After rising to a record high on February 19, the S&P 500 Index fell a cumulative 3% over the next seven trading days to finish the month down more than 1% overall. The selling pressure extended into early March, fueled by negative catalysts including the continued prospect of more and higher import tariffs. While the market setback was initially modest, it was the kind of rough patch that may become a recurring feature through the rest of this year as the new U.S. administration promotes an agenda that’s likely to continue stirring up the geopolitical order.

Despite the likelihood of such bumps, we maintain a constructive outlook for U.S. equities through the rest of this year. Our optimism is rooted in positive catalysts that we believe are likely to provide a durable source of market support in coming months—even if they don’t receive as much attention as trade disputes. At the top of our list are the financial strength of the aggregate U.S. consumer, growing investment in AI technology, a potential housing market rebound, and the continued strong earnings growth.  

Here’s a look at each of these factors.

• Consumer strength—Although some recent surveys have indicated weakening consumer sentiment due in part to tariff-related inflation fears,  we prefer to focus more on actual consumer spending—what people actually do with their money as opposed to how they respond to surveys—and the health of consumer finances. On those measures, U.S. consumers appear to us to be in good shape on the whole, with the most notable strength among the top 60% of wage earners who account for 79% of total expenditures.¹  Among this middle- and upper-income group, measures of household balance sheet strength have recently remained near their healthiest levels in four decades, as measured by household debt service payments relative to disposable personal income. Moreover, the U.S. unemployment rate has recently remained stable at a historically modest level of around 4.0%. Since early 2023, wage growth has been outpacing inflation, with wages rising around 4.0% annually versus 2.5% to 3.0% for inflation as measured by the Consumer Price Index. Overall, given that consumer spending typically accounts for a roughly 70% share of U.S. GDP,² we see consumer strength as a solid foundation that’s likely to bolster the U.S. equity market through episodes of volatility driven by tariff conflicts and other pressures. 

• AI investment—The role of AI in driving recent returns of the broad U.S. equity market and the Magnificent Seven stocks is well documented. However, U.S. AI optimism took a hit in January 2025 with the release of large language AI models by a Chinese start-up, which caused investors to question the long-term competitiveness of the foundational models developed by U.S. technology companies. Despite this challenge from lower-cost AI models, we expect that the Magnificent Seven are likely to continue grinding higher in coming months, even if we may see some temporary setbacks. Our optimism stems in part from an acceleration in AI-related capital spending plans that the largest U.S. technology companies have announced in recent months amid the announcement from the Chinese start-up and other competitive challenges. Early this year, a handful of the biggest U.S. companies lifted their full-year 2025 forecasts for AI-related capital expenditures on data centers and other infrastructure well above levels that they had projected just a few months earlier. As of February, AI-related capital expenditures at four of the biggest companies were forecast to exceed $330 billion in 2025³—a staggering amount that’s likely to drive continued data center demand. We expect that this spending will generate bottom-up opportunities in the information technology sector across growth and value stocks alike, from companies specializing in server technology to software-by-subscription developers.    
• Homebuilders and housing—In addition to the persistence of elevated mortgage rates and inflation, a housing shortage has been a key factor that has weighed on U.S. housing affordability and home sales since 2022. However, the rate-cutting cycle that the U.S. Federal Reserve (Fed) began in September 2024 has put downward pressure on mortgage rates. While recently mixed economic data has clouded the outlook for the number and magnitude of additional cuts through the rest of this year, we believe it’s unlikely that the Fed would consider reversing course and lifting rates rather than approving further cuts. We expect the housing market is likely to rebound, as normalization of mortgage rates gives prospective homebuyers another reason to get off the sidelines at a time when most consumers’ balance sheets are healthy, especially among the middle class. With housing shortages persisting in many regions, homebuilders may see substantial order activity in supply-starved local markets, resulting in attractive bottom-up equity investing opportunities. Some of these homebuilder names have recently traded at low valuations, providing what we consider to be a margin of safety from an investment perspective when combined with these stocks’ other strengths.  
• Earnings growth—In the recently concluded fourth-quarter earnings season, companies in the S&P 500 posted an average earnings gain of 17.8% over the same quarter a year earlier—the strongest growth since the fourth quarter of 2021 and up sharply from the 11.8% growth rate that analysts had expected heading into earnings season. At the sector level, the strongest growth rate of 56.0% came in financials, a sector where we currently see an abundance of bottom-up equity opportunities, especially among investment banks and other institutions tied heavily to capital markets. This strong earnings growth seen across sectors has recently provided an equity market buffer to help offset concerns over tariffs and other risks, and we believe this buffer has further staying power, given the consensus expectations of analysts for full-year earnings growth of around 12% in 2025 as of early March. While many factors drive stock prices, earnings are an enduring and fundamental factor that underpins the market, and we believe the solidly positive track that we see ahead for earnings bodes well for stocks broadly.  

An abundance of positive catalysts for potential equity market growth

While it’s easy for investors to get swept up in the day-to-day news about trade and geopolitical conflict, we believe that consumer strength, AI growth, housing market fundamentals, and rising corporate earnings are likely to provide support for the broader U.S. equity market to maintain generally positive momentum through the rest of the year. While we may continue to see bouts of turbulence like the one we experienced in late February, the positive catalysts outweigh the negatives, in our view. We believe the market remains on solid footing, and we’re trying to maintain a disciplined focus on bottom-up stock picking while emphasizing financially sound companies with competitive advantages, the ability to generate substantial cash flow over sustained periods, and attractive stock prices relative to our estimates of their worth.

1 Empirical Research Partners LLC, U.S. Federal Reserve, U.S. Bureau of Labor Statistics, 2024. 2 Empirical Research Partners LLC, 2024. 3 Source: Business Insider, February 7, 2025.