Quarterly Market Update

The first quarter of 2025 was marked by a mix optimism and caution across global markets, as investors navigated through shifting economic dynamics, central bank policy decisions, and geopolitical headwinds around US tariffs on foreign goods. US stocks had a strong start to the year in January, mainly driven by Value sectors like Health Care and Financials. US markets weakened in February and further deteriorated in March, leading to a steep market correction in early April. The S&P 500 and Nasdaq had their sharpest single-day drops, in recent years, driven in large part by tariff announcements. Markets were shaken by concerns over a potential trade war, stemming from retaliation from China.

Within the US, the economy remained relatively positive in the first quarter. GDP growth modestly slowed, while remaining positive, due to increased consumer spending. The labor market held strong, with the unemployment rate floating around 4%. On the flip side, investments were slower in sectors that are sensitive rates, such as manufacturing and commercial real estate. Although inflation dropped to 2.8% year-over-year, by the end of the first quarter, it remained above the Federal Reserve’s 2% longer term target. In the absence of imminent slowdown in the economy, the Fed continued its pause on the rate cuts we saw at the end of 2024, as a potentially higher inflation backdrop remains an overhang.

Although we continued to see accelerated volatility, the Mag7 drove down market performance, while Value outperformed and Growth lagged. Although we continue to see enthusiasm and momentum around automation and artificial intelligence, the better valuations of Value stocks, allowed them to hold up better in the downward market. China’s exceeded expectations, which year-over-year growth over 5%, being driven by stronger than expected domestic consumption and stimulus. On the flip side, exports faced pressure towards the end of the quarter, as tariff fears progressed. Compared to China, Europe has struggled to see growth. However, the outlook of increased fiscal spending in Europe has led the region to positive returns year to date. Volatility and uncertainty have also impacted fixed income markets, with rate volatility at high levels and spreads widening. Due to this, investors are demanding higher premiums in order to compensate for credit and liquidity risks that may arise.

As Q2 begins, investors are bracing for continued volatility, mainly being driven by market headlines around tariff and central bank policies. We believe portfolios should be designed for long-term investing and it is more about time in the market, instead of investors trying to time the market over the short term. Key focus areas at this time, will include, upcoming corporate earnings, inflations trends, Fed policy decisions, and upcoming developments on the geopolitical front. Rates in the US will more than likely be higher for longer, as inflation remains an issue and Chairman Powell noted that it is “too soon to say” when asked for the Fed’s assessment of the impact of trade policy.

As global markets shift, it is important to highlight how portfolio allocations must reflect both long-term conviction and flexibility. While valuations and geographical diversification will be at the core of the growth team within Equities, Fixed Income markets, will also be crucial at this time. In this current environment, uncertainty seems to be the overpowering factor, and while this is the case, it is key to stay up in quality on the credit spectrum. Unlike in prior markets, we are seeing shifts across technology, trade, demographics and policy, play out all at the same time. A multi-asset, diversified approved, that is driven by research and risk management, is extremely important in times like these.