In light of recent news, we want to provide extra resources as advisors and their clients navigate recent tariffs, inflation, and volatility in the market. As a supplement to the long-form market commentary that follows, we have gathered other resources that may be helpful to you at this time.
U.S. equity markets entered the first quarter of 2025 with strong momentum, notching fresh all-time highs in February. However, early-year optimism—fueled by expectations of pro-growth policies, reduced regulation, and lower taxes from a new administration, alongside hopes for a soft landing orchestrated by the Fed—quickly gave way to mounting concerns over tariffs, trade policy shifts, and signs of government contraction. By mid-March, that optimism had unraveled, with stagflation fears resurfacing as investors recalibrated expectations.
Major equity indices officially entered correction territory as the S&P 500 fell more than 10% from its February 19th high through March 13th. Although the full scope of tariffs was not disclosed until early April, rising inflation expectations and deteriorating consumer sentiment weighed on risk assets throughout the quarter. The looming impact of broad-based tariffs injected uncertainty into the earnings and inflation outlook for 2025 and 2026.
Nowhere was the selloff more acute than among the “Magnificent Seven” mega-cap tech names, which collectively declined by an average of 16% in Q1. The group—previously the engine of 2023–2024 market gains—suffered as AI-related enthusiasm failed to translate into near-term profitability. Disappointment over lackluster earnings growth, coupled with news that Chinese AI firms had developed comparable models using less sophisticated and less costly chips, contributed to the pullback and raised questions about the sustainability of current valuations.
Yet, despite the pressure on large-cap tech, market breadth improved meaningfully during the quarter. Investors broadened exposure beyond the narrow leadership of the past two years, a trend underscored by the S&P 500 Equal Weight Index outperforming its cap-weighted counterpart by 3.5%, the largest margin of outperformance in 16 quarters. In fact, the S&P 500 excluding the Magnificent Seven posted a modest gain of 0.4% for the quarter, highlighting just how concentrated the late-2024 rally had been. The sharp reversal in these names was the principal driver behind the S&P 500’s mid-single-digit decline.
The final weeks of the quarter revealed a clear rotation out of high-growth names and into large-cap value peers. From a factor perspective, strategies emphasizing low volatility, enhanced value, and low volatility/high dividend meaningfully outperformed, returning 7.3%, 5.8%, and 5.0%, respectively. Notably, low volatility posted its largest outperformance versus the S&P 500 Index—an 11.5% spread—since the index’s inception in 2011. This shift illustrates the market’s pivot toward quality and downside protection in the face of macro uncertainty.
At the sector level, returns were broadly positive, with Energy, Health Care, Utilities, and Consumer Staples leading. Stable oil prices and renewed investor interest in commodities lifted the Energy sector, while traditionally defensive areas benefited from increased demand for income and stability. Investors gravitated toward sectors less sensitive to cyclical slowdowns amid rising geopolitical and inflationary risks.
Fixed income markets delivered solid returns in Q1, with the top-performing segments being longer-duration Treasuries and mortgage-backed securities. The Bloomberg U.S. Treasury 20+ Year Index led with a 4.6% return, followed by the 5–7 Year Treasury Index at 3.4% and the MBS sector at 3.0%, as markets began to price in an earlier and more aggressive rate-cutting cycle in response to rising recession risks.
The Federal Reserve held interest rates steady at both of its meetings during the quarter, as policymakers faced an increasingly complex outlook. Early in the year, the expectation was for gradual disinflation and a possible soft landing. But that narrative was quickly challenged by the administration’s protectionist policy agenda. Even before the tariff levels were announced, markets grew wary of the inflationary impulse from tighter immigration and broad-based trade restrictions—prompting the FOMC to pause further rate cuts despite slowing momentum in economic growth.
By quarter-end, the macro backdrop had shifted further. The April rollout of sweeping tariffs—including a blanket 10% import tax and steep levies on key trading partners—intensified downside risks to U.S. GDP while threatening to reignite inflation. According to UBS Chief US Economist Jonathan Pingle, the scope of the tariffs could push the U.S. into a mild recession. “Clearly such a large adjustment poses material downside risks to expansion. Our assessment would lift not only inflation into 2026, but also sees GDP fall and the unemployment rate rise…we would expect two quarters of negative GDP growth.”
This dual-threat of slower growth and renewed inflation has left the Fed navigating a narrow path. Chair Jerome Powell acknowledged the central bank’s dilemma, stating: “We face a highly uncertain outlook with elevated risks of both higher unemployment and higher inflation.” That uncertainty has upended earlier consensus around monetary policy. Traders are now pricing in an increased probability of multiple rate cuts in 2025—with nearly 30% odds of a first cut at the May meeting, and roughly even odds for cuts at each subsequent meeting this year.
