Q1 2025 - A Market Review
Volatility gripped markets and the major stock indexes saw steep declines as chaotic US trade and tariff policies caused an abrupt plunge in confidence, with Big Tech/AI particularly punished.
Stocks started the new year by extending the declines of late 2024, as worries that the Federal Reserve could pause interest rate cuts weighed on markets early in January. However, solid economic data, encouraging inflation readings and positive commentary from Fed officials about future rate cuts pushed back on those fears and the S&P 500 had recovered most of those initial losses by mid-month. Additionally, stocks rallied into and following Inauguration Day, as markets cheered what they hoped would be a Trump administration focused on deregulation, tax cuts and a “pro-growth” agenda.
The S&P 500 hit a new all-time record high shortly after Trump’s inauguration and the rally continued into late January after the Fed signaled that it still expected to cut interest rates in 2025, further calming fears of a pause.
However, at the very end of January, investors got an inkling of the looming head-spinning tariff/trade chaos when Trump threatened Colombia with 25% levies. However, those tariffs were not ultimately implemented, so markets largely ignored them and stocks finished January with a solid gain.
Trade and tariff policy first began to impact stock prices in early February. During the first few days of the month, Trump threatened and then delayed 25% tariffs on Mexico and Canada, which temporarily spiked market volatility. However, the one-month delay of those tariffs led some market participants (naïvely, as it turned out) to believe that all this threatening behavior was only being used as a negotiating tactic and that substantial levies would not be implemented after all.
That sentiment helped to ease investor concerns while economic data remained solid. Those factors combined to send the S&P 500 to yet another new all-time record high on February 19th. However, the rally didn’t last long. Consumer confidence readings declined dramatically the next day and some economic reports began to imply that all the trade and tariff uncertainty was starting to meaningfully drag on overall US economic growth.
Meanwhile, almost daily savage tariff threats and general policy incoherence continued through the end of the month and it was this, combined with plunging consumer sentiment, that sparked real stagflation concerns amongst investors that weighed heavily on stocks and pushed the S&P 500 marginally into the red for February.
The pace of the declines accelerated in March led by some truly awful days for the so-called Magnificent Seven stocks (Tesla lost well over a third of its entire value in Q1 alone, with Nvidia and Alphabet/Google each losing close to 20%) as Trump made good on his threat to implement 25% tariffs on Mexico and Canada (and an additional 10% tariff on China). While he delayed some of those tariffs on Mexico and Canada until early April, many other tariffs were left in place which shattered investors’ belief that tariff threats were just a negotiating tactic.
Meanwhile, several corporations from various sectors began to lower their earnings guidance, citing crumbling consumer spending and business investment on the back of fears about the effect of tariffs. Those guidance cuts reinforced fears that chronic policy uncertainty could cause a serious economic slowdown and the S&P 500 plunged to a six-month low and moved into an official correction.
In late March, markets briefly tried to rebound amidst a short lull in the incessant exhausting tariff rhetoric but that came to crashing halt when Trump announced 25% auto tariffs on March 26th, sending stocks tumbling once again. The S&P 500 finished the quarter near year-to-date lows.
In summary, Wall Street’s optimism for a pro-growth agenda and tax cuts has been replaced by real and rising concerns about the potentially catastrophic fallout from a new global trade war brought about by the administration’s approach and a slowing US economy possibly heading towards recession, as policy uncertainty and often confusing and incompetent communication crushed investor and consumer confidence.
First Quarter Performance Review
While the S&P 500 logged a moderately negative return for the quarter, the declines in the index were mostly due to sharp drops in widely-held technology and discretionary consumer stocks, as other parts of the market proved rather resilient.
To that point, on a sector level, only four of the eleven S&P 500 sectors finished the quarter with a negative return and two of those four sectors saw only fractional declines. The Consumer Cyclical and Technology sectors were, by a massive margin, the worst-performing sectors in the Q1 as both saw sizable declines. And, since those two sectors carry some of the largest weights in the S&P 500 index, they weighed heavily on the overall index performance.
The Consumer Cyclical sector was the worst performer for the quarter as it was hit by intense weakness in one of the largest consumer stocks (I’m looking at you, Tesla) combined with general concerns about lower consumer spending in the face of heightened policy uncertainty and confusion.
The Technology sector was the other awful performer as Big Tech and AI stocks crashed, in part due to the debut of the Chinese AI program DeepSeek, which challenged assumptions about the future economic benefit of AI for major US tech firms.
Looking at sector outperformers, Energy was the top-performing sector in Q1 thanks to rising demand expectations following strong Chinese economic data and after some European countries committed to increasing debt to fund economic growth. The Healthcare, Utilities and Consumer Defensive sectors logged modest gains in Q1, as these traditionally defensive areas were viewed as more insulated from any trade wars and tend to be more resilient in the face of an economic slowdown.
From an investment style standpoint, Value stocks significantly outperformed Growth stocks as growth strategies posted substantial losses due to their large weightings of tech and consumer names.
Value strategies logged a slightly positive return over the past three months and benefited from exposure to a broader array of sectors that have recently traded at lower valuations and were not as impacted by all the negative sentiment.
Finally, looking at performance by market cap, Small Caps (as defined by the Russell 2000 index) declined sharply in the first quarter and lagged Large Caps (S&P 500) thanks to a combination of rising worries about economic growth and stubbornly high interest rates.
