Q1 2025 Review & Outlook
by Chris Broderick Research & Portfolio Strategy Director
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, which raised concerns that economic growth would slow and corporate earnings growth would disappoint.(1)
Stocks started the year extending the declines of late 2024, as worries that the Federal Reserve could pause interest rate cuts weighed on sentiment. However, solid economic data, encouraging inflation readings, and positive commentary from Fed officials about future rate cuts pushed back on those fears. The S&P 500 recovered much of those initial losses by mid-month.(2) Stocks then rallied into and following Inauguration Day, as investors anticipated a “pro-growth” administration taking power. In contrast, fears of dramatic tariffs on “Day One” of the Trump presidency went unfulfilled. The rally accelerated after the Fed signaled it still expected to cut rates in 2025, further calming fears of a pause in rate cuts.(3) But at the very end of January, investors got a preview of looming tariff and trade volatility when President Trump threatened 25% tariffs on Colombia. Those tariffs were not ultimately implemented, so markets largely ignored them, and stocks finished January with a solid gain.(4)
Still, trade and tariff policy significantly influenced markets in February and increased market volatility by month-end. During the first few days of February, President Trump threatened and delayed 25% tariffs on Mexico and Canada. The one-month delay of those tariffs led markets to believe President Trump was using tariff threats as a negotiating tactic and that substantial tariffs would not be implemented after all.(5) That sentiment helped to ease investor concerns while economic data remained solid. Those factors combined sent the S&P 500 to a new all-time high on February 19th. But the rally would not last. In late February, consumer confidence declined, and some economic reports implied that the trade and tariff uncertainty was starting to slow economic growth.(6) Those fears were reinforced when the Atlanta Fed’s GDPNow turned negative, implying economic growth may be stalling.(7) Meanwhile, tariff threats and general policy volatility continued through the end of the month, and that, combined with plunging consumer sentiment, sparked a “growth scare” amongst investors that weighed on stocks and sent the S&P 500 marginally lower in February.(8)
The market decline accelerated in March as President Trump made good on his threat to implement 25% tariffs on Mexico and Canada (and an additional 10% tariff on China). President Trump delayed some of those tariffs on Mexico and Canada until early April. Still, many other tariffs were left in place, challenging investors’ previous belief that tariff threats were just a negotiating tactic.(9) Meanwhile, several corporations from various sectors began to lower earnings guidance, citing reduced consumer spending and business investment.(10) Those guidance cuts reinforced fears that policy uncertainty could cause an economic slowdown, and the S&P 500 fell to a six-month low. In late March, markets tried to rebound amidst a lull in tariff threats, but it didn’t last as President Trump announced 25% auto tariffs on March 26th, sending stocks lower once again.(11) The S&P 500 finished the quarter near the year-to-date lows.
In sum, investor optimism for a pro-growth agenda and tax cuts to begin the year was replaced by rising concerns about a new global trade war and a slowing U.S. economy as policy uncertainty whipsawed investors and weighed on consumer confidence.
Stocks continue to face policy uncertainty and concerns over potentially slowing economic growth to begin the second quarter. While both factors are legitimate headwinds to the market, it’s essential to realize that stocks fell in the first quarter mostly on fears of what might happen in the economy, not because of what is occurring. If future policy decisions and an economic slowdown aren’t as bad as feared, it could lead to a market rebound in the coming months.
Starting with trade and tariff policy, on Wednesday, April 2nd, President Trump announced a 10% baseline tariff for virtually all imports and dramatically higher tariffs for significant trading partners, including China and the EU, which saw the imposition of 34% and 20% tariffs, respectively.(12) The implementation details, legal authority to enact the tariffs, and how these tariffs will interact with already implemented tariffs remain unclear. What is clear is that lingering uncertainty around these details is a concern that weighs on consumer and business sentiment. This uncertainty is a more significant risk than the tariffs themselves, given the lack of clarity around the duration and who absorbs them (exporter, importer, or consumer). The most beneficial thing the administration could do is identify a transparent trade policy goal so investors can more confidently benchmark progress toward a resolution. Markets don’t necessarily need the complete removal of tariffs to stabilize. Regardless of what policy is ultimately implemented, improvement in communication from the administration around the overall objective of trade policy could help reduce uncertainty, which would support the market.
Turning to economic growth, while fears of a slowdown surged in the first quarter, economic data mainly stayed resilient. Jobless claims remained subdued, measures of manufacturing and service activity showed continued expansion, and the unemployment rate remained historically low, close to 4.0%.(13) Put simply, there was little in the data in Q1 to imply the economy is weakening. If economic data stays solid throughout the second quarter, it will push back on recession fears and help to improve sentiment further, providing additional support.
The bottom line is that the first quarter did contain several negative surprises for investors, and we begin the second quarter with significant uncertainty on trade policies and legitimate concerns about future economic growth if consumers and businesses “hole up” and wait for clarity. However, positive factors at work must be considered, including a still-resilient economy and looming favorable economic policies such as deregulation and potential tax cut extensions. So, despite depressed investor sentiment, the outlook for the economy and markets is not universally negative.
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.
1 https://www.reuters.com/markets/us/us-consumer-confidence-deteriorates-further-march-2025-03-25/
2 https://www.forbes.com/sites/jasonschenker/2025/01/29/fed-leaves-interest-rates-unchanged-but-2025-cuts-are-still-expected/
3 https://www.forbes.com/sites/jasonschenker/2025/01/29/fed-leaves-interest-rates-unchanged-but-2025-cuts-are-still-expected/
4 https://sanctionsnews.bakermckenzie.com/president-trump-threatens-tariffs-and-sanctions-against-colombia-colombia-retaliates-with-25-tariffs-on-us-imports/
5 https://www.nytimes.com/2025/03/13/business/economy/trump-tariff-timeline.html
6 https://www.foxbusiness.com/economy/wall-street-firms-see-recession-risk-rising-over-tariffs-trade-war
7 https://paralleladvisors.box.com/v/Q22025EconIndicatorsandReturns
8 https://www.lpl.com/research/econ-market-minute/growth-scare-affects-bond-market.html5
9 https://www.atlanticcouncil.org/blogs/new-atlanticist/wall-street-is-finally-waking-up-to-trumps-tariff-policy/
10 https://www.reuters.com/business/aerospace-defense/delta-airlines-cuts-first-quarter-profit-forecast-increased-macroeconomic-2025-03-10/
11 https://www.cnn.com/2025/03/26/economy/auto-tariffs-announcement/index.html
12 https://apnews.com/article/trump-tariffs-us-world-reaction-5b8411d056e013015a0df6227b41dd5b
13 https://paralleladvisors.box.com/v/Q22025EconIndicatorsandReturns
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