First 100 Days
1Q25 was anything but typical. The early months of President Trump’s second term delivered sweeping policy changes that heightened uncertainty across financial markets. From federal spending cuts to an aggressive shift in trade policy, the administration’s “shock-and-awe” approach generated volatility across asset classes, sent inflation expectations higher, and provoked a sharp reaction from counterparts across the globe. While the U.S. economy remained on stable footing, several forward-looking indicators signaled a more challenging road ahead. As investors grappled with the shift in U.S. policy, they sought traditional safe havens, including U.S. Treasuries and gold, while U.S. equities repriced to reflect a more uncertain macroeconomic backdrop.
Policy
The Trump administration has had its sights set on reducing direct federal spending and, consequently, aim to reduce the federal deficit which reached $1.8 trillion at the end of fiscal year 2024. One of the president’s key tools to cut costs has been Elon Musk and his Department of Government Efficiency (DOGE), which has been slashing potentially hundreds of thousands of jobs at federal agencies (the actual figure is unclear due to court battles), freezing billions of dollars of federal grant money, canceling contracts, and dismantling government agencies. The administration’s second tool, a politically aligned Congress, is now debating how to address mandatory spending (roughly 40% of total outlays, including Medicaid, Medicare, and Social Security) after having recently worked toward extending tax cuts.
Trump 2.0’s approach to tariffs has followed a similar aggressive approach with an agenda of leveling the playing field by retaliating against countries that have placed trade controls against the U.S., and ultimately bringing manufacturing jobs back to the U.S. This includes tariffs on steel and aluminum products, on Mexican and Canadian goods, on Chinese goods, and ultimately broad-based reciprocal tariffs. The flurry of trade policy announcements, contentious comments from either side, and backpedaling progressively built anxiety in the markets as the administration’s agenda heightened uncertainty around inflation and created fears of an economic slowdown. The president and his cabinet were vocal that there could be short-term growing pains as they carry out their policy agenda. In an address to Congress the president even warned that there would be a “little disturbance” from his plan to impose sweeping tariffs.
At its March 2025 meeting, the Federal Open Market Committee (FOMC) held the Federal Funds Rate steady at 4.25% to 4.50% as it maintained a cautious tone. While two rate cuts are still projected for later this year, the Committee’s revised “dot plot” showed a shift in sentiment, with eight of the 19 voting members now anticipating only one or no cuts in 2025. The FOMC modestly raised its inflation forecast and trimmed its growth expectations. Inflation data for the quarter was mixed: headline and core CPI rose 2.8% and 3.1% year-over-year through February, both below consensus, while the Fed’s preferred measure, core PCE, came in slightly above expectations at 2.8%. Inflation breakeven rates widened, illustrating the market’s unease, particularly in the 2-year and 5-year segments where breakevens reached 3.3% and 2.6%, respectively.
U.S. Economy
While the U.S. economy marched forward, it began to show signs of a slowing pace and several indicators portrayed an uncertain road ahead. Real GDP increased at an annual rate of 2.4% in 4Q24, down from 3.1% in the previous quarter. A decrease in private inventories reflected strong demand, businesses adjusting to anticipated weak demand, or a combination of both scenarios. As 1Q25 progressed the Atlanta Fed’s GDPNow forecast for the first quarter fell deep into negative territory. It built an alternative model which adjusted for the surge of gold imports that was distorting the data, but that projection for 1Q25 GDP also ultimately turned negative by the end of March (-0.5%). This was in stark contrast to the Philadelphia Fed’s Survey of Professional Forecasters published in February, which had a median 1Q25 GDP projection that increased to 2.4% from 1.9% from the previous survey. However, if the actual first quarter print falls somewhere in between the two forecasts, it would signal a significant deceleration in the economy.
The manufacturing sector showed signs of deterioration as the March reading of the ISM’s Manufacturing PMI was down after having a short period of expansion. The ISM report also highlighted weakening demand as the New Orders Index fell for a second month in a row. Similarly, the Dallas Fed Texas Manufacturing Outlook Survey’s general business activity index registered at -16.3, its lowest level since July 2024. The Conference Board’s Consumer Confidence Index declined for the fourth consecutive month, and the outlook for income, business, and labor market conditions fell to the lowest level in 12 years. The Michigan Consumer Sentiment Index declined, with most consumers expecting unemployment to rise, registering the highest reading since 2009. The housing market also indicated weakness as building permits for private housing edged lower for a third consecutive month.
