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Q1 2025 Quarterly Update Thumbnail

Q1 2025 Quarterly Update

Insights Investing

With a new Administration taking charge, market watchers approached Q1 with a mixed sense of anticipation and trepidation. A tailwind of a strong economy, job creation, low unemployment, and declining inflation pressures, coupled with a generally pro-business Administration and potential tax-cut legislation later this year, were all ingredients for continued economic growth. 

 

At the same time, there was nervousness regarding cuts to government spending (an economic stimulus) and the President’s immediate pledge to increase tariffs, particularly against economic partners, Canada and Mexico. In this update, we review the past 1st quarter and market performance, key asset class activity, and the economic outlook for the next few months. 

 

2025 is already a year of significant change, so understanding the economic and market environment may be helpful in assessing any potential changes to your financial plan and investments.

Q1 Performance Review

  • Albeit a touch of overextension in Big Tech, U.S. stocks entered 2025 in a bullish mode. Investors were hoping to extend strong 2024 momentum into the new year. Those hopes were dashed just after Inauguration Day when the Trump Administration announced tariffs against Canada, Mexico, and China on February 1st.[1] This touched off retaliatory tariffs and mixed messaging by the Administration until February 10th when tariffs were levied on steel and aluminum imports, and later on February 21st when tariff policy was extended to include the EU. At this point, U.S. market indices began their descent as investor fears of a global trade war were becoming a reality. The decline from the February peak was amplified by the larger pullback of Big Tech stocks, which had fueled previous gains over the past two years.
  • After lowering rates twice in Q4 2024, the Fed decided to maintain rates at the 4.25-4.50% range for now to assess the impact of previous rate cuts and monitor slowing economic growth. Inflation was seen as “sticky,” inciting the FOMC to take a “wait and see” approach to further rate cuts, expected to be only one to two cuts for 2025.
  • During the quarter, annual inflation eased to 2.8% in February,[2] providing relief to Fed watchers. GDP growth, as reported on March 27th, slowed in Q4 year-over-year to 2.4 percent.[3] With tariffs potentially constraining economic activity, some are predicting Q1 growth to fall to just 0.3%.[4]
  • Overall, expectations for the year have completely reversed. With every week of expanding tariff policy, economists and major business leaders are raising predictions for a recession to plague the economy in the coming months.[5]
  • Real estate remains a problem area with elevated prices, stubbornly higher mortgage rates and still-low inventory, especially for starter homes. Tariffs on lumber, copper, and steel threaten to add to the real estate slump.

Sector and Asset Class Performance

  • U.S. stock markets posted their largest quarterly loss since Q3 2022. After two stellar years of advancements, the S&P 500 corrected by over 10% in February, falling 4.3% for the quarter. The Dow was more resilient, only falling 0.9%. Hardest hit were the Nasdaq Composite, off 10.3% and the Russell 2000 Growth index, down 11.1%. The Big Tech Magnificent 7 led the tech decline, plummeting 16% for the quarter.[6] 
  • The worst losses by sector came from consumer cyclicals, plunging 12.83%. Technology did almost as badly, falling 12.1%. On the positive side, energy stocks gained over 9% and healthcare registered a 5.43% gain.
  • Surprisingly, dividend stocks proved their resiliency in tough conditions, rising 2.2% versus the overall 4.3% pullback. Less surprisingly, value stocks fared better than growth, gaining 4.4% as opposed to the Growth Index decline of 9.3%[7]
  • Bonds were the star sector of the quarter, illustrating the benefits of balanced diversification, as they served their traditional role of countering the effects of stock declines. Core bonds and overall U.S. Treasuries gained 2.78% and 2.93%, respectively, with longer-term Treasuries outpacing all bonds with a quarterly gain of 4.93%. Inflation Treasuries (TIPS) gained investors’ attention again with a gain of 4.25%.
  • International markets were another bright spot, as countries sought to spur growth through fiscal stimulus measures. China’s wage increases for workers and bond issuance into local economies boosted economic growth over 16% for the quarter. German, Italy, and Spain markets all grew more than 12% due to fiscal stimulus, particularly due to investment in national defense in lieu of less anticipated U.S. support.
  • Though only 4 of the 11 U.S. sectors were negative for the quarter, their declines were severe enough to offset modest gains in the other seven. Consumer Defensive, Energy, Healthcare, and Utilities were the major leaders, while Technology and Consumer Cyclicals were dramatically lower. Oil and gas prices dropped slightly as production increases developed. Not surprisingly, copper and gold prices advanced significantly.

