Investing outlook: discipline over emotion

Raymond James Chief Investment Officer Larry Adam shares key drivers shaping markets and the economic outlook

Rapid advances in artificial intelligence, persistent geopolitical tensions – particularly the conflict in Iran – and ongoing trade uncertainty have kept headlines loud and emotions elevated, ultimately demanding investors remain adaptive and disciplined. In this kind of environment, the biggest mistakes come from reacting to noise rather than fundamentals. Instead, investors who stay focused on long‑term objectives and respond thoughtfully instead of emotionally are best positioned to succeed over time.

Oil market

In the near term, developments in Iran will shape the economic outlook. Energy prices have reached multi-year highs, pressuring consumers. While the situation remains fluid, our base case is that the conflict will likely end shortly. Limited public support, rising gasoline prices and shifting political momentum ahead of the midterm elections are likely to constrain its duration. Importantly, the impact on oil has been more about shipping disruptions than a significant loss of production. As conditions normalize, we expect oil prices to retreat toward $60 per barrel, reducing spillovers to economic growth, monetary policy and asset markets.

Historically, oil shocks have been most damaging to weaker, energy-dependent economies. Today, however, the US is on firmer footing: more energy efficient, less energy intensive and a net exporter of oil, providing a stronger defensive line against supply disruptions. Given our expectation of a brief conflict in Iran, higher oil prices appear to be a temporary headwind rather than a lasting disruption.

Consumer spending

Consumer spending should remain supported by healthy tax refunds this season and improving hiring conditions. Meanwhile, business investment continues to benefit from record AI‑related capital expenditures that are delivering the strongest productivity gains in two decades. While a prolonged rise in energy prices would likely raise recession risk, we see no reason to abandon our broader optimistic outlook at this time.

The Federal Reserve

The Federal Reserve (Fed) is navigating this stretch with potential new leadership on the horizon, as Kevin Warsh sits a Senate confirmation vote away from becoming the next Fed chair. He brings a rare blend of experience, combining firsthand knowledge from his time as a Fed governor (2006 to 2011) and a clear understanding of financial markets from his years on Wall Street. Still, the policy direction is shaped by the full Federal Open Market Committee. As with any new leader, markets and fellow policymakers will quickly test his discipline, credibility and consistency.

At present, the Fed faces a delicate tactical dilemma. Inflation remains stubbornly above the 2% target, constraining the Fed’s ability to ease, even as a softening labor market increasingly argues for eventual support. Geopolitical tensions and higher oil prices add near‑term complexity and reinforce that restraint. However, as those pressures fade later in the year, we expect the Fed to place greater weight on labor market conditions and deliver one rate cut before year‑end.

Fixed income

In fixed income, bonds continue to play a stabilizing role when market conditions become unsettled. While inflation remains a risk, we do not expect elevated energy prices to persist, and with growth holding up, the 10‑year Treasury yield should finish the year within our 4.25% to 4.50% forecast range.

Starting yields are attractive, especially when compared to the historically low COVID‑era levels. With monetary policy still mildly restrictive but gradually tilting toward easing, we continue to favor higher‑quality bonds, such as investment‑grade bonds, over riskier high‑yield credit.

Equities

Despite a modest pullback in the S&P 500 and its, by historical standards, narrow top-line trading range, a great deal of action has unfolded under the surface with meaningful sector rotation. We expect sector rotation to remain a defining feature of the equity market. Against geopolitical uncertainty and elevated energy prices, sectors with durable tailwinds and strong margins should prove most resilient.

• Technology remains the market’s leader with industrials, consumer discretionary and health care as additional key market leaders.
• Technology benefits from sustained AI investment; industrials from infrastructure, reshoring and defense spending; consumer discretionary from moderating energy prices; and health care from its more domestic orientation and support from durable demographic trends.
• While energy has been an early standout, we do not believe now is the time to increase exposure. As supply disruptions ease, recent outperformance may prove temporary.

While volatility is likely to remain elevated in the near term, the US economy remains on solid footing, and equities are entering this stretch from a position of strength. With valuations now more reasonable, we expect earnings growth of ~10% to carry the S&P 500 toward our year‑end target of 7,250.

Internationally, non-US equities were strong performers last year, aided by improving growth and a weaker dollar. However, we continue to prefer US equities over other developed international markets due to stronger GDP growth, more resilient earnings and lower sensitivity to Middle East-related costs. In Asia, near-term volatility may persist, but we view these pressures as temporary setbacks. We remain constructive – though selective – on Asian emerging markets, where improving earnings momentum and solid longer-term fundamentals, including exposure to the technology sector, remain intact.

Bottom line

Long‑term success comes from balance and preparation, not reacting to short‑term headline noise. During a full market cycle, results are shaped by positioning, discipline and maintaining perspective.

All expressions of opinion reflect the judgment of the author(s) and the Investment Strategy Committee and are subject to change. This information should not be construed as a recommendation. The foregoing content is subject to change at any time without notice. Content provided herein is for informational purposes only. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Past performance is not a guarantee of future results. Indices and peer groups are not available for direct investment. Any investor who attempts to mimic the performance of an index or peer group would incur fees and expenses that would reduce returns. No investment strategy can guarantee success.

Economic and market conditions are subject to change. Investing involves risks including the possible loss of capital.

The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Diversification and asset allocation do not ensure a profit or protect against a loss.

There are special risks associated with investing with bonds such as interest rate risk, market risk, call risk, prepayment risk, credit risk, reinvestment risk, and unique tax consequences. To learn more about these risks and the suitability of these bonds for you, please contact our office.

The S&P 500 Total Return Index: The index is widely regarded as the best single gauge of large-cap U.S. equities. There is over USD 7.8 trillion benchmarked to the index, with index assets comprising approximately USD 2.2 trillion of this total. The index includes 500 leading companies and captures approximately 80% coverage of available market capitalization.

Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary.

Sector investments are companies focused on a specific economic sector and are presented here for illustrative purposes only. Sectors, including technology, are subject to varying levels of competition, economic sensitivity, and political and regulatory risks. Investing in any individual sector involves limited diversification.

Investing in oil involves special risks, including the potential adverse effects of state and federal regulation and may not be suitable for all investors.