Not all was doom and gloom. Jobs data showed relative stability with unemployment holding steady (edged up 0.1 percentage points to 4.1% in February as reported by the BLS) and a decrease in average unemployment insurance claims in March. DOGE’s federal job cuts have yet to fully materialize in the unemployment data, but initial and continued unemployment insurance claims by former federal civilian employees were up from the year prior. The February Job Openings and Labor Turnover Survey highlighted little change in total separations during the month, with the largest increases in layoffs coming from retail (67,000), real estate (24,000), and the federal government (18,000).
Global Economy and Currencies
Forecasts for global economic growth in 2025 have been revised slightly downward. The OECD projects global growth in 2025 moderating to 3.1% from 3.2% in the year prior, citing weakening business and consumer sentiment and significant changes in policies that, if sustained, would impact global growth and inflation. Major central banks maintained a cautious tone in 1Q, balancing disinflationary pressures with ongoing political and trade-related uncertainties. The European Central Bank lowered its deposit rate to 2.5% as growth has remained tepid in the euro zone, particularly in Germany and France. The Bank of England also cut its policy rate by 25 bps, citing progress on inflation and declining growth. Japan continued to deviate from the pack as its central bank raised its short-term policy rate 25 bps to 0.50%, reaching its highest level since 2008, and revised its inflation forecasts upward.
Protectionist policies came to the forefront as the U.S. imposed tariffs that led to retaliatory measures and renewed concerns of a global trade war. Tensions rapidly escalated as China reinstated tariffs on U.S. agricultural goods, the EU targeted U.S. industrial and meat exports, and Canada responded with countermeasures on U.S. steel, aluminum, and consumer goods. The disruption even pushed China, Japan, and South Korea to reopen dialogue on regional free trade for the first time in years, a highly notable shift driven by shared economic concerns. Volatility spiked across markets, including currencies, as President Trump’s trade policy took shape. The U.S. dollar (DXY Index) plummeted after reaching a two-year high in December. The heaviest decline was in early March when tariffs on Mexican and Canadian goods went into effect. Most of the major currencies and emerging market currencies appreciated relative to the greenback in 1Q.
Global Equity
U.S. equities delivered modest gains in 4Q24 but capped off a second consecutive year of strong annual performance. The S&P 500 Index rose 2.4% in 4Q, bringing its one-year return to an impressive 25.0%. The mega-cap “Magnificent Seven” drove equity market strength in 2024, most notably from Nvidia and Tesla, which were up 171.2% and 62.5% YTD, respectively. Sector dispersion remained a dominant theme during the quarter. Growth-oriented sectors stood out, particularly Consumer Discretionary (+14.3%) and Communication Services (+8.9%), supported by strong consumer demand. Technology (+4.8%) also posted solid gains and finished the year as the top-performing sector (+36.6%) fueled by the enthusiasm around AI. In contrast, defensive sectors struggled during the quarter. Real Estate (-7.9%), Utilities (-5.5%), and Consumer Staples (-3.2%) faced headwinds of rising interest rates and moderating inflation expectations.
Growth and Value diverged further, reflecting investor preference for growth stocks, particularly in Technology. The Russell 1000 Growth Index outperformed with a quarterly return of 7.1%, while the Russell 1000 Value Index declined by 2.0%. Small cap stocks, as measured by the Russell 2000, were flat (+0.3%) during the quarter, with growth (+1.7%) outperforming value (-1.1%).
Developed non-U.S. and emerging market equities underperformed U.S. equities in 4Q as a stronger U.S. dollar and concerns over slower global growth were headwinds. The greenback strengthened against most major currencies, with the euro (-7.2%), yen (-9.0%), and pound (-6.6%) all depreciating. The MSCI ACWI ex-USA Index fell 7.6% in 4Q and ended the year with a gain of 5.5%. In developed markets, the MSCI EAFE Index declined 8.1% in 4Q, driven by broad weakness in Europe and the Pacific. Denmark (-21.5%) and Germany (-10.5%) were key detractors. Emerging markets similarly struggled, with the MSCI Emerging Markets Index declining 8.0% during the quarter. Taiwan (+3.3%) was the standout performer, fueled by Technology. South Korea sank (-19.2%) as the country endured political upheaval with President Yoon Suk Yeol being impeached and his allies ousted after declaring martial law. Latin America faced significant challenges as Brazil (-19.4%) and Mexico (-10.6%) fell sharply due to currency depreciation and political uncertainty.