Federal Reserve and Economic Outlook

  • In his December 2024 comments, Fed Chairman Jerome Powell indicated that inflation appeared to be “stubborn” and perhaps only two rate cuts could be expected for 2025. The Fed is taking a “wait and see” approach, balancing the need for rate cuts to sustain economic growth against inflation concerns, especially with the new factor of widespread import tariffs, considered “inflationary” by the Fed, economists, and bank leaders such as Jamie Dimon of JPMorgan Chase.[8]
  • Economic growth is now expected to stall and possibly slide into recession.[9] Unemployment is expected to remain near 4% through the quarter.[10] Job growth month-month is steady and is expected to remain so in 2025.
  • The 2025 outlook is uncertain. In early April, the Trump Administration issued further restrictive tariff policy and threats of further tariff expansion against countries that retaliate (particularly China), continuing to fuel investor and business angst.
  • Despite this, corporate earnings are expected to grow, albeit at a slower pace.[11] In addition, anticipated tax legislation from a GOP-majority Congress and the President is expected to include corporate tax relief and other incentives to boost profits. Much may change in the second quarter. 

Investment Strategy

  • One key lesson to take away from the chaos of Q1 and continuing into Q2 is the benefits of a balanced, diversified portfolio. While the previously high-flying AI and Big Tech sectors saw a free fall in Q1, other sectors (such as dividend-paying stocks, value and wide-moat defensive stocks, and (finally!) bonds) proved resilient. Those with such balanced portfolios may find their investment account performance has suffered far less than the market indices year-to-date. During times of trouble in the economy or markets, being defensive and including ample investments in dividends, bond interest, and even money market funds in your investment mix may help to weather the current storm.
  • Long-term, diversified financial planning is emphasized as the key to navigating market unpredictability and realizing investment goals. Volatility is generally a constant factor in investment management, and this year continues to be exceptionally volatile as the market digests the unpredictable policy changes forthcoming. Risk tolerance should therefore be balanced against appropriate time horizons and capacity to endure the inevitable declines that are part and parcel of investing in the financial markets.

Do You Have a Financial Advisor?

Navigating market fluctuations can be challenging, especially in today’s rapidly evolving economic landscape. If recent market movements or economic changes have you questioning your financial strategy, now is the perfect time to review your plan. 

 

We at Boyer and Sappenfield Investment Advisors are here for you. Don’t hesitate to reach out to our team for guidance—we’re here to align your investments with your long-term goals and risk tolerance as you pursue your ideal future.

 

 

[1] https://www.piie.com/blogs/realtime-economics/2025/trumps-trade-war-timeline-20-date-guide

[2] https://www.cnbc.com/2025/03/12/cpi-inflation-report-february-2025.html

[3] https://www.bea.gov/data/gdp/gross-domestic-product

[4]https://www.cnbc.com/2025/03/31/first-quarter-gdp-growth-will-be-just-0point3percent-as-tariffs-stoke-stagflation-conditions-says-cnbc-survey.html

[5] https://www.npr.org/2025/04/07/nx-s1-5354927/recession-trump-tariffs

[6] https://www.nasdaq.com/articles/first-quarter-2025-review-outlook

[7] https://www.morningstar.com/markets/13-charts-q1s-dramatic-rotation-stocks

[8] https://www.cnbc.com/2025/04/07/jamie-dimon-trump-tariffs-inflation-economy.html

[9]https://www.reuters.com/markets/jpmorgan-lifts-global-recession-odds-60-us-tariffs-stoke-fears-2025-04-04/

[10] https://www.bls.gov/news.release/pdf/empsit.pdf

[11] https://www.usbank.com/investing/financial-perspectives/market-news/focus-on-corporate-earnings.html