Q1 2025 Market Recap

Markets faced renewed volatility in the first quarter of 2025, with major indices posting modest declines. Investor optimism early in the year, driven by expectations for pro-growth policies and interest rate cuts, was ultimately overshadowed by growing uncertainty around U.S. trade and tariff actions1.

Stocks started the year on a weak note but rebounded mid-January as inflation data improved, and the Federal Reserve reiterated its plans to continue cutting interest rates. Markets further rallied around the inauguration of President Trump, as immediate fears of aggressive tariffs went unrealized.

However, by February, tariff threats targeting key trading partners like Mexico and Canada began to unsettle markets. Though some measures were delayed, concerns over trade policy weighed on consumer confidence and hinted at slowing economic growth2. The S&P 500 briefly reached new highs but faded into month-end.

March brought more clarity and more concern. The administration moved forward with several major tariffs, and corporate earnings forecasts were revised downward as companies cited trade-related uncertainty. These developments triggered a broader market pullback, and the S&P 500 ended the quarter near its lows for the year.

In summary, what began as a hopeful start to 2025 turned into a more cautious environment, as policy unpredictability, particularly around trade, became a headwind for both markets and sentiment.

First Quarter Performance Review

The S&P 500 posted a modest decline in Q1, driven largely by sharp losses in the technology and consumer discretionary sectors – two of the index’s largest components. Tesla’s decline and concerns over consumer spending dragged the consumer discretionary sector lower, while tech stocks fell amid competitive concerns following the launch of China’s AI platform, DeepSeek.

Despite the headline decline, most sectors were relatively resilient. Only four of the 11 S&P sectors posted negative returns, and two of those saw only slight losses3. On the positive side, energy led the quarter thanks to rising global demand expectations, while healthcare, utilities, and consumer staples posted modest gains as defensive plays during rising uncertainty.

From a style perspective, value outperformed growth, as growth strategies were more heavily exposed to tech and consumer names. Value strategies held up better, benefiting from lower valuations and broader sector exposure.

Small caps lagged in the quarter, hit by concerns over economic growth and elevated interest rates. Large caps also declined, but losses were less severe.

US Equity Indexes Q1

1/1-3/31/2025

Return

1/1-3/31/2025

YTD

S&P 500 -4.27% -4.27%
DJ Industrial Average -0.87% -0.87%
NASDAQ 100 -8.07% -8.07%
S&P MidCap 400 -6.10% -6.10%
Russell 2000 -9.48% -9.48%

Source: YCharts 1/1/2025 – 3/31/2025

International stocks outperformed the S&P 500 in Q1, with foreign developed markets leading the way. Gains were driven by strong performance in Europe, as countries like Germany signaled increased deficit spending to support growth and defense. Emerging markets also posted modest gains, supported by stronger-than-expected economic data from China.

International Equity Indexes Q1

1/1-3/31/2025

Return

1/1-3/31/2025

YTD

MSCI EAFE TR USD (Foreign Developed) 7.01% 7.01%
MSCI EM TR USD (Emerging Markets) 3.01% 3.01%
MSCI ACWI Ex USA TR USD (Foreign Dev & EM) 5.36% 5.36%

Source: YCharts 1/1/2025 – 3/31/2025

Commodities posted modest gains in Q1, driven by a strong rally in gold, which hit a record high above $3,000/oz. amid a weaker U.S. dollar and rising demand during policy uncertainty. Oil finished slightly lower but recovered from early declines on improved Chinese data and higher demand expectations from Europe.

Commodity Indexes Q1

1/1-3/31/2025

Return

1/1-3/31/2025

YTD

S&P GSCI (Broad-Based Commodities) 4.89% 4.89%
S&P GSCI Crude Oil -0.51% -0.51%
GLD Gold Price 19.02% 19.02%

Source: YCharts/Koyfin.com 1/1/2025 – 3/31/2025 

Bonds delivered modest gains in Q1, supported by better-than-expected inflation data and growing concerns about economic growth. Longer-duration bonds outperformed as investors sought stability amid policy uncertainty.

In corporate credit, investment-grade bonds outpaced high-yield counterparts, reflecting a cautious tone. Still, both segments posted positive returns, signaling underlying optimism among bond investors.

US Bond Indexes Q1

1/1-3/31/2025

Return

1/1-3/31/2025

YTD

BBgBarc US Agg Bond 2.78% 2.78%
BBgBarc US T-Bill 1-3 Mon 1.04% 1.04%
ICE US T-Bond 7-10 Year 3.90% 3.90%
BBgBarc US MBS (Mortgage-backed) 3.06% 3.06%
BBgBarc Municipal -0.22% -0.22%
BBgBarc US Corporate Invest Grade 2.31% 2.31%
BBgBarc US Corporate High Yield 1.00% 1.00%

Source: YCharts 1/1/2025 – 3/31/2025

Second Quarter Market Outlook

Markets enter Q2 2025 after the weakest quarterly performance in nearly three years, weighed down by policy uncertainty and recession fears4. However, it’s important to note that recent declines were driven more by concerns over potential risks rather than actual economic deterioration. If policy direction stabilizes and economic data remains resilient, markets could rebound meaningfully.

On trade and tariff policy, late-Q1 showed early signs that the administration may improve its communication with markets, an encouraging development. Clearer messaging, regardless of the final policy outcome, could help restore investor confidence.

Economic fundamentals have held up. Jobless claims remain low, business activity continues to expand, and unemployment is near 4%. These indicators suggest that, so far, the feared slowdown hasn’t materialized. Continued strength in the data could ease recession worries and support a market recovery.

Valuations have also become more attractive. The Q1 sell-off reset investor expectations, shifting sentiment from overly bullish to more cautious, often a setup for future gains.

Lastly, despite the broader market pullback, many sectors delivered positive returns in Q1, highlighting areas of resilience and opportunity.

Bottom line: While uncertainty remains, especially around trade and growth, the economy is still on solid footing. If policy communication improves and supportive measures like deregulation or tax cuts materialize, the outlook for the second quarter could turn more positive than current sentiment suggests.

 

Sources:

  1. https://www.reuters.com/markets/us/us-consumer-confidence-deteriorates-further-march-2025-03-25/
  2. https://www.foxbusiness.com/economy/wall-street-firms-see-recession-risk-rising-over-tariffs-trade-war
  3. https://www.reuters.com/business/aerospace-defense/delta-airlines-cuts-first-quarter-profit-forecast-increased- macroeconomic-2025-03-10/
  4. https://www.wsj.com/livecoverage/stock-market-today-dow-nasdaq-sp500-03-31-2025/card/the-s-p-500-is-on-course- for-its-biggest-quarterly-loss-in-nearly-three-years-F5gno08AFqP4R9tluRlt

 

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