Global Markets
Global Equity
U.S. equities retreated in 1Q25, giving back a portion of 2024’s outsized gains. The S&P 500 fell 4.3% as investors rotated out of mega-cap growth stocks, particularly in Technology (-12.7%) and Communication Services (-6.2%). The Magnificent 7—a dominant market driver for several years—declined heavily in 1Q, contributing to the sharp underperformance in growth-oriented sectors. AI-chip darling Nvidia suffered the worst single-day market cap decline in U.S. history (almost $600 billion) as worries emerged that a low-cost AI model from a Chinese company would threaten the chipmaker’s dominance.
Defensive sectors such as Health Care (+6.5%), Consumer Staples (+5.2%), and Utilities (+4.9%) outperformed, while Energy led all sectors with a 10.2% gain, supported by strength in natural gas following a colder-than-expected winter. The pullback in growth stocks was most acute in the Consumer Discretionary sector (-13.8%), which had been a top performer in 2024. Weakness in small cap stocks persisted, with the Russell 2000 Index falling 9.5%, as elevated interest rates weighed on more leveraged businesses. Style dispersion was significant during the quarter. The Russell 3000 Growth Index declined 10.0% while the Russell 3000 Value Index rose 1.6%, marking a sharp trend reversal. Value’s outperformance was driven by a strong showing in cyclical sectors like Financials and Energy, while Growth underperformed largely due to its exposure to large-cap Tech.
Global ex-U.S. equities outperformed U.S. stocks in 1Q, helped by a weaker dollar. The MSCI ACWI ex-USA Index gained 5.2%, with developed markets (MSCI EAFE: +6.9%) and emerging markets (MSCI EM: +2.9%) both in positive territory. European equities rebounded strongly, especially in Spain (+22.4%), Italy (+17.2%), and Germany (+15.5%), amid improving PMI data and an accommodative monetary policy. There was investor optimism as EU governments announced plans to boost defense spending in response to rising geopolitical tensions. Emerging markets (MSCI EM: +3.0%) posted modest gains overall, but results varied widely—companies in China (+15.0%), Brazil (+14.0%), and Chile (+17.8%) surged, while those in Taiwan (-12.6%) and Thailand (-13.7%) fell sharply, underperforming on concerns around slowing tech exports and political instability.
Fixed Income
Fixed income markets rebounded in 1Q as rates declined across the U.S. Treasury yield curve. Safe-haven flows and rate cuts from major central banks supported broad-based gains. The Bloomberg US Aggregate Bond Index rose 2.8% as the 10-year U.S. Treasury yield peaked near 4.8% in early January in response to early inflation prints before retreating to 4.2% by quarter-end. Treasuries and agency MBS (+3.1%) outperformed other sectors. TIPS posted strong gains (+4.2%), outperforming nominals as breakeven inflation expectations rose, particularly in the 2-year and 5-year tenors. Investment grade corporates (+2.3%) benefited from declining yields and continued demand, while high yield corporates posted more muted gains (+1.0%) with lower credit quality bonds slipping. Spreads widened modestly across both investment grade and high yield markets but remained below long-term averages.
Municipal bonds lagged the broader bond market, and in March logged their weakest monthly return in four years. The Bloomberg Municipal Bond Index declined 0.2% as supply picked up. Short-duration munis outperformed longer maturities, with the Bloomberg Muni Short-Term 1–5 Year Index gaining 1.0%. The yield ratio of 10-year AAA munis to Treasuries climbed to 77% from 67%, indicating better value versus the start of the year.
Outside the U.S., fixed income returns varied by currency exposure. Hedged global bonds (Bloomberg Global Agg ex-US Hedged: +1.2%) underperformed unhedged (+2.6%) as the U.S. dollar weakened. Emerging market debt delivered solid results, led by local currency sovereign bonds (JPM GBI-EM Global Diversified: +4.3%), while hard currency sovereigns (JPM EMBI Global Diversified: +2.2%) also gained.
Closing Thoughts
For closing thoughts, we’ve borrowed inspiration from our 1Q17 quarterly letter during President Trump’s first term—then, as now, markets entered a new administration at record highs. Valuations across equities and credit have reflected a high degree of optimism, if not complacency. While recent volatility has pulled markets off their peaks, the S&P 500 remains elevated, and credit spreads continue to hover near historical tights. In this environment, we encourage clients to temper expectations for returns and prepare for continued market turbulence. Uncertainty around the trajectory of U.S. fiscal and trade policy, coupled with evolving geopolitical risks, suggests that the road ahead may be bumpy. As always, we encourage investors to maintain a long-term perspective and prudent asset allocation with appropriate levels of diversification.
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