Q1 2025 Rose Capital Advisors Market Outlook & Commentary

DeepSeek

• The Magnificent 7 and other AI adopters have ramped up Capex levels over the last couple of years with plans integrate AI into their business and ultimately increase productivity and decrease costs
• Shareholders have been increasingly looking for ROA generated from the Capex to justify the spending
• DeepSeek’s launch of its R2 model in February launched it into the public spotlight, with claims that it had developed its model at a fraction of the cost – calling into question the large capex spend by large US tech companies

China’s Tech Revival

• As one of the top tech companies in China, Alibaba’s share price (along with other companies in China) has been trading at a significant discount due to relationship with the government
• Shareholders have been increasingly looking for ROA generated from the Capex to justify the spending
• In February, there was a symbolic handshake between Xi Jinping and Jack Ma, symbolizing the end of the government’s strict regulations and fines, promoting a more conducive environment

• As China reiterates their 5% GDP growth target and emphasizes their renewed focus on the consumer, there is a growing risk of remaining underweight China
• Shareholders have been increasingly looking for ROA generated from the Capex to justify the spending
• During the China National People’s Congress in March, there as a significant shift in focus on driving the Chinese consumer via stimulus, which has been absent in the past

Germany Goes Fiscal

Q1 Recap

Policy Uptick
Germany’s soon-to-be government announced a sweeping spending plan to kickstart the economy, including lifting their foot off the “Debt Brake” to finance the plan. After years of fiscal austerity, their plan will lead to higher defense and infrastructure. Germany’s fiscal policies (up until the plan takes effect) couldn’t be more different to the US, where the “debt ceiling” is extended quite frequently. Germany and other European countries are in a stronger fiscal position to increase spending, unlike the US.

Difference Between Governments Across the Globe

Market Broadening

Q1 Recap

• When the top ten weights in the S&P 500 have historically made up an outsized share of the benchmark, the equal-weight S&P 500 outperforms its cap-weighted counterpart over the next five years.
• Shareholders have been increasingly looking for ROA generated from the Capex to justify the spending
• While the Magnificent 7 earnings growth continues to exceed those of the broader market, the rest of the market is catching up, with the gap between them narrowing.

Trump’s Tariff Timeline

Q2 Outlook

Liberation Day – By the Numbers

Q2 Outlook

• Leading up to Liberation Day on April 2 nd, Trump had enacted tariffs equating to about a 10% effective tariff rate, mainly targeting countries such as China, Canada, and Mexico.
• Shareholders have been increasingly looking for ROA generated from the Capex to justify the spending
• In a highly telegraphed event, the White House shook the markets with the surprise of proposing ~$470B of reciprocal tariffs or ~25% effective tariff rate
• Typically markets look for a calming voice from The Federal Reserve or the White House in times like this, but this time there was no solace from either

April Market Shocks

Q2 Outlook

April 1st – Market Close on April 2nd
Markets priced in a ~10% tariff across the board, and had no real reason to panic

After Close on April 2nd
President Trump announces a sweeping tariff plan that far exceeded expectations

April 4th
China announces a retaliatory tariff of 34%

April 8th
Markets jump, then lose steam

April 9th
President Trump announces a 90-day pause on tariffs as well as reducing reciprocal tariffs to a 10% baseline for 60 countries. The S&P 500 has its 9th largest single-day % change in history.

 

Stagflation

Q2 Outlook

• Sustained high tariffs could disrupt supply chains, drive up prices, and weigh on both U.S. businesses and consumers, ultimately dragging down economic growth
• Shareholders have been increasingly looking for ROA generated from the Capex to justify the spending
• The last major period of Stagflation in the US was during the 1970’s, which resulted due to a function of skyrocketing oil prices, a GDP slowdown, and inflation that was invertedly worsened by the government’s response to the crisis
• If the tariffs remain at their existing levels, Stagflation is a real possibility the US could have to face

Correlations Up, Markets Down

Q2 Outlook

Rising Correlations

• Markets in stress typically see correlations converge across asset classes
• Shareholders have been increasingly looking for ROA generated from the Capex to justify the spending
• Since the start of March, correlations between major asset classes have increased, making it harder to properly diversify during turbulent markets
• If the tariffs remain at their existing levels, Stagflation is a real possibility the US could have to face

Markets in Step with GDP

• While the administration has expressed their focus on ‘Main Street’ instead of Wall Street, the stock market is often highly correlated to the health of the economy and economic growth, especially when large moves occur

Peak Uncertainty

Q2 Outlook

• Driven by on-again, off-again tariffs, US policy uncertainty is close to levels last seen in the GFC
• Going back to 1985, periods of uncertainty have historically been followed by strong stock market returns, presuming the US does not go into recession
• At the same time, prolonged uncertainty makes it hard for businesses and consumers to make decisions regarding spending. The longer it remains, the worse the impact could be

Implications

Q2 Outlook

We expect concessions to exceed retaliation and the ultimate effective tariff rate to be closer to 15% rather than 25%, potentially serving as an eventual relief tailwind to risk assets.

Why Notes Worked in ‘20 & ‘22 Market Corrections

The Case for Structured Notes

1. Deep Downside Protection
With 30% protection over 5 years, the structure absorbed standard corrections (10–20%) and even deeper drawdowns—helping reduce the chance of a barrier breach.

2. Strategic Timing
Notes priced during dislocations lock in lower strike levels, increasing the likelihood of capturing upside as markets recover.

3. Efficient Return Profile
Point-to-point design avoids the drag of daily compounding seen in leveraged ETFs— delivering a cleaner, more efficient upside multiple over time.

4. Enhanced Upside Without Active Management
Participation rates of 1.5x–2x offer stronger potential returns without the need for market timing or tactical allocation shifts.

5. Aligned With Recovery Trends
Equities have historically posted strong 12-, 24-, and 36-month gains post-correction. Pairing this trend with enhanced participation and downside protection positions clients to benefit.

6. Liquidity & Reset Flexibility
As markets rebound, these notes often reprice well in the secondary market—offeringoptionality for early liquidity or resetting exposure.

7. Supports Strong Client Behavior
Defined outcomes reduce panic-selling and promote confidence in staying the course—key for long-term investing success.

8. Proven Across Market Cycles
Outperformance in both the 2020 COVID crash and the 2022 inflation-driven selloff shows the durability of the structure in varying macro environments.

Gauging the Next Move

Q2 Outlook

What We are Watching

Where Total Effective Tariffs Land – currently around ~25% total, anticipating a move down to the 10-15% range when chaos subsides

How Tariffs Will Be Digested – consumer sentiment, profit margins, long-run inflation expectations, and supply chain disruptions are key indicators of response

Impact on Earnings – economic data and earnings revisions for 2025 and beyond and the multiple the market will be willing to pay

What’s Next?

Q2 Outlook

After an eventful first 85 days in office, one thing has become clear: uncertainty now dominates the outlook. Markets had anticipated a more measured approach to trade policy and were caught off guard by a more aggressive tariff stance followed by immediate reversals.

As we enter Q2, expectations for growth likely require a reset. The sharp market moves in early April revealed how misaligned investor assumptions were with the evolving policy direction. Defensive sector rotation and broader de-risking suggest this adjustment is already underway.

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