In this video, Vanessa Welch, Empower vice president for financial insights, and Marta Norton, Empower chief investment strategist, review the outlook for markets and tariffs for the second quarter of 2025. Here is a transcript:

Vanessa Welch: Marta, as we head into the second quarter this year, uncertainty is really high for a lot of reasons, but I think we have to start with tariffs since that seems to have really shaken investor confidence and rattled markets quite a bit. You and your team just released your Q2 2025 outlook, and tariffs are a big part of it. We've been having a lot of discussions around this topic, and you don't think this problem is behind us.

Marta Norton: Well, I think the market has been trying to look through tariffs as solely negotiating tools — and clearly they are that. But conversations, especially in recent weeks, are beginning to center around this idea that tariffs are potentially a cornerstone of the America First policy agenda and, as such, could be broader-based and longer-lasting than maybe investors had expected initially. Markets might be underestimating this fact. So let's just talk about reciprocal tariffs —which is something that President Trump and the administration have talked about, which is essentially matching the tariffs that are applied to the U.S.

To give you a sense of what that looks like, we're showing a range of different countries and the tariff differential here — between what the U.S. charges and what's charged on the U.S. We're also including in this other bar VAT tax — value added tax — which is something that President Trump has referenced. If we do see tariffs at this breadth, you can see a meaningfully different tariff rate than what's charged today, and that would have an impact on companies — both on a cost perspective and potentially on a revenue perspective if we're looking at a retaliatory situation. So it's questionable whether that's really taken into account as we look at company earnings.

Welch: Interesting perspective there, Marta. I think what concerns me is whether we're looking at sustained volatility ahead.

Norton: Well, frankly, I do see that possibility. What matters a lot is not how much prices have moved, but where is valuation. And when we do our analysis of valuations across the various sectors, arguably not much has changed since the start of the year. You could say that healthcare looks reasonably attractive, but I don't know if there's a ton of other areas to point to. Also, earnings estimates — or the analyst estimate of what earnings could be over the course of 2025 — we've seen those come down in certain areas like materials, but not in other areas like technology.

I would typically call a market sell-off a potential opportunity, but I don't know if valuations are telling us that today.

Welch: So despite the pullback, you're not seeing those compelling buying opportunities that typically emerge during market corrections. I think that's a really, really important point and important context for us. Speaking of market concerns, I've noticed an interesting connection lately, Marta, between tariff discussion and inflation anxiety, and we see this in consumer confidence surveys. Consumer confidence has really taken a dive lately with inflation expectations moving higher.

Norton: Well, you have seen that. You've seen that in a number of different surveys. And what I would point out — just on that survey front — is that those surveys are inherently volatile, not always predictive, but certainly giving the impression of uncertainty. Now, let me show you what inflation looks like even before we take into account tariffs. Inflation made a lot of progress over the course of 2024.

But if we're taking a look at some of those sticky areas, we're showing one of them right now. This is “supercore” inflation — so this is services without housing. And what we can see here, you know — transportation, financial services, healthcare — these areas have not come back down to pre-pandemic norms.

And what's interesting is where wage growth is. So that's that line that's cutting across this chart. And you can see that wage growth is also a hair above where it was at pre-pandemic norms. The question is whether we're going to need to see wages come down to see some sort of progress on this supercore area.

Now, does tariff change this picture altogether? I'm not sure it's necessarily going to have a meaningful impact, but we're in a game of inches here — and every inch counts.

Welch: That visual really brings things to life, seeing how those wage pressures there continue to feed into that service sector inflation. I want to pivot, Marta, now to something that seems to have taken a back seat lately: artificial intelligence. It dominated the headlines. It was said that it was going to be the transformative story of 2025 — the technology that would reshape business and investment opportunities. Has that narrative changed?

Norton: Well, it's certainly true that fiscal policy is grabbing all the headlines these days, but AI is still a force to be reckoned with. And let me give you some perspective on how investors are looking at AI. One of the big talking points around AI is how much we're seeing companies spend on it — Big Tech, in particular, spend on AI.

Now, that's part of an innovation cycle. So when we're looking at innovation cycles, we're looking at companies spending a lot of money to build the cutting-edge technology that's used across the economy. That's what we saw in the dot-com era or the Web 1.0. And what we're doing to get a sense of what that spending looks like is we're looking at capital expenditures by these companies and comparing it to their revenue to see if that proportion is growing meaningfully.

And what we see with the hyperscalers today is that they're actually spending pretty meaningful levels — higher than what we would see with telecom companies rolling out 5G, higher than what we saw during the Web 1.0 or dot-com era. And just fun fact: also higher than what we're seeing China tech spend. So a big push on the spending front, and what the market is nervous about is we're not necessarily seeing the returns of that investment, at least immediately.

Welch: It's remarkable, Marta, to see those investment levels compared to previous tech cycles and to see the big difference there. Right? With all these crosscurrents — we've got tariff concerns, we've got persistent inflation pressures, we've got AI uncertainty — how do you bring all of this together, you and your team, as you put together this quarterly outlook? What's your guidance for the next quarter?

Norton: What really matters is what's priced in its markets. Where do valuations stand? And, unfortunately, from our estimate, we're not seeing massive opportunities on evaluation front.

Now on the economic front, maybe we can offer some optimism there. We do see a slowdown, but we're not necessarily expecting a recession. A lot of folks have called this a wait-and-see economy, and I think that's a fair characterization. Now should we see bad news — you know, something on the tariff front or something on the economic front weaken — we could see market sell-off. And if we see valuations come down as a result, that could be a buying opportunity.

Welch: So what's your recommendation for investors today?

Norton: Well, no one-size-fits-all recommendation for all investors because it really depends on how they are positioned coming into this period. But I would want to highlight the long-term perspective. I know nobody likes sell-offs, but we've been in a great era: 2023, 2024, 20%+ returns on the S&P 500 index. With that context in mind, I think volatility is something that we should expect from tariffs or anything else, and it doesn't necessarily mean investors need a whole new investment strategy.

Welch: Great reminders. Great perspective, Marta. Love talking markets and the economy with you. Thank you so much.

There is so much research in Marta's outlook. And in particular, Marta and her team, they take a really deep dive into tariffs and how they might impact corporate earnings, and they offer perspective on the larger picture with tariffs. Investors can find Marta's outlook through LinkedIn, on her LinkedIn, on Empower's LinkedIn. It'll be on mine as well.

Also, check out Empower's investment perspectives page at Empower.com. Marta, thanks so much, and we hope all of you found this helpful.