LIVE MARKETS-More volatility before the clouds part

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MORE VOLATILITY BEFORE THE CLOUDS PART

The U.S. stock market will likely stay volatile while investors await clarity on U.S. policy issues such as tariffs and immigration curbs and pro-growth promises like tax cuts and de-regulation, but Edward Jones senior investment strategist Angelo Kourkafas is also looking for opportunities.

In an interview with Reuters, the strategist pointed to immigration curbs as having a potentially bigger impact than tariffs as a shortage in labor supply could bring wage inflation.

"A structural change in the labor force, that can be more inflationary than actual tariffs. So it's a key risk that we monitor," he said.

But one thing preventing an all-out stock sell-off so far may be a belief that the Trump administration sees market performance as a seal of approval or disapproval.

"There is a notion that stock market performance is going to be viewed as gauge of the success of this administration and so that could be a natural stabilizer in terms of how aggressive some of these policies are going to be if the market revolts," said Kourkafas.

"It doesn't change the fact that we could see a period of volatility until we see some re-calibration in policy," he said.

But he also sees solid fundamentals allowing investors to "put that headline noise on the side until we know more."

For example expectations that corporate profits will rise more than 10% for the year, "provides some buffer if we see valuations decline by 10%" he said.

Kourkafas described recent declines in stocks in sectors such as technology as "a lot of the froth coming out of the market" and said it "helps de-risk the situation."

"I wouldn't be surprised if eventually we do get a 10% correction, but maybe that sideways consolidation that we've been going through the last three months, really is the way that the market is self correcting, via rotating instead of indiscriminate selling."

He sees this rotation as welcome news for investors with diversified portfolios. Kourkafas is looking for parts of the market with "catch-up potential" such as domestic and cyclical stocks, particularly in mid-caps.

"In the environment where rates are still high for longer, it might be a little too early to jump into small-caps, but mid-caps still have low valuations," he said.

"They are more domestically oriented. They have less exposure to that tariff uncertainty that is lingering, and they could benefit from pro-growth policies if we see tax cuts for domestic manufacturers."

So far in 2025 the S&P 400 mid-cap index .IDX is down ~1.4% while the S&P 500 is virtually unchanged while the Russell 2000 small cap index .RUT is down 3.6% YTD.

(Sinéad Carew)

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