Market Update highlights challenges faced by US domestic equity due to AI competition

The Investment Advisory Board of Rio Rancho convened on May 28, 2025, to discuss recent market trends and economic indicators affecting investment strategies. The meeting highlighted significant fluctuations in domestic and international equity markets, as well as insights into fixed income and overall economic performance.

The session began with a review of market movements for the first quarter of 2025, noting that domestic equity faced challenges, particularly in March. The emergence of DeepSeek, an AI company from China, introduced competition to established firms, impacting the "Magnificent Seven" stocks, which constitute a substantial portion of the U.S. stock market. This development, coupled with tariff uncertainties affecting mid and small-cap companies, contributed to a downturn in domestic equity.

In contrast, international equity showed resilience, benefiting from a weakening U.S. dollar, which improved returns when converting local currencies. This trend marked a reversal from the previous quarter, where a stronger dollar had negatively impacted international investments. The board noted that international equities were a bright spot in portfolio performance, with continued strong returns expected.

The discussion then shifted to fixed income markets, where the Federal Reserve's recent policy changes were analyzed. The board noted expectations for two rate cuts later in the year, with a 70% probability of a cut in September. The short end of the yield curve has decreased, while the long end has risen due to inflation concerns.

Economic indicators presented a mixed picture. While consumer and business sentiment showed slight declines, hard economic data remained strong. The U.S. GDP contracted in the first quarter, primarily due to increased imports, as businesses and consumers anticipated potential tariffs. Despite this contraction, the markets exhibited a recovery following a significant drop in early April.

Looking ahead, the board expressed cautious optimism, noting that uncertainty surrounding policies could eventually stabilize, allowing businesses and consumers to adapt. The meeting concluded with a review of asset class expectations, indicating a neutral outlook across most categories, with emerging markets and listed real estate adjusting to neutral positions from previous assessments.

Overall, the meeting underscored the complexities of the current investment landscape, emphasizing the need for strategic adjustments in response to evolving market conditions.