International stocks largely outperformed their U.S. peers in the first quarter of 2025 amid shifting economic and policy winds. Many European and Asian indices posted solid gains, while the S&P 500 fell sharply on trade-war jitters. The chart below highlights Q1 returns across major markets, with Eurozone and Chinese equities leading gains and U.S. benchmarks lagging.
The STOXX Europe 600 has outperformed the S&P 500 by nearly 10% through the first quarter of 2025 for its largest quarterly outperformance since 2015. In the March global fund manager survey from Bank of America, respondents showed a record rotation out of US stocks with preferences for eurozone equities.
The surge in Eurozone equities during Q1 was supported by improving macroeconomic trends and fiscal tailwinds. The MSCI Europe Index jumped roughly +10% over the quarter – Europe’s strongest start to a year in decades. Economic data surprised to the upside, as manufacturing and services PMIs improved and corporate earnings outlooks stabilized. Crucially, European leaders’ commitment to boost defense spending provided a significant tailwind. At a March summit, pledges to raise military budgets (with EU/NATO defense outlays potentially rising from ~2% to 3.5% of GDP) fueled a rally in defense stocks. The aerospace & defense sector spiked +6.5% in a single day after the announcement, helping lift broader indexes near record highs. Several Eurozone countries posted standout gains. S&P Germany climbed about 15% in Q1 – one of the best performers globally – aided by reports of a new defense investment fund and strong results from major industrials.
France was a strong performer as well with a double digit return of 10% buoyed by value sectors and resilient corporate earnings. Meanwhile, the euro currency strengthened modestly (up ~1% versus the dollar in early March) as investor sentiment improved. On the policy front, Eurozone inflation stabilized around the ECB’s 2% target, allowing the European Central Bank to pivot to rate cuts. Trade tensions emerged as a late-quarter risk – U.S. tariff threats against EU exports (autos, luxury goods) briefly dented sentiment – but overall Eurozone equities significantly outperformed U.S. stocks in Q1.
China’s equity performance was mixed in Q1. Mainland stocks (CSI 300) posted modest gains amid muted stimulus and lingering trade tensions, while Hong Kong’s Hang Seng surged over 15% on renewed optimism in tech and AI. Beijing’s GDP target of 5% and signals of further policy support helped stabilize sentiment, though escalating U.S. tariffs and currency concerns continue to weigh on the outlook.
Latin American equities posted modest gains in Q1, with Brazil outperforming on a currency rebound and strong commodity-linked sectors, returning 14% for the S&P Brazil BMI. In contrast, Mexico lagged Brazil as U.S. tariff threats pressured the peso and dampened growth expectations, but still posted a strong quarter return with 7% on the S&P Mexico BMI.
As we turn the page on a volatile first quarter, it's critical to maintain a disciplined, long-term perspective. Q1 2025 was a reminder that after two years of unusually smooth gains, volatility, policy risk, and sector rotation have returned to the forefront. Staying diversified, focusing on quality, and keeping macro risks in context will be essential for navigating what lies ahead. Periods of uncertainty often set the stage for future opportunity—and staying grounded in fundamental principles can help investors remain resilient through market stress.
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Past performance is no guarantee of future returns.
The graphs and charts in this commentary are for illustrative purposes only and not indicative of any actual investment. Index returns do not reflect any fees, expenses, or sales charges. Stocks are not guaranteed and have been more volatile than other asset classes. Historical returns were the result of certain market factors and events which may not be repeated in the future. Financial professionals are responsible for evaluating investment risks independently and for exercising independent judgement in determining whether investments are appropriate for clients.
The information here is not intended to constitute an investment recommendation or advice.
Returns are based on the S&P 500 Total Return Index, an unmanaged, capitalization-weighted index that measures the performance of 500 large capitalization domestic stocks representing all major industries. Indices do not include fees or operating expenses and are not available for actual investment. The hypothetical performance calculations are shown for illustrative purposes only and are not meant to be representative of actual results while investing over the time periods shown. The hypothetical performance calculations for the respective strategies are shown gross of fees. If fees were included returns would be lower. Hypothetical performance returns reflect the reinvestment of all dividends. The hypothetical performance results have certain inherent limitations. Unlike an actual performance record, they do not reflect actual trading, liquidity constraints, fees and other costs. Also, since the trades have not actually been executed, the results may have under- or overcompensated for the impact of certain market factors such as lack of liquidity. Simulated trading programs in general are also subject to the fact that they are designed with the benefit of hindsight. Returns will fluctuate and an investment upon redemption may be worth more or less than its original value. Past performance is not indicative of future returns. An individual cannot invest directly in an index.
This material has been prepared for information and educational purposes and should not be construed as a solicitation for the purchase or sell of any investment. The content is developed from sources believed to be reliable. This information is not intended to be investment, legal or tax advice. Investing involves risk, including the loss of principal. No investment strategy can guarantee a profit or protect against loss in a period of declining values.