Valuations Under Pressure: Empower's Norton Sees a Shifting Landscape

In early 2025, equity markets face a pivotal crossroads. Despite ongoing geopolitical tensions and the lingering specter of tariffs, Empower Inc.’s Chief Investment Strategist Marta Norton argues that valuations in certain sectors have become “a little easier to swallow”—even as risks remain elevated. Her analysis underscores a nuanced market reality: while some assets appear more affordable, others still harbor hidden vulnerabilities.

The Tariff Effect on Sector Valuations

Norton’s research highlights stark contrasts in how sectors are pricing in the risks of protectionist trade policies.

Materials: Overvalued, but Earnings Are Adjusting
The materials sector, which includes metals and chemicals, trades in the ninth decile of its own history—meaning valuations are near their highest in decades. Yet earnings expectations have already fallen significantly since December 2024, suggesting the market has partially priced in tariff-related costs. This mismatch creates a cautious optimism: “The materials sector is expensive but less so than before,” Norton notes, “as profit forecasts have normalized.”

Technology: High Valuations, Underappreciated Risks
The technology sector presents a more troubling picture. IT stocks remain in the ninth decile post-sell-off, yet earnings estimates have not meaningfully declined. Norton calls this a “red flag,” warning that tariffs could pressure both revenue (via global supply chains) and profit margins.

The Geopolitical Wild Card: Tariffs as a New Normal

Norton emphasizes that tariffs are no longer just a negotiating tactic but a “sea change in global trade.” Under the Trump administration, their goals have crystallized:
1. Reviving U.S. manufacturing
2. Boosting federal revenue
3. Addressing trade imbalances

This shift means tariffs are likely to persist, reshaping corporate strategies. For example, China’s threats to add U.S. firms to its “unreliable entity list” highlight escalating risks for sectors reliant on cross-border collaboration.

Navigating Volatility: A Portfolio Rebalance

Norton’s advice to investors centers on balance. She urges:
- Rebalancing away from overexposed sectors: Avoid large-cap tech giants, which dominate passive index funds.
- Embracing small caps: Overlooked small-cap stocks, which often have less global exposure, can act as a volatility hedge.
- Avoiding passive strategies: “A passive equity strategy may overexpose you to valuation risk,” she warns, pointing to the concentration of high-priced tech stocks in indexes like the S&P 500.

Near-Term Risks and Long-Term Realities

April 2025 looms as a critical month. Markets will gain clarity on the scope and duration of tariffs, potentially triggering volatility as investors reassess earnings trajectories. Norton also cautions that inflation and corporate profit margins will come under scrutiny.

Yet, she stresses that long-term goals should not be abandoned. “Market adjustments are natural,” she says. “Investors must avoid panic-driven decisions and focus on sustainable returns.”

Conclusion: A Delicate Dance Between Risk and Reward

Empower’s analysis paints a clear picture: while tariffs have begun to recalibrate valuations in some sectors, tech remains a cautionary tale of misplaced optimism. Materials, though pricey, reflect adjusted expectations, while technology’s high valuations clash with unresolved risks.

The data reinforces this divide:
- Materials sector earnings have dropped by ~15% since late 2024, aligning with tariff-driven cost pressures.
- Tech sector valuations, however, remain 20% above their five-year average, despite no meaningful downward revisions to earnings.

Norton’s call for portfolio diversification gains urgency here. By shifting toward small caps and avoiding passive overexposure to tech, investors can navigate the coming volatility. As she notes, “Equities may not be cheap, but their path forward depends on how well we prepare for the tariffs’ long shadow.”

In this environment, balance is not just a strategy—it’s a necessity.