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Key Takeaways, First Quarter 2025

The quarter marked a decisive shift in investor sentiment. In the US, after two consecutive years of stocks returning more than 20%, US equities fell over tariff-related uncertainty. Weaker economic and consumer confidence data hurt investor sentiment. In contrast, the macro-outlook improved in Europe and both the UK and Continental Europe rallied. The rotation favored value stocks and defensive sectors.

The Fed is taking a “wait-and-see” stance after 2024’s three cuts (totaling 1%), citing low unemployment, solid growth, and progress toward its 2% inflation target. Treasury rates fell as they were viewed as a safe asset. Economic uncertainty caused spreads to widen and bond volatility to rise. However, all fixed income sectors gained.

Markets are focused on tariffs and other sources of policy uncertainty, especially those related to geopolitical shocks and their implications for inflation and economic growth. Even if a trade war is avoided, the Fed must successfully navigate a narrow course between continuing to bring down inflation and cutting off economic growth.

Equities

After treading water during the first two months, a negative March resulted in a down quarter. The broad US market was down 4.7% in Q1, and small caps struggled, falling 9.5%. Value outperformed growth.
Developed international stocks gained 6.9%, and emerging market gained 2.9%.
The Magnificent 7 are down more than 20% from their highs. Without their influence, the S&P would have been up ~0.5% rather than down 4.3%.

Fixed Income

Despite positive developments on inflation, tariffs and other sources of uncertainty kept the Fed on hold.
Interest rates on bonds fell. The yield of the 10-year Treasury fell 31 basis points, and the 20-year rate fell 21 bps.
Despite widening credit spreads, Core bonds gained 2.8%, Investment Grade gained 2.4%, and High Yield gained 0.9%.

Note that this commentary is through March 31, 2025. The discussion and outlook do not reflect data or news since then. This is relevant given the announcement relating to tariffs on April 2, 2025, and markets’ subsequent reactions. We understand there are significant near- and long-term implications of the announcement. However, there is ongoing uncertainty about tariffs’ effect on economic growth, inflation, and corporate earnings. We continue to monitor developments.