the S&P 500 had dropped 10.57% and NASDAQ plummeted 17.23%.  The indices rallied in the final 15 days of March to end the first quarter with the S&P 500 down -4.95% and the NASDAQ down -9.1%.  The relief rally was short-lived and turned out to be the highest point for these indices until August 2023.

The Federal Reserve did initiate its rate hike campaign in March 2022 as inflation continued to soar.  The short-lived rally in late March 2022 fizzled quickly as Investors ran to the exits and drove the major indices down all of 2022 wiping most of the gains from the pandemic rally since March 2020.  Institutional investors didn’t start to consistently rebuild their stock allocations until the beginning of 2023 which initiated a strong rally for the next two years.  As it turned out, the Federal Reserve’s rate hike campaign was successful in reducing US Inflation to the current 2.8%, and recession fears proved overstated.

However, throughout the year 2022, while the stock market was selling off, corporate profits continued to rise.  The combination of declining stock prices with rising profits resulted in attractive values and terrific new buying opportunities.  Below is the same chart for 2022 and 2023 with corporate profits added.  Note that the stock market rally that began in January 2023 was when the spread between rising profits and the S&P500 index was at its widest range.  The two indices did not catch up to the rise in profits until August 2024.

As illustrated below, corporate profits plummeted in early 2020 and quickly bounced back.  However, profit growth peaked in Q1 2021 and declined each quarter thereafter in 2021.  This may have been the result of competitive price cuts to attract more sales as government subsidies were being eliminated.  The positive momentum of rising profits began again in Q2 2022 just as the Federal Reserve was to begin its rate hike campaign and has continued with quarterly increases since. 

Last week the Bureau of Economics Analysis released last Thursday the Q4 2024 US corporate profit report.  The report stated that corporate profits last quarter accelerated from the third quarter, increasing 5.9% to $3.312 trillion.  Undistributed profits soared 15.1% last quarter due to the negative growth of profits in the prior quarter.

As illustrated below is the chart of the S&P 500, NASDAQ, and corporate profits (through Q4 2024) from January 2022 through yesterday.  As mentioned, stock prices caught up to their profit growth in August 2024, and typical of the market, stock prices continued to accelerate faster than corporate profit growth.  This resulted in stock prices now at a premium from prior years being at a discount.  We have mentioned in past UPdates, that after a robust market rally, like the past two years, corrections are typical and a healthy retreat for investors. 

However, along with the similarities between the 2022 market correction and now in 2025, there are several notable dissimilarities. Unlike the Federal Reserve in 2022 when Jerome Powell outlined their concerns, goals, and strategy, the same can’t be said about the current administration.  The key issue troubling institutional investors today and rocking the markets are the details of pending tariffs by the Trump Administration.  Tariffs imposed on other countries create a complicated domino effect throughout the world that analysts and economists are frantically trying to determine the net impact on US companies.  Average investors must rely on the media and other sources to conclude whether the tariff campaign is good or detrimental for America.  The media of course will only be negative ON anything this administration does and will rarely present possible positive outcomes.  Institutional investors do not like uncertainty and creating uncertainty seems to be a key strategy for this administration. 

Investors didn’t like the Federal Reserve’s rate hike campaign and demonstrated their disagreement by selling stocks even with rising corporate profits.  Wall Street does not like change even if the ultimate results are positive in the long term.  Wall Street's only focus is today and immediate impact on stocks or bonds.

The Trump administration has not convinced the investing community of the issues challenging America and the benefits of raising tariffs on our trading partners.  The combination of uncertainty without understanding of future benefits has investors again protecting their accounts by selling.  Uncertainty and unpredictability may be an effective negotiating strategy, but investors need to know more.

To summarize, below is a quick outline comparing the differences between the approaches of the Federal Reserve in 2022 and the Trump administration:

What Does This Mean to Me?

Tomorrow the Trump administration will be announcing the tariff policies on our trading partners.  Yesterday and today the stock market started the day in the red and slowly recovered most of the decline by the end of the day.  The interpretation is investors are nervous but remain optimistic about continued growth in corporate profits. Yesterday, Jeffery Buchbinder, CFA and Chief Equity Strategist for LPL Financial made this comment in his article titled, “Tariff Fog to Start Clearing Soon”:

• Wednesday is a big day. The Trump administration will provide more clarity on its tariff plans.

• The latest news has been a mix of encouraging talk about narrow reciprocal tariffs and hard-hitting auto (and auto parts) tariffs.

• It’s tough to lay out a tariff playbook for investors right now, so our advice is to wait and see. Markets and corporate America will need time to digest the information and figure out their next move. As potential dip buyers, we’re not in a big hurry.

• We know markets hate uncertainty. But once it clears, stocks tend to rally. The S&P 500 gained 7% three months after the peak in trade policy uncertainty on August 31, 2019, and more than 16% until the pre-pandemic high on February 19, 2020.

• We don’t want to sound too bullish, and we remain cautiously neutral right now, but the opportunity for upside is there after some of this fog clears.

Let us know what you think about this UPdate.  Also, please call or email us to schedule a time to meet and discuss your financial planning and how we may be able to help you and your family.

Random Note:

In case you missed it, NewsMax (NMAX) had its initial public offering (IPO) yesterday and the stock soared 1,540% in two days.  This is reminiscent of the 1990s dot.com years.