Quarterly Market Review 2025 Q1

After two years of strong stock market performance and relatively steady growth, the first quarter of 2025 marked a jarring shift. Heading into the year there was optimism about a “soft landing” in which the economy would slow down enough to curb inflation, without triggering a recession. Instead, Q1 brought renewed fears about inflation, declining consumer confidence, and the increasing risk of a recession, driven largely by escalating trade wars.

However, there were also bright spots for investors with well-diversified portfolios. International stock markets delivered gains, while Treasury bonds also provided positive returns, reinforcing their role as a stabilizing force in portfolios.

Here are a few data points from Q1:

• The U.S. stock market finished down 4.7% in Q1.

• Value stocks outpaced growth, with 4.4% gains in value vs. 9.2% losses in growth.

• Technology stocks suffered their worst quarter since 2020.

• Global stock market volatility picked up as markets responded to U.S. trade economic policies in the U.S., including increased deregulation and tariffs and the impact on economic growth and inflation.

• International stocks significantly outperformed the U.S., with developed markets posting 6.2% gains, and emerging markets and real estate up 3% and 1.4%, respectively.

• The Fed kept interest rates steady but indicated expectations of two 0.25% rate cuts later in the year (projections always subject to change).

• U.S. bonds were up 2.8%, nearly offsetting the 3% losses in Q4.

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Below is a snapshot of key top-line economic indicators:

U.S. Stocks

The U.S. stock market faced a turbulent first quarter in 2025, marking a sharp departure from the tech-driven gains of the past two years. Investor sentiment shifted in late February as rising geopolitical tensions and trade disputes brought uncertainty into the economic outlook. Concerns over inflation resurfaced, dampening hopes for near-term interest rate cuts by the Federal Reserve.

The prevailing theme in Q1 was a reversal of Q4. Value stocks rallied (up 4.4%) while growth stocks tumbled (down 9.2%). After leading the market for nearly two years, U.S. technology stocks had a rough first quarter of 2025, down 12%, weighing down overall market performance. Consumer cyclicals was hardest hit by economic concerns and waning consumer confidence, dropping 12.8%, while sectors like energy and healthcare rebounded strongly.

By mid-March, U.S. stocks had officially entered correction territory, dropping over 10% from February highs. However, the market managed to rebound slightly and ended the quarter above its lowest point.

International Stocks

Global markets delivered a strong start to the year, with many non-U.S. stock markets outperforming the U.S. in the first quarter of 2025. After years of lagging behind, regions like Europe and Asia saw renewed investor interest, driven by improving economic data, easing inflation pressures, and more attractive valuations.

Despite lingering geopolitical uncertainties, European stocks were buoyed by resilient consumer spending and signs of economic stabilization, while falling energy prices helped ease cost pressures for businesses. European markets were up 12.2%, with increased government spending to build up the region’s defensive capabilities amidst concerns stemming from Russia’s ongoing invasion of Ukraine. In Asia, Chinese markets (+14.2%) rallied with new government stimulus measures aimed at reviving growth, along with easing tensions in global trade. Japan also posted solid gains, supported by continued corporate reforms and a favorable currency environment.

Emerging markets saw mixed results, with performance varying by region. Some countries benefited from a weaker U.S. dollar and improving commodity prices, while others continued to face challenges related to inflation and political instability.

Overall, the first quarter marked a notable shift in global market dynamics due to volatility and increased unpredictability in the U.S. market, and investors looked for diversification and value in international markets.

Fixed Income

The U.S. bond market delivered positive returns (2.8%) in the first quarter of 2025, offering a measure of stability amid a more volatile environment for stocks. While inflation concerns re-emerged due to geopolitical tensions and trade-related disruptions, expectations for slower economic growth – and potentially fewer interest rate hikes – supported demand for government bonds. As a result, long-duration Treasuries outperformed, benefiting from the flight to quality.

With an uptick in risk aversion, investment-grade corporate bonds posted modest gains, while high-yield bonds faced pressure from renewed recession fears and tighter financial conditions.

The overall tone of the bond market reflected a cautious but constructive outlook, with fixed income once again serving its traditional role as a portfolio stabilizer.

Global bonds did not fare as well as those in the U.S., and were just barely negative in Q1 (-0.17%). European bonds were impacted by expectations of increased government spending, leading to modest declines, and Japanese bonds dropped by 2.4% with the Bank of Japan raising rates by 0.50% in January as a response to ongoing inflationary pressures and strong wage growth.

As Q2 gets underway, we expect continued volatility in the stock markets. Aggressive tariff strategies are impacting global markets across many major industries and will increase concerns around inflationary pressures. The Federal Reserve is expected to maintain current interest rates, balancing the need to control inflation without hindering economic growth