2025 Volatility Playbook – 3 Studies to Keep You Invested

Stocks have been cruising since October 2023.

But trading is getting choppier as macro risks pile up. Every week seems fraught with fresh tape bombs.

On top of tariff, Fed, fiscal and valuation worries, investors now have a growth scare to contend with.

That’s a pretty full plate.

Today, we’ll offer a 2025 volatility playbook, with three time-tested, macro reasons not to overreact to current market uncertainty.

Then, we’ll use a proven factor-based strategy to screen for top stocks to help you navigate the chop and profit on the other side.

Growth Scare Spooks Stocks

Unfortunately, the Trump administration’s stimulative, pro-growth policies like tax cuts and deregulation require congressional action and take time to pass

On the flipside, presidential executive orders allow the administration to quickly enact many of their more economically restrictive policies such as tariffs and immigration reform.

The result is slowing growth as consumers and businesses pull back.

Consensus Q1 real GDP growth forecasts have recently edged down to 1% amid softening economic data.

The Citi Economic Surprise Index - which measures how much economic data is beating or missing consensus forecasts – just went negative (chart).

Before you decide to hit the exits, consider a few studies about uncertain times.

2025 Volatility Playbook – 3 Studies to Keep You Invested

While plenty of macro worries are swirling around, slowing growth tops the list. 

Reason #1 you shouldn’t overreact to recent market volatility is that history shows stocks don’t need fast economic growth to rise.

Since 1970, the Russell 3000 Index has posted positive returns 87% of the time with real GDP growth between 1.5% and 3%, and 71% of the time when growth has been positive but below 1.5%.

Recessions have been the only economic regime associated with weak stock performance. The Russell 3000 has only risen half the time when growth has been negative (chart).

So be careful stepping to the sidelines solely due to a slowing growth outlook.

The Fed put is real.

Recent weakening economic data and January’s benign 2.6% Y/Y core PCE inflation print have put rate cuts back on the front burner.

Fed funds futures now expect three quarter-point rate cuts beginning in June by year end, up from just a single trim expected as recently as mid-February.

Additional Fed easing is good news for equities because it cuts recession risk and boosts the odds of a soft landing.

Reason #2 you shouldn’t overreact to recent market volatility is that, while macro uncertainty often rules the short-term, stocks follow earnings over time.

The reality is most of the short-term risks investors fret about day-to-day never threaten earnings (chart).

Note how the GFC and COVID pandemic were the only 2 big outliers reducing earnings over the past 20 years:

Be careful predicting recessions!

There’s an old saying on Wall Street: “economists have predicted 9 of the last 3 recessions”. It’s 100% true.

That’s why the vast majority of worry-driven market pullbacks never morph into fact-based meltdowns (table).

Reason #3 to not overreact to recent market volatility is the fact that bear markets come along once every 7 years on average.

Most of the time we’re looking at 5-10% equity haircuts where losses are recovered quickly:

How to Tilt Your Portfolio

There are many different ways to slice and dice the stock market. Regular readers know we usually focus on finding outperforming sectors.

Factors are another lens through which to analyze equity performance. Every factor incorporates a variety of fundamental and/or technical company attributes.

There are five widely cited factors: quality, value, size, momentum, and high dividend.

If you aren’t a PRO member, and are a serious investor, get started today to access the below report. It’s a beauty!

Today, we’re recommending 31 high-quality stocks as the best way to navigate a choppier stock market without trading away upside when this bull market resumes its upward charge.

This stands in stark contrast with the growing popularity of overweighting defensive sectors. Staples, utilities and health care offer downside protection but leave you largely sidelined when the market rebounds. High quality stocks don’t have that problem.

High-quality companies aren’t just more profitable, their earnings are more reliable and steadier than their low-quality peers.

In addition, they sport low debt to equity ratios and strong balance sheets, enabling consistent dividend growth.