Q1 2025 Review & Outlook

Policy Uncertainty Weighs on Markets in Q1

Volatility gripped markets in the first quarter, and the major U.S. stock indices saw moderate declines as chaotic U.S. trade and tariff policies caused a plunge in business and consumer confidence,¹ which raised concerns that economic growth would slow and corporate earnings growth would disappoint.

Stocks started the year extending the declines of late 2024, as worries that the Federal Reserve could pause interest rate cuts weighed on sentiment. Yet the S&P 500 recovered much of those initial losses by mid-month as economic data improved, inflation readings were positive, and the Fed noted that while it would be patient with rate cuts, it still expected them in 2025.^2,3 Following Inauguration Day, stocks rallied on expectations of "pro-growth" policies from the new administration, including potential tax cuts, deregulation, and business-friendly initiatives. However, by the end of the month, tariff threats had emerged, including tariffs on Colombia.⁴

Still, trade and tariff policy significantly influenced markets in February. President Trump threatened 25% tariffs on Mexico and Canada, but delayed implementation for one month.⁵ Markets initially interpreted this as a negotiating tactic rather than a firm policy commitment and rallied to a new all-time high on February 19th. However, consumer confidence subsequently declined as uncertainty mounted about the administration's trade policies. This triggered a "growth scare" among investors,^6,7,8 concerned that tariff threats—even if not immediately implemented—could dampen business investment and consumer spending. The Atlanta Fed's GDPNow turned negative, implying economic growth may be stalling.⁹ The S&P 500 finished February marginally lower despite reaching new highs mid-month.

The market decline accelerated in March as the administration implemented 25% tariffs on Mexico and Canada, plus 10% on China, challenging investor assumptions that tariff threats were primarily negotiating tools. Multiple corporations reduced earnings guidance, citing concerns about reduced consumer spending and increased input costs from tariffs.¹⁰ These earnings warnings reinforced investor fears about slowing economic growth and corporate profitability. Auto tariffs announced on March 26th¹¹ accelerated market declines, as the automotive sector represents a significant portion of both the economy and corporate earnings.¹² The S&P 500 fell to near six-month lows by the end of March.

Despite market declines, underlying economic data remained resilient throughout Q1.¹³ Jobless claims stayed subdued, indicating a healthy labor market, and manufacturing and service sector activity remained robust. This disconnect between market performance and economic reality is significant. Stocks fell primarily on recession fears driven by policy uncertainty rather than actual economic deterioration. The fundamentals of the economy remained solid even as investor confidence wavered.

We remain vigilant towards risks to portfolios and the economy, and we thank you for your ongoing confidence and trust. Please rest assured that our entire team will remain dedicated to helping you navigate this market environment and keeping your financial plan on track.

Please do not hesitate to contact us with any questions or comments or to schedule a portfolio review.