US Equity Indexes Q1 Return YTD
Internationally, foreign markets significantly outperformed the S&P 500 and finished the quarter with a substantially positive return. Foreign Developed markets saw the largest gains and outperformed Emerging Markets after Germany and other EU countries signaled a willingness to increase deficit spending to boost economic growth and defense. Emerging markets logged more modest gains but still benefitted from better-than-expected Chinese economic data.
International Equity Indexes Q1 Return YTD
Commodities were modestly positive in the first quarter as strength in gold helped to boost the major commodity indexes. Gold hit a new record high and traded above $3,000/oz. for the first time ever, thanks to a weaker U.S. dollar and increased demand following policy chaos and volatility from the new administration.
Oil logged a small loss but finished well off the lows of the quarter thanks to better-than- expected Chinese economic data and expectations for more demand from Europe, as well as growing skepticism in late March about the viability of any Trump-led solution in Ukraine.
Commodity Indexes Q1 Return YTD
Switching to fixed income markets, the leading benchmark for bonds (Bloomberg Barclays US Aggregate Bond Index) realized a modestly positive return for the first quarter of 2025. Better-than-expected inflation readings and general concerns about economic growth boosted bonds broadly and helped longer-duration bonds to outperform shorter-duration ones, as investors sought higher long-term yields amidst all the market uncertainty.
Turning to the corporate bond market, higher-quality but lower-yielding investment-grade bonds outperformed higher-yielding but lower-quality bonds in the first quarter and that reflected investor concerns about future economic growth. However, both investment-grade and high-yield corporate bonds finished Q1 with modest gains, reflecting a still present sense of economic optimism from bond investors and the role of bonds as an escape room when all hell breaks loose in stocks.
US Bond Indexes Q1 Return YTD
Q2 2025 Market Outlook
Stocks embarked on Q2 2025 following the worst quarterly performance in three years and facing dual market headwinds of policy uncertainty and potentially slowing economic growth. However, while markets are clearly facing legitimate obstacles, it’s important to realize that stocks fell in the first quarter mostly on fears of what might happen in the economy rather than because of what is actually occurring.
Point being, if future policy decisions and an economic slowdown aren’t as bad as currently feared, it has the capability to cause a substantial market rebound in the coming weeks and months.
Starting with trade and tariff policy, an improvement in the appalling communication strategy from the administration regarding its policy goals would really help and there were signs late in the quarter that officials were at least recognizing their blunders and were working to communicate more effectively and consistently with markets.
Regardless of what actual tariff policy ultimately looks like, an improvement in the communication of the administration’s policy goals will be a market positive and could help slow down this pullback.
Turning to economic growth, while fears of a slowdown surged in the first quarter, the actual economic data stayed mostly resilient. Jobless claims remained subdued, measures of manufacturing and service activity showed continued expansion and the unemployment rate remained historically low, right around 4.0%.
Put simply, there was not much in the hard data in Q1 to imply that the economy is actually weakening. If economic data were to stay solid throughout Q2, it will ease recession fears and possibly fuel a rebound in the markets.
On market valuation, the declines of the first quarter have resulted in stocks trading at a more reasonable valuation compared to the start of the year, as extremely bullish investor sentiment has now been replaced by a decidedly bearish outlook.
Bottom line, the market was richly valued at the start of the year and investor sentiment was very complacent, but the volatility of the first quarter has removed both of those conditions and that is in fact a general positive for the markets going forward.
Finally, while the S&P 500 did suffer declines in the first quarter, there were many parts of the market that weathered the volatility very well and posted positive returns. More than half of the sectors within the S&P 500 logged positive returns in the first quarter while two other sectors only saw slight declines (see the market mosaic at the top of this report). This underscored that the volatility we witnessed in the first quarter did not result in a broad market wipeout and there are sectors and factors that can continue to outperform in this environment, despite what the indexes seemed to be saying.
Money flows are favoring large-cap quality and defensive, value-focused areas of the market while investors are avoiding the more economically sensitive or high-valuation areas. This is consistent with a growing sense of caution towards the sustainability of the current economic expansion phase, risks of a recession and historically elevated political policy uncertainty.
Bottom line, the quarter contained plenty of negative surprises for investors and we begin Q2 with significant uncertainty on trade policies and legitimate concerns about future economic growth. But there are also positive factors at work that must be considered, including a still-resilient economy and still-possible deregulation and potential tax cut extensions. So, despite depressed investor sentiment, the outlook for markets is not universally negative.
In my present and former professional life, I have experienced these types of markets many times before and I am committed to helping clients effectively navigate this challenging environment. Successful investing is a marathon, not a sprint and through both bull and bear markets, I will remain focused on the diversified approach set up to meet clients’ long-term investment goals.
I remain constantly vigilant on behalf of Anglia Advisors’ clients regarding their portfolio risk, as well as economic and geopolitical factors and will continue to keep you informed of my opinions with my weekly market review every Sunday morning.
If you are already a client, I want to thank you for your ongoing confidence and trust. Please do not hesitate to contact me with any questions, comments or to schedule a portfolio review.
If you aren’t a client yet, please reach out and I’d be delighted to discuss bringing you into the Anglia Advisors family.
Simon Brady CFP® CETF®. Founder, principal Anglia Advisors.
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